<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 10, 1997
PEGASUS COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 0-21389 51-0374669
--------------- ----------- ----------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
c/o Pegasus Communications Management Company, 100 Matsonford Road,
5 Radnor Corporate Center, Suite 454, Radnor, Pennsylvania 19087
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-341-1801
------------
Not Applicable
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 5. Other Events.
(a) Completed DBS Acquisitions. In 1997, Pegasus
Communications Corporation ("Pegasus" and together with its direct and indirect
subsidiaries, the "Company") acquired from 25 independent DIRECTV(R) ("DIRECTV")
providers the rights to provide DIRECTV programming in certain rural areas of 23
states and related assets (the "Completed DBS Acquisitions"). Total
consideration for the acquisitions was approximately $162.3 million, which,
depending upon the particular transaction, consisted of cash, promissory notes,
shares of Class A Common Stock, warrants to purchase Class A Common Stock,
preferred stock of a subsidiary and/or assumed liabilities.
(b) DBS Acquisitions. As of December 31, 1997, the Company had
entered into letters of intent or definitive agreements to acquire DIRECTV
distribution rights and related assets from seven independent providers of
DIRECTV services (the "Pending DBS Acquisitions"), which have exclusive DIRECTV
service territories in certain rural areas of Illinois, Minnesota, Nebraska, New
Mexico, South Dakota, and Texas and whose territories include, in the aggregate,
approximately 227,200 television households (including 17,100 seasonal
residences), 23,500 business locations and 22,100 subscribers. The Pending DBS
Acquisitions range in consideration from $1.0 million to $12.5 million. In the
aggregate, the consideration for the Pending DBS Acquisitions is $38.7 million
and consists of $28.7 million in cash and $10.0 million in promissory notes.
In addition to the Pending DBS Acquisitions, Pegasus has
entered into an agreement and plan of merger (the "Agreement and Plan of
Merger") dated January 8, 1998 to acquire Digital Television Services,
Inc. ("DTS"), the second largest independent provider of DIRECTV(R) ("DIRECTV")
programming, for approximately 5.5 million shares of Pegasus' Class A Common
Stock. Upon completion of the acquisition of DTS (the "DTS Acquisition"), DTS
will become a wholly-owned subsidiary of Pegasus.
After giving effect to the DTS Acquisition, including a
pending acquisition to be made by DTS, and the Pending DBS Acquisitions, the
Company will serve approximately 266,000 DIRECTV subscribers, as of November 7,
1997, in 33 states in territories consisting of approximately 4.2 million
television households (including approximately 1.1 million households not served
by cable).
Each of the Pending DBS Acquisitions for which there is
only a letter of intent is subject to negotiation of a definitive
agreement, and all of the Pending DBS Acquisitions are subject,
if not already obtained, to the prior approval of Hughes
Electronics Corporation or one of its subsidiaries ("Hughes") and
the National Rural Telecommunications Cooperative ("NRTC"). In
-1-
<PAGE>
addition to these conditions, each of the Pending DBS Acquisitions will be
subject to conditions typical in acquisitions of this nature, certain of which
conditions, like the Hughes and NRTC consents, may be beyond the Company's
control. There can be no assurance that definitive agreements will be entered
into with respect to all of the Pending DBS Acquisitions, or, if entered into,
that all or any of the Pending DBS Acquisitions will be completed.
The DTS Acquisition is expected to be completed in the first
quarter of 1998 and is subject to, among other things, the approval of Pegasus'
and DTS' stockholders, consents from the NRTC, Hughes, and DTS' lenders, and
other conditions customary in transactions of this nature.
(c) New Credit Facility. On December 10, 1997, Pegasus Media &
Communications, Inc. ("PM&C"), a direct subsidiary of the Company which operates
the Company's TV, Cable and DBS operations, entered into a $180.0 million
six-year, secured, reducing revolving credit facility (the "New Credit
Facility"). Borrowings under the New Credit Facility are available for
acquisitions, subject to the approval of the lenders in certain circumstances,
working capital and general corporate purposes. Concurrently with the closing of
the New Credit Facility, PM&C's existing credit facility was repaid in full and
the commitments thereunder were terminated.
(d) New England Cable Sale. As previously reported,
effective January 31, 1997, the Company sold substantially all of the assets of
its New Hampshire cable system for approximately $6.9 million in cash, net of
certain selling costs. The Company recognized a gain on the transaction of
approximately $4.5 million. As previously reported, on November 6, 1997, the
Company entered into a letter of intent with respect to the sale of its
remaining New England cable systems. The completion of this sale is subject to
the negotiation of definitive agreements, the prior approval of the local
franchising authorities and to other conditions typical in transactions of this
nature, certain of which are beyond the Company's control. It is anticipated
that this sale will be consummated in the second quarter of 1998 and will result
in net proceeds to the Company of approximately $28.0 million. There can be no
assurance that this sale will be consummated on the terms described herein or at
all.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Acquired or to be Acquired
Businesses.
Historical financial statements for the following acquired or to be
acquired businesses are attached hereto:
(i) ViewStar Entertainment Services, Inc. (an acquired
business)
Report of Arthur Andersen, LLP.............................F-1
Balance Sheets as of December 31, 1996 and
September 30, 1997 (unaudited).............................F-2
Statements of Operations for the year ended December
31, 1996 and the nine months ended September 30, 1996
(unaudited) and 1997 (unaudited)...........................F-3
Statements of Stockholders' Equity for the year
ended December 31, 1996 and the nine months ended
September 30, 1997 (unaudited).............................F-4
Statements of Cash Flows for the year ended
December 31, 1996 and the nine months ended
-2-
<PAGE>
September 30, 1996 (unaudited) and 1997
(unaudited).............................................F-5
Notes to Financial Statements...........................F-6
(ii) DBS Operations of Pioneer Services Corporation (an
acquired business)
Report of Jackson, Thornton & Co., P.C.................F-15
Balance Sheet at September 30, 1997 ...................F-16
Statement of Operations and Division Deficiency
for the fiscal year ended September 30, 1997 ..........F-17
Statement of Cash Flows for the fiscal year ended
September 30, 1997.....................................F-18
Notes to Financial Statements..........................F-19
(iii) Digital Television Services, LLC (DTS) (a proposed
acquisition)
Report of Arthur Andersen LLP..........................F-22
Consolidated Balance Sheets as of December 31,
1996 and as of September 30, 1997 (unaudited)..........F-23
Consolidated Statements of Operations for the
Period from Inception (January 30, 1996) Through
December 31, 1996, for the Period from Inception
(January 30, 1996) Through September 30, 1996
(unaudited) and for the Nine Months Ended
September 30, 1997 (unaudited).........................F-24
Consolidated Statements of Members' Equity for the
Period from Inception (January 30, 1996) Through
December 31, 1996 and for the Nine Months Ended
September 30, 1997 (unaudited).........................F-25
Consolidated Statements of Cash Flows for the
Period from Inception (January 30, 1996) Through
December 31, 1996, for the Period from Inception
(January 30, 1996) Through September 30, 1996
(unaudited) and for the Nine Months Ended
September 30, 1997 (unaudited).........................F-26
Notes to Consolidated Financial Statements.............F-27
(iv) WEP Intermediate Corp. (a business acquired by DTS)
Report of Arthur Andersen LLP..........................F-48
Balance Sheet as of September 30, 1997.................F-49
Statement of Cash Flows for the Period from Inception
(January 28, 1997) through September 30,
1997...................................................F-50
Notes to Financial Statements..........................F-51
(v) Direct Programming Services Limited Partnership (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-53
Balance Sheets as of December 31, 1995 and
1996...................................................F-54
Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996.......................F-55
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<PAGE>
Statements of Changes in Partners' Capital for the
Years Ended December 31, 1994, 1995 and 1996...........F-56
Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996.......................F-57
Notes to Financial Statements..........................F-58
(vi) Kansas DBS, L.L.C. (a business acquired by DTS)
Report of Arthur Andersen LLP..........................F-64
Balance Sheets as of December 31, 1995 and
1996...................................................F-65
Statements of Operations and Changes in
Accumulated Deficit for the Years Ended December
31, 1995 and 1996......................................F-66
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1996.............................F-67
Notes to Financial Statements..........................F-68
(vii) DBS Operations of NRTC System No. 0422 (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-73
Statements of Assets and Liabilities and
Accumulated Deficit as of December 31, 1995 and
1996 and as of March 31, 1997 (unaudited)..............F-74
Statements of Expenses over Revenues and Changes in
Accumulated Deficit for the Years Ended December 31,
1995 and 1996 and for the Three
Months Ended March 31, 1997 (unaudited)................F-75
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1996 and for the Three
Months Ended March 31, 1997 (unaudited)................F-76
Notes to Financial Statements..........................F-77
(viii) DBS Operations of NRTC System No. 0073 (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-82
Statement of Assets and Liabilities and
Accumulated Earnings as of December 31, 1996 and
as of March 31, 1997 (unaudited).......................F-83
Statements of Revenues over Expenses and Change in
Accumulated Earnings for the Year Ended December
31, 1996 and for the Three Months Ended March 31,
1997 (unaudited).......................................F-84
Statements of Cash Flows for the Year Ended
December 31, 1996 and for the Three Months Ended
March 31, 1997 (unaudited).............................F-85
Notes to Financial Statements..........................F-86
(ix) Northeast DBS Enterprises, L.P. (a business acquired
by DTS)
Report of Fishbein & Company, P.C......................F-91
Balance Sheets as of December 31, 1994 and
1995...................................................F-92
Statements of Operations and Partners' Equity for
the Years Ended December 31, 1994 and 1995.............F-93
-4-
<PAGE>
Statements of Cash Flows for the Years Ended
December 31, 1994 and 1995..............................F-94
Notes to Financial Statements...........................F-96
(x) Northeast DBS Enterprises, L.P. (a business acquired
by DTS)
Report of Arthur Andersen LLP..........................F-100
Balance Sheet as of December 31, 1996..................F-101
Statement of Operations for the Year Ended
December 31, 1996......................................F-102
Statement of Changes in Partners' Capital for the
Year Ended December 31, 1996...........................F-103
Statement of Cash Flows for the Year Ended
December 31, 1996......................................F-104
Notes to Financial Statements..........................F-105
(xi) DBS Operations of NRTC System No. 0001 (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-111
Statements of Assets and Liabilities and
Accumulated Deficit as of December 31, 1995 and
November 26, 1996......................................F-112
Statements of Expenses over Revenues and Changes in
Accumulated Deficit for the Year Ended December 31,
1995 and the Period From January 1, 1996
Through November 26, 1996..............................F-113
Statements of Cash Flows for the Year Ended
December 31, 1995 and the Period From January 1,
1996 Through November 26, 1996.........................F-114
Notes to Financial Statements..........................F-115
(xii) DBS Operations of NRTC System No. 1025 (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-120
Statements of Assets and Liabilities and
Accumulated Deficit as of December 31, 1995 and
August 28, 1996........................................F-121
Statements of Expenses over Revenues and Changes
in Accumulated Deficit for the Period From March
10, 1995 (Inception) Through December 31, 1995 and
the Period From January 1, 1996 Through August 28,
1996...................................................F-122
Statements of Cash Flows for the Period From March
10, 1995 (Inception) Through December 31, 1995 and
the Period From January 1, 1996 Through August 28,
1996...................................................F-123
Notes to Financial Statements..........................F-124
(xiii) Satellite Television Services, Inc. (a business
acquired by DTS)
Report of Deloitte & Touche LLP........................F-129
Balance Sheets as of September 30, 1996 and
1997...................................................F-130
Statements of Cash Flows for the Years Ended
September 30, 1995, 1996 and 1997......................F-131
-5-
<PAGE>
Statements of Operations for the Years Ended
September 30, 1995, 1996 and 1997.......................F-132
Statements of Shareholder's Equity for the Years
Ended September 30, 1995, 1996 and 1997.................F-133
Notes to Financial Statements...........................F-134
(xiv) Ocmulgee Communications, Inc. (an acquisition proposed
by DTS)
Report of Arthur Andersen LLP...........................F-138
Balance Sheets as of December 31, 1996 and as of
September 30, 1997 (unaudited)..........................F-139
Statements of Operations for the Year Ended December
31, 1996 and for the Nine Months Ended September 30,
1996 (unaudited) and September 30,
1997 (unaudited)........................................F-140
Statements of Changes in Stockholder's Deficit for the
Year Ended December 31, 1996 and for the Nine Months
Ended September 30, 1997 (unaudited)....................F-141
Statements of Cash Flows for the Year Ended
December 31, 1996 and for the Nine Months Ended
September 30, 1996 (unaudited) and September 30,
1997 (unaudited)........................................F-142
Notes to Financial Statements...........................F-143
(b) Pro Forma Consolidated Financial Information
(i) Basis of Presentation.....................F-150
(ii) Pro Forma Consolidated Balance Sheet as
of September 30, 1997.....................F-151
(iii) Pro Forma Consolidated Statement of
Operations for the Year Ended December
31, 1996..................................F-153
(iv) Pro Forma Consolidated Statement of
Operations for the Nine Months Ended
September 30, 1997........................F-155
(v) Notes to Pro Forma Consolidated
Statements of Operations..................F-157
(c) Exhibits
2.1 Agreement and Plan of Merger dated
January 8, 1998, by and between
Pegasus and DTS (schedules have been
omitted but will be provided upon
request to the SEC).
10.1 Credit Agreement dated as of
December 10, 1997, by and among
Pegasus Media & Communications,
Inc., the lenders thereto and
Bankers Trust Company, as agent
(exhibits and schedules have been
omitted but will be provided upon
request to the SEC).
-6-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PEGASUS COMMUNICATIONS CORPORATION
By /s/ Ted S. Lodge
--------------------------------------
Ted S. Lodge,
Senior Vice President
January 12, 1998
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
ViewStar Entertainment Services, Inc.:
We have audited the accompanying balance sheet of VIEWSTAR ENTERTAINMENT
SERVICES, INC. (a Georgia corporation) as of December 31, 1996 and the related
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ViewStar Entertainment
Services, Inc. as of December 31, 1996 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
April 18, 1997 (except with respect
to Note 10, as to which the date is
September 15, 1997)
F-1
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 182,181 $ 209,281
Accounts receivable:
Trade, net of allowance for doubtful accounts of $8,666 and
$3,527 at December 31, 1996 and September 30, 1997,
respectively ................................................. 207,800 169,842
Other ......................................................... 11,987 2,462
Deferred promotional costs .................................... 68,984 74,256
Prepaid expenses and other .................................... 51,530 5,359
Inventory ...................................................... 27,938 43,255
------------ ------------
Total current assets ....................................... 550,420 504,455
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ....................................... 129,478 131,717
Rental satellite systems equipment ........................... 42,651 40,092
Service vehicles ............................................. 28,913 28,913
Leasehold improvements ....................................... 17,260 17,260
------------ ------------
218,302 217,982
Less accumulated depreciation ................................. (99,102) (142,237)
------------ ------------
Property and equipment, net ................................. 119,200 75,745
------------ ------------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ........................ 1,512,298 1,411,422
------------ ------------
Total assets ................................................ $ 2,181,918 $ 1,991,622
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ................................................ $ 493,963 $ 409,061
Accounts payable ............................................. 166,420 265,741
Accrued liabilities .......................................... 147,714 102,127
Unearned revenue ............................................. 299,505 255,507
Other ......................................................... 88,844 48,711
------------ ------------
Total liabilities .......................................... 1,196,446 1,081,147
------------ ------------
DEFERRED CREDITS ................................................ 43,007 67,291
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000,000 shares authorized and
641,680 shares issued and outstanding ........................ 2,037,525 2,037,525
Retained deficit ................................................ (1,095,060) (1,194,341)
------------ ------------
Total stockholders' equity ................................. 942,465 843,184
------------ ------------
Total liabilities and stockholders' equity .................. $ 2,181,918 $ 1,991,622
============ ============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-2
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
Year ended ----------------------------
December 31, September 30, September 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES:
Programming ........................ $ 2,100,927 $1,559,920 $2,158,506
Equipment and installation ......... 308,082 226,803 192,103
Other .............................. 14,779 3,046 8,864
----------- ---------- ----------
Total revenues .................. 2,423,788 1,789,769 2,359,473
----------- ---------- ----------
COST OF REVENUES:
Programming ........................ 987,379 681,058 950,387
Equipment and installation ......... 250,347 180,772 198,447
Service fees ........................ 280,771 197,176 280,823
----------- ---------- ----------
Total cost of revenues ......... 1,518,497 1,059,006 1,429,657
----------- ---------- ----------
GROSS PROFIT ........................... 905,291 730,763 929,816
----------- ---------- ----------
OPERATING EXPENSES:
General and administrative ......... 694,718 490,238 371,465
Sales and marketing ............... 255,540 173,635 462,931
Depreciation and amortization ...... 226,963 168,583 168,296
----------- ---------- ----------
Total operating expenses ......... 1,177,221 832,456 1,002,692
----------- ---------- ----------
OPERATING LOSS ........................ (271,930) (101,693) (72,876)
----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense .................. (76,848) (55,067) (35,900)
Loss on sale of rental units ...... (36,339) -- (1,281)
Other .............................. 9,246 37,657 10,777
----------- ---------- ----------
(103,941) (17,410) (26,404)
----------- ---------- ----------
NET LOSS .............................. $ (375,871) $ (119,103) $ (99,280)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------ Retained
Shares Amount Earnings Total
--------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 ............... 508,340 $1,537,525 $ (719,189) $ 818,336
Conversion of note (Note 3) ............ 133,340 500,000 0 500,000
Net loss .............................. 0 0 (375,871) (375,871)
-------- ----------- ------------ ----------
BALANCE, December 31, 1996 ............... 641,680 2,037,525 (1,095,060) 942,465
Net loss (unaudited) .................. 0 0 (99,281) (99,281)
-------- ----------- ------------ ----------
BALANCE, September 30, 1997 (unaudited) ... 641,680 $2,037,525 $ (1,194,341) $ 843,184
======== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Year ended ----------------------------
December 31, September 30, September 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................... $ (375,871) $(119,103) $ (99,280)
---------- --------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ................................. 226,963 168,583 168,296
Loss on sale of rental units ................................. 36,339 -- 1,281
Changes in operating assets and liabilities:
Accounts receivable, net .................................... (103,090) (28,140) 37,958
Inventory ................................................... 96,767 95,621 (15,317)
Other current assets .......................................... (46,371) (30,159) 50,424
Accounts payable ............................................. 135,759 72,904 99,321
Accrued liabilities and other ................................. (6,329) (20,237) (85,721)
Unearned revenue ............................................. 199,405 3,466 (43,998)
---------- --------- ---------
Total adjustments .......................................... 539,443 262,038 212,244
---------- --------- ---------
Net cash provided by operating activities .................. 163,572 142,935 112,964
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............................. (44,485) (38,831) (962)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt .................................... (17,464) (3,402) (84,902)
---------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................ 101,623 100,702 27,100
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ......................................................... 80,558 80,558 182,181
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................ $ 182,181 $ 181,260 $ 209,281
========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest .......................................... $ 51,308 $ 32,789 $ 38,742
========== ========= =========
Cash paid for taxes ............................................. $ 500 $ 500 $ 500
========== ========= =========
NONCASH TRANSACTIONS:
Conversion of note (Note 3) .................................... $ 500,000 $ -- $ --
========== ========= =========
Noncash patronage dividend (Note 2) .............................. $ 29,856 $ 29,856 $ 24,284
========== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY
ViewStar Entertainment Services, Inc. ("ViewStar" or the "Company") is a
full-service provider of direct broadcast satellite ("DBS") service to
approximately 4,900 customers in eight counties in North Georgia. The Company
was incorporated in Georgia on August 12, 1993 and began marketing its services
in July 1994. Through a contracted agreement with the National Rural
Telecommunications Cooperative ("NRTC"), ViewStar has the exclusive right to
market and distribute DirecTv's (a subsidiary of Hughes Aircraft) satellite
programming services to the eight-county area for a period of ten years or the
life of the DirecTv satellite, whichever is longer. The life of the satellite is
currently estimated to be 15 years.
The Company has experienced operating losses since its inception as a
result of efforts to build its customer base and develop its operations. The
Company expects to continue to focus on developing its operations while
continuing to expand its market penetration. While the Company has achieved
positive cash flows from operations during 1996, there are risks associated with
the Company's growth plans and its ability to continue to generate positive cash
flows from operations and achieve or sustain profitability.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates and Assumptions
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Source of Supplies
As a distributor of DirecTv services, the Company relies on DirecTv for
programming services. Further, the NRTC provides its members certain services,
such as billing, centralized payment processing, and promotions. Any disruption
of these services could have an adverse effect on the operating results of the
Company.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is limited
due to the large number of subscribers comprising the customer base. The
Company's risk of loss is also limited due to advance billings to customers for
monthly programming services. As a result, at December 31, 1996, management does
not believe that any significant concentration of credit risk exists.
Inventories
The Company maintains inventories consisting of Digital Satellite Systems
("DSS(R)") equipment and related accessories. The inventories are stated at the
lower of cost or market, determined generally by the average cost method, which
approximates the first-in, first-out ("FIFO") method.
Deferred Promotional Costs
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Effective September 1, 1996, DirecTv introduced a
national marketing program offering new purchasers of DSS(R) equipment a $200
cash rebate, called the cash back offer rebate. To be eligible, a buyer must
subscribe to and pay for one year's worth of programming in advance. The Company
has elected to defer these costs and is amortizing these expenses over the life
of the buyer's one-year contract.
F-6
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Deferred Promotional Costs (continued)
ViewStar had 407 of these customers, with gross rebate costs of $81,400, of
which $12,416 was amortized during the year. In addition, as a part of this
program, ViewStar receives $1 per month for up to five years from the NRTC for
each subscriber whose account remains active. These amounts are included as a
reduction of sales and marketing expense in the accompanying statement of
operations when earned.
Property and Equipment
Property and equipment are stated at cost. ViewStar capitalizes major
property additions and expenses maintenance and repairs which do not extend the
useful lives of these assets. Depreciation for property and equipment is
provided using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to five years. Depreciation expense for
the year was $59,893. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from the balance sheet and any gain
or loss is reflected in current earnings.
Depreciation is computed for financial reporting purposes based on the
following lives:
Furniture and equipment Three to five years
Rental satellite systems equipment Five years
Service vehicles Three years
Leasehold improvements Three years
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1996:
Contract rights ............... $1,573,409
Organization costs ............ 309,930
----------
1,883,339
Accumulated amortization ...... (417,200)
----------
1,466,139
NRTC patronage capital ......... 43,007
Other ........................ 3,152
----------
$1,512,298
==========
Contract Rights
In 1993, the Company acquired from the NRTC the exclusive right to market
and distribute DirecTv services to households and commercial establishments in
the following eight counties located in northern Georgia: Banks, Bartow, Dawson,
Gordon, Hall, Habersham, Lumpkin, and Pickens. The Company acquired these rights
for a purchase price of $1,573,409 and for a period of ten years or the life of
the current satellite, whichever is longer. Contract rights are being amortized
over 15 years, the estimated useful life of the satellite (Note 1) operated by
DirecTv which provides service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying statement
of operations, for the year ended December 31, 1996 was $104,894.
Organization Costs
All costs incurred prior to the commencement of operations on July 1, 1994
have been capitalized on the balance sheet as organization costs and are being
amortized over five years. Amortization expense, included in depreciation and
amortization in the accompanying statement of operations, for the year ended
December 31, 1996 was $62,176.
F-7
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
NRTC Patronage Capital
ViewStar is an affiliate member of the NRTC (Note 9). While affiliate
members have no vote, they do have an ownership interest in the NRTC in
proportion to their prior patronage. NRTC patronage capital represents the
noncash portion of NRTC patronage income. Under its bylaws, the NRTC declares a
patronage dividend of its excess of revenues over expenses each year. Of the
total patronage dividend, 20% is paid in cash and the remaining 80% is
distributed in the form of noncash patronage capital, which will be redeemed in
cash only at the discretion of the NRTC. Noncash patronage capital is included
in other assets. The Company has also deferred the recognition of income from
the noncash portion of the patronage dividend until it is realized. Accordingly,
this amount is recorded in deferred credits in the accompanying balance sheet.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Management
believes that the long-lived assets in the accompanying balance sheet are
appropriately valued.
Income Taxes
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which the taxes are expected to be paid. Deferred income taxes are
provided for items when there is a temporary difference in recording such items
for financial reporting and income tax reporting.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). In 1996, the Company adopted the disclosure option
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 requires that
companies which do not choose to account for stock-based compensation as
prescribed by this statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted. Additionally,
certain other disclosures are required with respect to stock compensation and
the assumptions used to determine the pro forma effects of SFAS No. 123.
Advertising Costs
The Company expenses all advertising costs as incurred.
Revenue Recognition
ViewStar earns programming revenue by providing DirecTv services to its
subscribers. Programming revenue includes DirecTv services purchased by
subscribers in monthly or annual subscriptions; additional premium programming
available on an a la carte basis; sports programming available under monthly,
annual, or seasonal subscriptions; and movies and events programming available
on a pay-per-view basis. Programming purchased on a monthly, annual, or seasonal
basis, including premium programming, is billed in advance and is recorded as
unearned revenue. All programming revenue is recognized when earned.
Equipment and installation revenues primarily consist of the sale of DSS(R)
equipment and accessories and related installation charges. Equipment sales
revenue is recognized upon delivery of the equipment to the customer.
Installation revenue is recognized when the equipment is installed.
F-8
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Cost of Revenues
Cost of revenues includes the cost associated with providing DirecTv
services to the Company's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv through the NRTC, the
royalty fee paid to DirecTv, and monthly subscriber maintenance fees charged by
DirecTv, such as security fees, ground service fees, system authorization fees,
and fees for subscriber billings. Cost of equipment and installation includes
the wholesale cost of the equipment, fees paid to independent contractor
installers, and service department costs.
3. STOCKHOLDERS' EQUITY
The Company has authorized 1,000,000 shares of no par value common stock.
On August 24, 1993, the Company issued 18,750 shares of common stock for total
proceeds of $1,037,500 to the following three individuals: Donald W.
Weber--15,000 shares (80%) (the "majority stockholder"), Steven D. Weber--1,875
shares (10%), and Woodrow W. Griffin, Jr.--1,875 shares (10%). Under a
stockholder agreement dated August 24, 1993, the majority stockholder or the
Company possesses the right of first refusal to purchase shares owned by
minority stockholders before any transfer of these shares may occur.
On March 30, 1994, the Company issued 6,667 shares of common stock at $75
per share to ITC Holding Company for total proceeds of $500,025. Under a
stockholder agreement dated March 30, 1994, the majority stockholder or the
Company possesses the right of first refusal to purchase shares owned by ITC
Holding Company before any transfer of these shares may occur.
On March 30, 1994, the board of directors and stockholders approved a
restatement of the $500,000 note payable to Donald W. Weber to include the
option to convert the note to common stock at a rate of $75 per share. On
December 31, 1996, this note was converted to 133,340 shares of common stock.
Interest of $88,844 accrued on the note during the period that it was
outstanding but has not been paid.
On June 30, 1995, the board of directors and stockholders approved a
20-for-1 stock split by way of a 19-share dividend or 482,923 shares to current
stockholders on a pro rata basis.
The following table summarizes stock ownership as of December 31, 1996:
Number Percentage Total
of of Consideration
Shares Shares Paid
--------- ------------ --------------
Donald W. Weber ............... 433,340 67.54% $1,500,000
ITC Holding Company ......... 133,340 20.78 500,025
Woodrow W. Griffin, Jr. ...... 37,500 5.84 18,750
Steven D. Weber ............... 37,500 5.84 18,750
-------- -----------
Total ........................ 641,680 $2,037,525
======== ===========
4. STOCK-BASED COMPENSATION PLANS
Employee Stock Option Plan
Under the Company's 1995 stock option plan (the "Stock Option Plan"), as
adopted by the board of directors and approved by the stockholders on June 30,
1995, 75,000 shares of common stock are reserved and authorized for issuance
over a nine-year period. All permanent employees of the Company are eligible to
receive options under the Stock Option Plan. The Stock Option Plan is
administered by the board of directors. The plan is intended to provide for
incentive stock options ("ISOs") under Section 422 of the Internal
F-9
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
4. STOCK-BASED COMPENSATION PLANS -- (Continued)
Employee Stock Option Plan (continued)
Revenue Code of 1986, as amended, and for options which do not qualify as ISOs.
Options were granted at an exercise price of at least 100% of the estimated fair
value of the common stock at the dates of grant, as determined by the board of
directors based on previous equity transactions, historical financial condition
and results of operations, and other analyses.
Options are generally granted at a price (established by the board of
directors) equal to at least 100% of the estimated fair market value of the
common stock on the option grant date. Options granted become exercisable pro
rata over four years from the date of grant. The options expire on December 31,
2004.
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity instrument
and which encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the method of
accounting prescribed by APB No. 25, "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting methodology required by APB No.
25 must make pro forma disclosures of net income as if the fair value-based
method of accounting defined in SFAS No. 123 was used.
The Company has elected to account for its Stock Option Plan under APB No.
25; however, the Company has computed for pro forma disclosure purposes the
value of all options granted during 1995 and 1996 using the minimum value option
pricing model as prescribed by SFAS No. 123 using the following assumptions:
1995 1996
------------ --------------
Risk-free interest rate ...... 5.95% 6.5%
Expected dividend yield ...... 0 0
Expected lives ............... Five years Five years
Volatility .................. 0 % 0 %
Using these assumptions, the total fair value of the stock options granted
in 1996 and 1995 is $45,920 and $31,322, respectively, which would be amortized
as compensation expense over the four-year vesting period of the options. Had
compensation cost been determined consistent with the provisions of SFAS No.
123, the Company's net loss and pro forma net loss per share for 1996 would have
been as follows:
As Pro
Reported Forma
-------------- ------------
Net loss ............... $ (375,871) $ (387,844)
Net loss per share ...... $ (.59) $ (.60)
F-10
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
4. STOCK-BASED COMPENSATION PLANS -- (Continued)
The following table summarizes stock option transactions under the Stock
Option Plan during 1996 and 1995:
Weighted
Number Average
of Price
Shares Per Share
----------- ----------
Granted .............................. 20,800 $ 6.00
Forfeited ........................... (1,000) 6.00
-------
Outstanding at December 31, 1995 ...... 19,800 6.00
Granted .............................. 21,250 8.00
Forfeited ........................... (2,500) 8.00
-------
Outstanding at December 31, 1996 ...... 38,550 6.97
=======
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
Number Weighted
Outstanding Average Weighted
Actual at Remaining Average
Exercise December 31, Contractual Exercise
Prices 1996 Life Price
- ------------------- -------------- ------------- ---------
$6.00 19,800 2.50 $ 6.00
8.00 18,750 3.42 8.00
------ ---- -------
38,550 2.96 6.97
======
There were 4,950 options exercisable at a weighted average exercise price
of $6 per share at December 31, 1996.
5. RELATED-PARTY TRANSACTIONS
During 1996, the Company shared administrative, executive, and accounting
functions and incurred certain costs on behalf of DBS Depot, a company which is
owned by certain common stockholders of the Company. The Company was reimbursed
by DBS Depot for all expenses at full cost. The amount due from DBS Depot as of
December 31, 1996 was $4,165.
As of December 31, 1996, the Company had outstanding a demand note payable
in the amount of $100,000 and an equipment loan payable in the amount of $14,061
due to the principal stockholder. See Note 6 for discussion of notes payable
terms.
6. DEBT
The Company's debt obligations at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Note payable to First Community Bank of Dawsonville, due March 31, 1997, interest at
prime plus 2%, secured by certain assets of the Company ........................ $375,000
Note payable to majority stockholder, due on demand, interest at prime plus 2% ... 100,000
Equipment loans from majority stockholder, due on demand, interest at 5% ......... 14,061
---------
Total outstanding ............................................................ $489,061
=========
</TABLE>
F-11
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
6. DEBT -- (Continued)
As all of the Company's debt at December 31, 1996 matures in 1997 or is due
on demand, these amounts are classified as current in the accompanying balance
sheet.
7. COMMITMENTS AND CONTINGENCIES
Leases
ViewStar leases office space and equipment. Rent expense for the year ended
December 31, 1996 was $53,878. The operating leases expire at various dates
through 2000.
At December 31, 1996, the Company's minimum rental commitments under
noncancelable operating leases with initial or remaining terms of more than one
year were as follows:
1997 ....................................... $50,000
1998 ....................................... 24,000
1999 ....................................... 5,000
2000 ....................................... 5,000
--------
Total future minimum lease payments ...... $84,000
========
Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. There are no pending legal proceedings to which the
Company is a party.
8. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1996 are as follows:
Deferred tax assets:
Net operating loss carryforwards ............... $ 288,000
Unearned revenue ................................. 110,000
Accrued interest ................................. 34,000
Depreciation .................................... 15,000
----------
Total deferred tax assets ..................... 447,000
Deferred tax liabilities:
Other .......................................... (3,000)
----------
Net deferred tax assets ........................ 444,000
Valuation allowance for deferred tax assets ...... (444,000)
----------
Net deferred taxes ........................... $ 0
==========
The Company's net operating loss carryforwards will expire between 2008 and
2011 unless utilized. Due to the fact that the Company has incurred losses since
inception, the Company has not recognized the income tax benefit of the net
operating loss carryforwards. Management has provided a 100% valuation reserve
against its net deferred tax asset, consisting primarily of net operating loss
carryforwards. In addition, the Company's ability to recognize the benefit from
the net operating loss carryforwards could be limited under Section 382 of the
Internal Revenue Code if ownership of the Company changes by more than 50%, as
defined.
F-12
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
8. INCOME TAXES -- (Continued)
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the year ended December 31, 1996 is as
follows:
Income tax benefit at statutory rate ............ 34%
State income taxes, net of federal benefit ...... 4
Deferred tax asset valuation allowance ......... (38)
Effective tax rate .............................. 0%
9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS
The NRTC has contracted with third parties to provide the NRTC members with
certain services, including billing services and centralized remittance
processing services. The NRTC bills the Company for these services on a monthly
basis. These fees are recorded as service fees in the accompanying statement of
operations. The NRTC also sells DSS(R) equipment to its members.
Because the Company is, through the NRTC, a distributor of DirecTv
Services, the Company would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communications Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and Hughes
(the "Hughes Agreement") and the NRTC Member Agreements, participating NRTC
members acquired the exclusive rights to provide DirecTv services to residential
and commercial subscribers in certain rural DirecTv markets. In general, upon
default by the NRTC under the Hughes Agreement, the Company would have the right
to acquire DirecTv Services directly from DirecTv. The NRTC has contracted with
third parties to provide the NRTC members with certain services, including
billing services and centralized remittance processing services. If the NRTC is
unable to provide these services for whatever reason, the Company would be
required to acquire the services from other sources. There can be no assurance
that the cost to the Company to obtain these services elsewhere would not exceed
the amounts currently payable to the NRTC.
The Company would also be adversely affected by the termination of the NRTC
Member Agreements by the NRTC prior to the expiration of their respective terms.
If the NRTC Member Agreements are terminated by the NRTC, the Company would no
longer have the right to provide DirecTv Services. There can be no assurance
that the Company would be able to obtain similar DBS services from other
sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when Hughes
removes its current satellites from their assigned orbital locations. Although,
according to Hughes, the three DirecTv satellites have estimated orbital lives
of approximately 15 years from their respective launches in December 1993 and
1994, there can be no assurance as to the longevity of the satellites and thus
no assurance as to how long the Company will be able to continue to acquire DBS
services pursuant to the NRTC Member Agreements.
While the Company believes it will have access to DirecTv Services
following the expiration of the current Hughes Agreement by virtue of the NRTC's
right of first refusal in the Hughes Agreement and the Company's existing
contractual and membership relationship with the NRTC, there can be no assurance
that such services will be available to the Company from Hughes or the NRTC, and
if available, there can be no assurance with regard to the financial and other
terms under which the Company could acquire the services.
F-13
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS -- (Continued)
The Company's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the Company's DBS business.
DirecTv and, therefore, the Company are dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and have
different renewal and cancellation provisions. There can be no assurance that
any such agreements will be renewed or will not be canceled prior to expiration
of their original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
10. SUBSEQUENT EVENT
In September 1997, the Company entered into a non-binding letter of intent
with Pegagus Communications Corporation ("Pegasus") to sell the stock of the
Company to Pegasus in exchange for a combination of cash and stock.
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pioneer Services Corporation
Greenville, Alabama
We have audited the accompanying balance sheet of the DBS Operations of
Pioneer Services Corporation (operating division of Pioneer Services Corporation
as more fully described in Note 1 to financial statements) (the Division) as of
September 30, 1997 and the related statements of operations and retained
earnings, and cash flows for the year then ended. These financial statements are
the responsibility of the Division's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DBS Operations of
Pioneer Services Corporation as of September 30, 1997 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements may not necessarily be indicative of
the conditions that would have existed or the results of operations had the
Division been unaffiliated with Pioneer Services Corporation. As discussed in
Notes 1 and 6 to the financial statements, Pioneer Services Corporation provides
financing and certain general and administrative and other corporate services to
the Division.
Jackson Thornton & Co., P.C.
Montgomery, Alabama
November 14, 1997
F-15
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
GREENVILLE, ALABAMA
BALANCE SHEET AT SEPTEMBER 30, 1997
ASSETS
CURRENT ASSETS:
Cash ............................................... $ 36,409
Accounts receivable:
Customers, less provision for doubtful accounts
of $20,783 ....................................... 310,516
Inventories ........................................ 45,883
-----------
Total current assets ........................... 392,808
-----------
EQUIPMENT:
Leased property (net of accumulated depreciation
of $462,988) ...................................... 2,197,780
-----------
OTHER ASSETS:
Deferred charges ................................... 143,235
-----------
Total assets ................................... $ 2,733,823
===========
LIABILITIES AND DIVISION DEFICIENCY
CURRENT LIABILITIES:
Accounts payable ................................... $ 224,251
Deferred credits ................................... 207,353
-----------
Total current liabilities ...................... 431,604
-----------
LONG-TERM DEBT:
Notes payable ...................................... 4,957,908
-----------
Total liabilities .............................. 5,389,512
-----------
EQUITY:
Division deficiency ................................ (2,655,689)
-----------
Total liabilities and equity ................... $ 2,733,823
===========
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
STATEMENT OF OPERATIONS AND DIVISION DEFICIENCY
FOR THE YEAR ENDED SEPTEMBER 30, 1997
OPERATING REVENUES ....................................... $ 4,815,067
OPERATING EXPENSES ....................................... (5,388,767)
-----------
LOSS FROM OPERATIONS ..................................... (573,700)
INTEREST EXPENSE ......................................... (356,709)
-----------
NET LOSS ................................................. (930,409)
DIVISION DEFICIENCY AT BEGINNING OF YEAR ................. (1,725,280)
-----------
DIVISION DEFICIENCY AT END OF YEAR ....................... $(2,655,689)
===========
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss ...................................................... $ (930,409)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization ............................... 566,704
Provision for losses on notes and accounts receivable ....... 251,496
Loss on sale of assets ...................................... 32,563
Decrease (increase) in operating assets and increase
(decrease) in operating liabilities:
Accounts receivable ....................................... (223,512)
Inventories ............................................... 284,668
Accounts payable .......................................... 62,994
Accrued liabilities ....................................... (34,758)
Deferred credits .......................................... 12,288
----------
Net cash from operating activities ...................... 22,034
----------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Capital expenditures .......................................... (332,773)
Proceeds from the sale of assets .............................. 637,685
Deferred charges .............................................. (217,301)
----------
Net cash from investing activities ...................... 87,611
----------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Proceeds from long-term debt .................................. 2,296,500
Principal paid on long-term debt .............................. (2,395,643)
----------
Net cash used for financing activities .................. (99,143)
----------
NET INCREASE IN CASH ........................................... 10,502
CASH AT BEGINNING OF YEAR ...................................... 25,907
----------
CASH AT END OF YEAR ............................................ $ 36,409
==========
SUPPLEMENTAL INFORMATION:
Cash paid for interest on long-term debt ...................... $ 424,643
==========
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 - PRESENTATION AND NATURE OF BUSINESS:
Basis of presentation - The DBS operations of Pioneer Services Corporation
(the Division) are comprised of the assets and liabilities of the division of
Pioneer Services Corporation (PSC) which provides direct broadcast satellite
(DBS) services. PSC intends to sell these assets pursuant to an agreement
with Pegasus Communications Holdings, Inc. (see Note 7). This division has no
separate legal existence apart from PSC.
The historical financial statements of the DBS operations of PSC do not
necessarily reflect the results of the operations or financial position that
would have existed if the DBS operations were an independent company. PSC
provides certain general and administrative and other corporate services to the
Division (see Note 6).
Nature of business - PSC sells direct broadcast satellite equipment and
programming for television to consumers in rural central Alabama franchised by
the National Rural Telecommunication Cooperative (NRTC). While this franchise is
exclusive as it relates to programming provided through NRTC, other programming
providers may offer DBS services within the Division's market. Under the
franchise agreement, NRTC leases satellite capacity through which programming is
transmitted. The NRTC provides certain billing functions for the Division.
The Division extends credit to its customers who are primarily in the State
of Alabama.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Inventories - Inventories are stated at the lower of cost (first-in,
first-out (FIFO) method) or market.
Equipment - Equipment is stated at cost. Depreciation of equipment is
computed on a straight-line basis over the useful lives of the assets. The
useful life of equipment held at the balance sheet date was determined to be
from five to seven years. The useful life of direct broadcast satellite
equipment is estimated to be seven years. Depreciation expense on all equipment
totaled $490,754 in 1997. Leased property is leased to customers on a monthly
basis.
In 1993, the Division borrowed $1,400,520 to acquire the franchise for the
DBS service areas which it now serves. This loan was secured by the franchise
for satellite television service. This note was satisfied in full on September
30, 1995 when PSC transferred the franchise for satellite television service to
Pioneer Electric Cooperative.
Deferred credits - Deferred credits include programming charges which have
been collected in advance from the consumer. These charges are brought into
income as the service is provided to the consumer.
F-19
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (Continued)
SEPTEMBER 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Revenue recognition - Revenue in connection with programming services and
associated costs are recognized when such services are provided. Revenue in
connection with the sale of equipment and installation and associated costs are
recognized when the equipment is installed.
Income taxes - Pioneer is established as a not-for-profit organization
under the laws of the State of Alabama. Pioneer is subject to federal income
tax. The Division is included in the tax return of Pioneer. Accordingly, income
taxes have been presented in these financial statements as though the Division
filed a separate federal income tax return. The Division accounts for income
taxes under the provisions of Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes (see Note 5).
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Supplier - The Corporation purchases all of its programming from NRTC. The
cost of programming was $1,724,534 for 1997.
NOTE 3 - CASH AND CASH EQUIVALENTS:
The Division maintains its cash accounts in a bank located in Ohio. The
account at this bank is guaranteed by the Federal Deposit Insurance Corporation
(FDIC) for up to $100,000. At September 30, 1997, all of the Division's cash was
insured.
NOTE 4 - LONG-TERM DEBT:
Long-term debt consists of notes payable to NRUCFC. Those notes are
variable interest rate loans (currently 6.20%), secured by all assets of PSC,
and mature on April 17, 2000. The outstanding balance at September 30, 1997 is
$4,957,908.
NOTE 5 - INCOME TAXES:
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes, requires companies to record deferred tax assets or liabilities
for the deferred tax consequences of all temporary differences. The Statement
requires that deferred tax balances be adjusted to reflect new tax rates when
they are enacted into law. Also, SFAS No. 109 requires the establishment of an
asset and/or liability to recognize the cumulative effect of deferred tax
activity.
The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods.
Deferred income taxes are provided for certain temporary differences principally
due to the use of accelerated depreciation for income tax purposes. Such
deferred taxes are credited to income as the related temporary differences
reverse.
The Division has no income tax benefit for losses incurred, as any benefit
would serve PSC and not the Division separately. A valuation allowance has been
recorded to reflect this.
F-20
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (Continued)
SEPTEMBER 30, 1997
NOTE 5 - INCOME TAXES: -- (Continued)
Significant items comprising the Division's deferred tax assets and
liabilities at September 30, 1997 are as follows:
Net deferred income tax asset:
Deferred tax asset:
Benefit from net operating loss carryforwards expiring
through the year 2012 .............................. $ 390,718
Deferred tax liability:
Depreciation expense ................................. (154,403)
----------
Net deferred tax asset ................................. 236,315
Valuation allowance .................................... (236,315)
----------
Net deferred tax balance ........................... $ -
==========
NOTE 6 - RELATED PARTIES:
Some of the PSC's directors also serve as directors of Pioneer Electric
Cooperative (PEC). PSC is managed in accordance with a management contract
between PSC and PEC.
The Division had notes payable to PEC for capital expenditures and working
capital deficiencies. In 1997, those notes were paid in full by PSC. Interest
expense on PEC loans for the year ended September 30, 1997 totaled $66,230.
Interest paid to PEC for the year ended September 30, 1997 totaled $101,737.
NOTE 7 - SUBSEQUENT EVENT:
On October 21, 1997 PSC executed the sale of its DBS operating assets along
with its subscribers list for $7,697,040 to Pegasus Communications Holdings,
Inc.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Managers
of DTS Management, LLC, the sole manager of
Digital Television Services, LLC:
We have audited the accompanying consolidated balance sheet of DIGITAL
TELEVISION SERVICES, LLC (a Delaware limited liability company and formerly DBS
Holdings, L.P.) AND SUBSIDIARIES as of December 31, 1996 and the related
consolidated statements of operations, members' equity, and cash flows for the
period from inception (January 30, 1996) through December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Digital
Television Services, LLC and subsidiaries as of December 31, 1996 and the
results of their operations and their cash flows for the period from inception
(January 30, 1996) through December 31, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 28, 1997
(except with respect to the matters
discussed in Note 10
as to which the date is November 6, 1997)
F-22
<PAGE>
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, September 30, September 30,
1996 1997 1997 (NOTE 10)
--------------- ---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 1,595,955 $ 29,971,003
Restricted cash .................................... -- 36,544,197
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$6,750 and $166,075 at December 31, 1996 and
September 30, 1997, respectively .................. 893,950 3,273,629
Other ............................................. 154,840 548,844
Inventory .......................................... 244,544 1,044,596
Other (Note 2) ....................................... 234,153 829,159
------------ -------------
Total current assets .............................. 3,123,442 72,211,428
------------ -------------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements .............................. 81,244 236,216
Furniture and equipment .............................. 397,201 1,965,485
------------ -------------
478,445 2,201,701
Less accumulated depreciation ........................ (44,339) (366,089)
------------ -------------
434,106 1,835,612
------------ -------------
CONTRACT RIGHTS AND OTHER
ASSETS, NET (Note 2) ................................. 38,604,625 144,398,793
------------ -------------
$ 42,162,173 $ 218,445,833
============ =============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................... $ 1,041,019 $ 4,047,579
Accrued liabilities ................................. 1,380,321 7,178,610
Unearned revenue .................................... 1,082,601 3,679,357
Current maturities of long-term debt ............... 6,033,732 9,323,778
Other ................................................ 92,279 256,913 295,538
------------ ------------- ----------
Total current liabilities ........................ 9,629,952 24,486,237 24,524,862
------------ ------------- ----------
LONG-TERM DEBT,
less current maturities .............................. 17,542,883 166,896,333
------------ -------------
OTHER LIABILITIES .................................... 83,615 46,645 1,035,680
------------ ------------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 5, 6, 8, and 10)
MEMBERS' EQUITY/STOCKHOLDERS' EQUITY
Class A units ....................................... 0 29,820,008 0
Class B units ....................................... 18,440,982 20,499,979 0
Class C units ....................................... 0 0 0
Class D units ....................................... 0 0 0
Preferred stock, $.01 par value; 10,000,000 shares
authorized; 1,404,056 issued and outstanding
at September 30, 1997 .............................. 0 0 14,041
Common stock, $.01 par value; 10,000,000 shares
authorized; 2,137,049 issued and outstanding
at September 30, 1997 .............................. 0 0 21,370
Additional paid-in capital ........................... 0 0 25,953,547
Retained deficit .................................... (3,535,259) (23,303,369) 0
------------ ------------- ----------
Total members' equity/ stockholders' equity ...... 14,905,723 27,016,618 25,988,958
------------ ------------- ----------
$ 42,162,173 $ 218,445,833
============ =============
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
F-23
<PAGE>
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception Inception Nine Months
(January 30) To (January 30) To Ended
December 31, September 30, September 30,
1996 1996 1997
----------------- ----------------- ----------------
(Unaudited)
<S> <C> <C> <C>
REVENUE:
Programming revenue ..................... $ 3,085,146 $ 1,269,107 $ 28,811,235
Equipment and installation revenue ...... 323,663 95,798 3,291,122
------------ ------------ -------------
Total revenue. ........................ 3,408,809 1,364,905 32,102,357
------------ ------------ -------------
COST OF REVENUE:
Programming expense ..................... 1,595,963 668,881 14,117,014
Cost of equipment and installation ...... 398,144 96,306 4,026,498
Service fees ........................... 275,704 98,909 2,758,947
------------ ------------ -------------
Total cost of revenue .................. 2,269,811 864,096 20,902,459
------------ ------------ -------------
GROSS PROFIT .............................. 1,138,998 500,809 11,199,898
OPERATING EXPENSES:
Sales and marketing ..................... 778,036 297,443 5,557,260
General and administrative ............... 1,953,635 830,580 5,884,949
Depreciation and amortization ............ 1,147,963 529,265 10,483,916
------------ ------------ -------------
Total operating expenses ............... 3,879,634 1,657,288 21,926,125
------------ ------------ -------------
OPERATING LOSS ........................... (2,740,636) (1,156,479) (10,726,227)
------------ ------------ -------------
OTHER INCOME (EXPENSE):
Interest expense, net .................. (817,603) (93,717) (8,917,920)
Other income (expense) .................. 22,980 5,025 (123,963)
------------ ------------ -------------
(794,623) (88,692) (9,041,883)
NET LOSS ................................. $ (3,535,259) $ (1,245,171) $ (19,768,110)
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-24
<PAGE>
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1996) THROUGH DECEMBER 31, 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Class A Class B
Units Amount Units Amount
----------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
BALANCE, January 30, 1996 ...... -- $ -- -- $ --
Sale of Class B Units ......... -- -- 1,844,098 18,440,982
Issuance of Class C Units ...... -- -- -- --
Net loss ........................ -- -- -- (3,535,259)
--------- ------------ --------- -------------
BALANCE, December 31, 1996 ...... -- -- 1,844,098 14,905,723
Sale of Class A Units ......... 1,333,333 29,820,008 -- --
Sale of Class B Units ......... -- -- 205,902 2,058,997
Issuance of Class D Units ...... -- -- -- --
Net Loss (unaudited) ............ -- (2,803,390) -- (16,964,720)
--------- ------------ --------- -------------
BALANCE, September 30, 1997
(unaudited) ..................... 1,333,333 $ 27,016,618 2,050,000 $ 0
========= ============ ========= =============
<CAPTION>
Total
Class C Class D Members'
Units Amount Units Amount Equity
-------- -------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 30, 1996 ...... -- $ -- -- $ -- $ --
Sale of Class B Units ......... -- -- -- -- 18,440,982
Issuance of Class C Units ...... 87,049 -- -- -- --
Net loss ........................ -- -- -- -- (3,535,259)
------ ------ ------- ------ -------------
BALANCE, December 31, 1996 ...... 87,049 -- -- -- 14,905,723
Sale of Class A Units ......... -- -- -- -- 29,820,008
Sale of Class B Units ......... -- -- -- -- 2,058,997
Issuance of Class D Units ...... -- -- 124,000 -- --
Net Loss (unaudited) ............ -- -- -- -- (19,768,110)
------ ------ ------- ------ -------------
BALANCE, September 30, 1997
(unaudited) ..................... 87,049 $ -- 124,000 $ -- $ 27,016,618
====== ====== ======= ====== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-25
<PAGE>
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception Inception Nine Months
(January 30) to (January 30) to Ended
December 31, 1996 September 30, 1996 September 30, 1997
------------------- -------------------- -------------------
(Unaudited)
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (3,535,259) $ (1,245,171) $ (19,768,110)
------------- ------------ --------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 1,106,264 529,265 9,586,005
Amortization of capitalized debt costs and debt
discount ................................................... 313,329 -- 1,502,106
Amortization of deferred promotional costs .................. 41,699 -- 897,902
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net .................................... (428,281) (221,107) 11,943
Inventory ................................................... (218,140) (28,053) (420,808)
Other current assets ....................................... (269,721) (33,389) (1,308,523)
Accounts payable .......................................... 877,630 274,461 3,005,559
Accrued liabilities and other liabilities .................. 1,099,003 159,974 2,845,516
Unearned revenue .......................................... 379,533 117,659 (869,870)
------------- ------------ --------------
Total adjustments .......................................... 2,901,316 798,810 15,249,830
------------- ------------ --------------
Net cash used in operating activities ..................... (633,943) (446,361) (4,518,280)
------------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of acquisitions (382,175) (226,672) (1,339,466)
Disposals of property and equipment ........................... (3,930) (3,930) --
Increase in restricted cash for payment of subordinated
notes ...................................................... 0 0 (36,544,197)
Purchase of contract rights and related net assets,
net of amounts financed .................................... (12,695,488) (7,121,586) (88,745,395)
Increase in other assets .................................... (693,690) (313,305) --
------------- ------------ --------------
Net cash used in investing activities ..................... (13,775,283) (7,665,493) (126,629,058)
------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank credit facility ........................... 9,400,000 -- 72,769,409
Repayment of bank credit facility ........................... -- -- (82,169,409)
Proceeds from subordinated notes offering, net of
discounts ................................................... -- -- 152,840,850
Issuance of notes payable .................................... 32,399 -- 344,417
Repayment of seller notes and other notes payable ............ (9,047,023) -- (6,132,908)
Capitalized financing fees .................................... (2,821,177) -- (9,325,449)
Sale of Member Units .......................................... 18,440,982 8,888,475 31,879,005
Other, net ................................................... -- 83,616 (683,529)
------------- ------------ --------------
Net cash provided by financing activities .................. 16,005,181 8,972,091 159,522,386
------------- ------------ --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,595,955 860,237 28,375,048
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ...................................................... -- -- 1,595,955
------------- ------------ --------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD ................................................... $ 1,595,955 $ 860,237 $ 29,971,003
============= ============ ==============
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared .............................. $ 83,615 $ 83,616 $ --
============= ============ ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ....................................... $ 301,035 $ -- $ 5,009,366
============= ============ ==============
Issuance of seller notes in connection with acquisitions . $ 24,156,000 $ 17,300,000 $ 15,524,198
============= ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. Organization and Nature of Business
Digital Television Services, LLC ("DTS") is a limited liability company
organized under the Delaware Limited Liability Company Act (the "LLC Act") and
is successor to DBS Holdings, L.P., a Delaware limited partnership originally
formed on January 30, 1996 by Columbia Capital Corporation ("Columbia") and
senior management of DTS. On November 19, 1996, the limited partnership was
converted into a limited liability company under the applicable provisions of
the LLC Act and Delaware limited partnership laws. All information in the
accompanying consolidated financial statements and notes has been restated for
the conversion to a limited liability company. DTS is owned by its members
(Note 7). DTS and its wholly owned subsidiaries (collectively, "the Company")
were formed to acquire and operate the exclusive rights to distribute direct
broadcast satellite ("DBS") services ("DIRECTV Services") offered by DirecTv,
Inc. ("DirecTv") in certain rural markets. The Company completed its first
acquisition of a rural DIRECTV Services provider in March 1996 and has made a
total of 16 acquisitions through May 9, 1997 (Notes 3 and 10). On October 10,
1997, DTS effected a conversion from a limited liability company to a
corporation through a merger with and into WEP Intermediate Corp. (Note 10).
In connection with the Company's expansion, Columbia and certain of its
affiliates increased their investment in the Company subsequent to December 31,
1996. Additional equity was raised from J.H. Whitney & Co. and Fleet Equity
Partners (together with Columbia, the "Equity Investors") and from senior
executives of the Company subsequent to year-end. The Equity Investors and
senior executives, in aggregate, have contributed $50,500,000 of equity capital
to the Company from inception through February 28, 1997 (Note 10).
DTS is a holding company which operates primarily through its wholly-owned
subsidiaries. The principal wholly-owned subsidiaries of DTS as of December 31,
1996 consist of 8 entities (the "Operating Subsidiaries") which, except for one
subsidiary which is a Delaware limited liability company and one subsidiary
which is a New Mexico corporation, are limited liability companies organized
under the laws of the state of Georgia. The Operating Subsidiaries are
independent providers of DIRECTV Services. The sole manager of DTS is DTS
Management, LLC ("DTS Management"), a Georgia limited liability company, which
is a wholly-owned subsidiary of DTS. The Company's other wholly-owned
subsidiary, DTS Capital, Inc. ("DTS Capital"), was formed subsequent to
December 31, 1996 and currently has nominal assets and does not conduct any
operations. DTS Capital was formed to facilitate issuance of certain senior
notes (Note 10). In connection with the reorganization (the "Reorganization")
of the Company in February 1997, the Company contributed to the capital of DTS
Management the Company's ownership interest in each of its direct subsidiaries,
other than DTS Management and DTS Capital. As a result thereof, each direct
subsidiary became a wholly-owned direct subsidiary of DTS Management and a
wholly-owned indirect Subsidiary of the Company. Since each subsidiary was a
wholly-owned direct or indirect subsidiary of the Company prior to the
Reorganization, the Reorganization had no impact on the consolidated financial
statements of the Company.
The Company obtained the rights to distribute DIRECTV Services in its
territories pursuant to agreements (the "NRTC Member Agreements") with the
National Rural Telecommunications Cooperative (the "NRTC"). Under the
provisions of the NRTC Member Agreements for the 1996 Acquisitions (Note 3) and
the 1997 Acquisitions (Note 10), the Company has the exclusive right to provide
DIRECTV Services within certain rural territories in the United States.
The Company has had a limited operating history during which time it has
generated negative cash flows and net losses. The negative cash flows can be
attributed to the costs incurred to purchase NRTC contract rights and related
assets (Notes 3 and 10) and general corporate overhead expenses. The Company
expects negative cash flows and net losses to continue through at least 1997,
as the Company plans to purchase additional contract rights and to incur
substantial selling and marketing expenses in order to build its subscriber
base. The ability to generate positive cash flow in the future is dependent
upon many factors, including general economic
F-27
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. Organization and Nature of Business -- (Continued)
conditions, the level of market acceptance for the Company's services, and the
degree of competition encountered by the Company. As discussed in Note 5,
financing totaling $100 million has been committed by a syndicate of lenders,
of which $82,169,409 was outstanding at September 30, 1997. The Company also
issued $155 million in senior subordinated notes in July 1997 (Note 10) to
refinance certain existing indebtedness and to provide additional funds for
possible future acquisitions and general operating needs.
The success of the Company is dependent on this financing and the future
ability of DTS and its subsidiaries to generate projected revenues through
successful operations. The members have no present plans to discontinue support
of the Company. In the opinion of management, capital on hand, as well as funds
provided from financings (Notes 5 and 10), will be sufficient to meet the
capital and operating needs of the Company through at least 1997. Additional
funding may be required for any future acquisitions. However, there can be no
assurance when or if future operations of the Company will be successful or
that further financing, if needed, will be available with terms acceptable to
the Company, or at all.
On November 6, 1997, the Company entered into an agreement in principle
with Pegasus Communications Corp. ("Pegasus") providing for the acquisition of
the Company and all of its subsidiaries by Pegasus (Note 10).
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of DTS and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Interim Unaudited Financial Information
The consolidated balance sheet as of September 30, 1997 and the
consolidated statements of operations, members' equity and cash flows for the
nine months ended September 30, 1997 are unaudited and have been prepared by
management of the Company in accordance with the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements contain adjustments (consisting of only normal items) necessary for
the fair presentation of the financial portion and results of operations for
the interim period. The results of operations for the nine months ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under monthly, annual, or seasonal subscriptions; and movies and events
programming available on a pay-per-view basis. Programming purchased on a
monthly, quarterly, annual, or seasonal basis, including premium programming,
is billed in advance and is recorded as unearned revenue. All programming
revenue is recognized when earned.
F-28
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
2. Summary of Significant Accounting Policies -- (Continued)
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the Company and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the Company for such services.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the Company's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the NRTC (Note
9)); monthly subscriber maintenance fees charged by DirecTV, such as security
fees, ground service fees, system authorization fees, and fees for subscriber
billings; costs of equipment and installation; and certain subscriber operating
costs. Cost of equipment and installation represents the actual cost of the
equipment to the Company plus the costs to install the equipment.
Inventories
The Company maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Other Current Assets
Other current assets consist of the following:
December 31, September 30,
1996 1997
-------------- --------------
Deferred promotional costs ...... $214,939 $699,678
Other ........................... 19,214 129,481
-------- --------
$234,153 $829,159
======== ========
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who sign a
non-cancellable and non-refundable contract pursuant to which they agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the Company for the credit. The Company defers both the
programming revenue and the cost of this credit and amortizes them over the
one-year contract period. In addition, as a part of this program, the Company
receives $1 per month for up to five years from the NRTC for each subscriber
whose account remains active.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment is provided using the straight-line
method over the estimated useful lives of the respective assets, ranging from
three to seven years. Depreciation expense was $48,269 and $322,513 for the
period from inception (January 30, 1996) through December 31, 1996 and for the
nine months ended September 30, 1997, respectively. Upon retirement or disposal
of assets, the cost and related accumulated depreciation are removed from the
balance sheet and any gain or loss is reflected in earnings.
F-29
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
2. Summary of Significant Accounting Policies -- (Continued)
Contract Rights and Other Assets
Contract rights and other assets consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- ----------------
<S> <C> <C>
Contract rights ............................................. $32,727,697 $ 141,793,076
Organization costs .......................................... 599,528 1,239,348
----------- -------------
33,327,225 143,032,424
Accumulated amortization .................................... (1,057,995) (10,309,709)
----------- -------------
32,269,230 132,722,715
Deposits on 1997 Acquisitions and Pending Acquisitions ...... 3,380,961 --
Debt issuance costs, net .................................... 2,776,658 4,263,126
Bond issuance costs, net .................................... -- 7,136,372
NRTC patronage capital ....................................... 83,615 46,645
Other ...................................................... 94,161 229,935
----------- -------------
$38,604,625 $ 144,398,793
=========== =============
</TABLE>
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services (Note 3), less net tangible assets acquired.
Contract rights are being amortized over ten years, the estimated remaining
useful life of the satellites operated by DirecTv which provide service under
the related contracts. Amortization expense, included in depreciation and
amortization in the accompanying statement of operations, was $1,021,606 and
$9,088,690 for the period from inception (January 30, 1996) through December
31, 1996 and for the nine months ended September 30, 1997, respectively.
Accumulated amortization, included in the accompanying balance sheets, was
$1,021,606 and $10,110,299 for the period from inception (January 30, 1996)
through December 31, 1996 and for the nine months ended September 30, 1997,
respectfully.
Organization Costs: Organization costs are costs associated with the
formation of the Company and its subsidiaries and are being amortized over five
years. Amortization expense included in depreciation and amortization in the
accompanying statement of operations was $36,389 and $165,520, for the period
from inception (January 30, 1996) through December 31, 1996 and for the nine
months ended September 30, 1997, respectively. Accumulated amortization,
included in the accompanying balance sheets, was $36,389 and $199,410 for the
period from inception (January 30) through December 31, 1996 and for the nine
months ended September 30, 1997, respectively.
Deposits on Acquisitions: In accordance with the provisions of asset
purchase agreements entered into by the Company, deposits were made into escrow
accounts for acquisitions of contract rights in Kentucky, Vermont and Kansas,
which were pending at December 31, 1996.
Debt Issuance Costs: Debt issuance costs are amortized over the term of
the related long-term debt facility. Amortization expense, included in interest
expense in the accompanying statement of operations, was $44,520 and $582,493
for the period from inception (January 30, 1996) through December 31, 1996 and
for the nine months ended September 30, 1997, respectively. Accumulated
amortization, included in the accompanying balance sheets, was $44,520 and
$627,013 for the period from inception (January 30) through December 31, 1996
and for the nine months ended September 30, 1997, respectively.
Bond Issuance Costs: Bond issuance costs represent deferred costs incurred
in connection with a bond offering (Note 10) subsequent to December 31, 1996
and are capitalized over the life of the bonds. Amortization expense, included
in interest expense in the accompanying statement of operations, was $120,114
for the nine month period ended September 30, 1997. Accumulated amortization,
included in the accompanying balance sheets, was $120,114 for the same nine
month period.
F-30
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
2. Summary of Significant Accounting Policies -- (Continued)
NRTC Patronage Capital: The Company, through its subsidiaries, is an
affiliate of the NRTC. While affiliates have no vote, they do have an interest
in the NRTC in proportion to their prior patronage. NRTC patronage capital
represents the noncash portion of NRTC patronage income. Under its bylaws, the
NRTC declares a patronage dividend of its excess of revenues over expenses each
year. Of the total patronage dividend, 20% is paid in cash and recognized as
income when received and is netted against programming expense in the
accompanying statement of operations. The remaining 80% is distributed in the
form of noncash patronage capital, which will be redeemed in cash only at the
discretion of the NRTC. The Company includes noncash patronage capital as other
assets, with an offsetting deferred patronage income amount included in other
liabilities in the accompanying balance sheet. The patronage capital will be
recognized as income when cash distributions are declared by the NRTC.
Income Taxes
The Company is considered a partnership for federal and state income tax
purposes. All taxable income or loss is allocated to the members in accordance
with the terms of the member agreement. Accordingly, no provision for income
taxes is included in the accompanying financial statements.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments for which it is practicable to estimate that
value. For purposes of the following disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties other than in a forced sale or
liquidation.
The methods and assumptions used to estimate fair value are as follows:
Cash and cash equivalents: The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amount approximates fair value due to the relatively
short period to maturity of these instruments.
Long-term debt: Fair value is estimated based on borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities.
The asset and liability amounts recorded in the accompanying balance sheet
at December 31, 1996 for cash and cash equivalents and long-term debt
approximate fair value based on the above assumptions.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of geographically dispersed subscribers. As a
result, at December 31, 1996, management does not believe any significant
concentration of credit risk exists.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the
F-31
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
2. Summary of Significant Accounting Policies -- (Continued)
asset and its eventual disposition. Having found no instances whereby the sum
of expected future cash flows (undiscounted and without interest charges) was
less than the carrying amount of the asset and thus requiring the recognition
of an impairment loss, management believes that the long-lived assets in the
accompanying balance sheet are appropriately valued.
3. Contract Rights
During 1996, the Company acquired the rights to distribute DIRECTV
Services in eight rural DirecTv markets in certain rural areas in the United
States (the "1996 Acquisitions"). The aggregate consideration was approximately
$32.3 million, including closing date working capital and other adjustments as
defined in the purchase agreements and fair value adjustments related to the
seller notes (Note 5), subject to increase based on the number of subscribers
in one of the markets on October 1, 1998 (Note 5). Of the total purchase price,
approximately $9.3 million was paid in cash and approximately $24.2 million
(before fair value adjustments related to the seller notes of $1.2 million
(Note 5)) was financed through the issuance of promissory notes to the sellers
of the contract rights (Note 5). Under the 1996 Acquisitions, rights were
acquired in the following markets:
o In March 1996, the Company acquired the outstanding common stock of
Spacenet, Inc. and the rights to provide DIRECTV Services in certain counties
in New Mexico.
o In April 1996, the Company acquired the rights to provide DIRECTV
Services in certain counties in California from Pacific Coast DBS, Inc.
o In August 1996, the Company acquired the rights to provide DIRECTV
Services in certain counties in New Mexico from Teg DBS Services, Inc., in
certain counties in New York from Northeast Cable Services, Inc. and Falls
Earth Station, Inc., and in certain counties in Colorado from Omega Cable.
o In November 1996, the Company acquired the rights to provide DIRECTV
Services in certain counties in South Carolina from Pee Dee Electric
Cooperative, Inc. and Santee Electric Cooperative, Inc.
When the Company purchases the exclusive rights to provide DIRECTV
Services in a rural DirecTv market, it acquires the NRTC Member Agreement and
related agreements providing for the exclusive rights to provide DIRECTV
Services within that market, all net assets related to the provision of DIRECTV
Services in such market, and any residual rights to provide DBS services which
the NRTC may grant the owner of such market after the termination or expiration
of the NRTC Member Agreement. The purchase price of the above acquisitions was
allocated to the fair values of the net assets acquired as follows (in
thousands):
<TABLE>
<S> <C>
Current assets ...................................................... $ 751
Property and equipment ............................................. 96
Contract rights, net of fair value adjustments of $1.2 million ...... 32,728
Current liabilities ................................................ (1,240)
--------
Total consideration ............................................. $ 32,335
========
</TABLE>
Any additional contingent consideration will be recorded as an increase in
contract rights.
During the first nine months of 1997, the Company acquired the rights to
distribute DIRECTV Services in eight additional rural DirecTv markets. The
aggregate consideration was approximately $105.0 million including closing date
working capital and other adjustments as defined in the purchase agreements and
fair value adjustments related to the seller notes (Note 5). Of the total
price, approximately $29.7 million was paid in cash, approximately $59.8
million was financed through borrowings under the Credit Facility and
approximately $15.5 million (before fair value adjustments related to the
seller notes of $3.0 million (Note 5)) was financed through the issuance of
promissory notes to the sellers of the contract rights (Note 5). Under these
acquisitions, rights were acquired in the following markets:
F-32
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
3. Contract Rights -- (Continued)
o In January 1997, the Company acquired the rights to provide DIRECTV
Services in certain counties in Kentucky from Direct Programming Services
Limited Partnership
o In January 1997, the Company also acquired the rights to provide DIRECTV
Services in certain counties in Kansas from Kansas DBS, L.L.C. and Skywave
Communications, Inc.
o In February 1997, the Company acquired the rights to provide DIRECTV
Services in certain counties in Vermont from Northeast DBS Enterprises, L.P.
o In May 1997, the Company acquired the rights to provide DIRECTV Services
in certain counties in Georgia from Mitchell Electric Membership Corporation,
Washington Electric Membership Corporation, Planters Electric Membership
Corporation and DigiCom Services, Inc.
The purchase price of the above acquisitions was allocated to the fair
values of the net assets acquired as follows (in thousands):
<TABLE>
<S> <C>
Current assets ...................................................... $ 3,529
Property and equipment ............................................. 385
Contract rights, net of fair value adjustments of $3.0 million ...... 108,081
Current liabilities ................................................ (6,967)
--------
Total consideration ............................................. $105,028
========
</TABLE>
4. Related-Party Transactions
Columbia, which is owned by certain members of the Company holding Class A
and Class B interests, provides financial, managerial, and other services to
the Company. Total fees and expenses paid to Columbia were approximately
$322,000 and $36,000 for the period from inception (January 30, 1996) through
December 31, 1996 and for the nine months ended September 30, 1997,
respectively. Such fees are included in general and administrative expenses in
the accompanying statement of operations.
5. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
-------------------------- ----------------------------
Unamortized Unamortized
Principal Discount Principal Discount
------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Senior subordinated notes ......... $ -- $ -- $155,000,000 $2,123,164
Credit facility .................. 9,400,000 -- -- --
Seller notes and commitments ...... 15,113,250 965,011 26,120,448 3,097,446
Installment notes .................. 28,376 -- 320,273 --
----------- -------- ------------ ----------
24,541,626 965,011 181,440,721 5,220,610
Less current maturities ............ 6,130,183 96,451 9,615,622 291,844
----------- -------- ------------ ----------
$18,411,443 $868,560 $171,825,099 $4,928,766
=========== ======== ============ ==========
</TABLE>
The Seller Notes
In connection with the acquisition of the Company's California rural
DirecTv market, one of the Operating Subsidiaries, Digital Television Services
of California, LLC ("DTS California"), entered into a promissory note dated
April 1, 1996, as modified as of December 31, 1996 (as so modified, the "DTS
California Note"), in favor of Pacific Coast DBS, Inc. ("Pacific"). Pursuant to
the DTS California Note, DTS California is obligated to pay to Pacific the sum
of (i) $480,000, payable in 24 equal monthly installments commencing May 1,
1996, and (ii) an amount payable on October 1, 1998 equal to the greater of
$4.0 million or the Contingent Payment Amount.
F-33
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
5. Long-Term Debt -- (Continued)
The Contingent Payment Amount is determined by multiplying the number of
subscribers to DIRECTV Services in DTS California's rural DirecTv market as of
October 1, 1998 by certain dollar amounts. As of December 31, 1996 and
September 30, 1997, the Contingent Payment Amount is recorded as $4,223,250 and
$5,786,250, which is based on subscriber levels at December 31, 1996 and
September 30, 1997, respectively. The obligations of DTS California pursuant to
the DTS California Note are secured by a $6,000,000 irrevocable letter of
credit (the "DTS California Letter of Credit") issued in favor of Pacific
pursuant to the Credit Facility, as subsequently defined. The stated amount of
the DTS California Letter of Credit will increase so that it will at all times
be at least equal to 110% of the Contingent Payment Amount. The DTS California
Note contains certain covenants which, among other things, prohibit the payment
of dividends or other distributions by DTS California and payments by DTS
California to Columbia. A failure to make any payment due under the DTS
California Note will allow Pacific to draw under the DTS California Letter of
Credit.
In connection with the acquisition of one of the Company's rural DirecTv
markets in South Carolina (the "South Carolina Rural DirecTv Markets"), one of
the Operating Subsidiaries, Digital Television Services of South Carolina I,
LLC ("DTS South Carolina I"), entered into a promissory note dated November 26,
1996 (the "South Carolina I Note") payable to Pee Dee Electricom, Inc. ("Pee
Dee") in the amount of $7,955,000, of which $3,265,000 was paid in January
1997. The balance is due on January 2, 1998. The note bears interest at a rate
of 4% per annum, payable quarterly. The obligations of DTS South Carolina I
with respect to the South Carolina I Note are secured by an irrevocable letter
of credit (the "South Carolina I Letter of Credit") issued in favor of Pee Dee
pursuant to the Credit Facility. The South Carolina I Note does not contain any
covenants; however, a failure to make any payment due under the South Carolina
I Note will allow Pee Dee to draw under the South Carolina I Letter of Credit.
In connection with the acquisition of the Company's other South Carolina
rural DirecTv market, one of the Operating Subsidiaries, Digital Television
Services of South Carolina II, LLC, entered into a promissory note dated
November 26, 1996 (the "South Carolina II Note") payable to Santee Satellite
Systems, Inc. ("Santee") in the amount of $2,200,000, of which $1,100,000 was
due on November 26, 1997, with the balance due on November 26, 1998. The entire
balance was paid in January 1997 and thus is classified as current maturities
in the accompanying consolidated balance sheet at December 31, 1996. The note
bears interest at 6% per annum, payable quarterly. The note is secured by an
irrevocable letter of credit issued pursuant to the Credit Facility (the "South
Carolina II Letter of Credit") issued in favor of Santee. The South Carolina II
Note does not contain any covenants; however, a failure to make any payment due
under the South Carolina II Note will allow Santee to draw under the South
Carolina II Letter of Credit.
In connection with the acquisition of one of the Company's New Mexico
rural DirecTv markets, the Company entered into a promissory note dated March
1, 1996, as modified as of November 27, 1996 (as so modified, the "New Mexico
Note"), in favor of Edward Botefuhr and Janet Blakeley Botefuhr in the amount
of $415,000, payable in equal installments on April 1, 1998 and April 1, 1999.
The note bears interest at 15% per annum, payable monthly. The note is secured
by an irrevocable letter of credit issued pursuant to the Credit Facility (the
"New Mexico Letter of Credit") issued in favor of the Botefuhrs. The New Mexico
Note does not contain any covenants; however, a failure to make any payment due
under the New Mexico Note will allow the Botefuhrs to draw under the New Mexico
Letter of Credit. The entire balance was paid in January 1997 and thus is
classified as current maturities in the accompanying consolidated balance sheet
at December 31, 1996.
In connection with the acquisition of the Company's Rural DirecTv Markets
in Georgia (the "Georgia Rural DirecTv Markets"), one of the Subsidiaries,
Digital Television Services of Georgia, LLC ("DTS Georgia"), issued three
promissory notes, each of which represents a portion of the purchase price for
one of the Georgia Rural DirecTv Markets. DTS Georgia issued (i) a promissory
note dated May 9, 1997 (the "Planters Notes") payable to Planters Electric
Membership Corporation ("Planters") in the amount of approximately $850,000,
(ii) a promissory note dated May 9, 1997 (the "Mitchell Note") payable to
Mitchell Electric Membership Corporation ("Mitchell") in the amount of
approximately $9.4 million and (iii) a promissory note dated May 9, 1997
F-34
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
5. Long-Term Debt -- (Continued)
(the "Washington Note") payable to Washington Electric Membership Corporation
("Washington") in the amount of approximately $5.2 million. The principal
amount of the Planters Note is payable on January 2, 1998 and bears interest at
a rate of 3% per annum; provided that if DTS Georgia acquires a certain Rural
DirecTv Market, the interest rate will increase as of the date of such
acquisition to 3 1/2% per annum. The principal amount of each of the Mitchell
Note and the Washington Note is payable on January 2, 2001 and bears interest
at a rate of 3% per annum until May 9, 2000 and at a rate of 3 1/2% per annum
thereafter; provided that if DTS Georgia acquires a certain Rural DirectTv
Market, the interest rate will increase as of the date of such acquisition to 3
1/2% per annum, until May 9, 2000, and to 4% thereafter. The obligations of DTS
Georgia with respect to the Georgia Notes are secured by three irrevocable
letters of credit issued pursuant to the Credit Facility (the "Georgia Letters
of Credit"), each of which has been issued for the benefit of one of Planters,
Mitchell and Washington. The Georgia Notes do not contain any affirmative or
negative covenants regarding the Company, DTS Georgia or the operation of the
Georgia Rural DirecTv Markets; however, a failure to make any payment due under
a Georgia Note will allow the payee of such Georgia Note to draw under the
applicable Georgia Letter of Credit.
Credit Facility
The Company is party to a credit agreement (the "Credit Facility") dated
November 27, 1996 with the banks and other lenders party thereto from time to
time. The Credit Facility is a revolving credit facility in the amount of
$100.0 million, with a $25.0 million sublimit for letters of credit. Proceeds
from the Credit Facility can be used to refinance certain existing
indebtedness, to finance the acquisition of contract rights, to finance capital
expenditures and for general corporate purposes and working capital needs.
Borrowings under the Credit Facility are available until November 30,
2001; however, the commitments thereunder shall be reduced on December 31, 1998
by an amount equal to 75% of the available commitments of all lenders on such
date, provided that the reduction shall not be made unless the aggregate amount
of available commitments exceeds $5,000,000, and thereafter available
commitments shall be reduced quarterly commencing on March 31, 1999 at a rate
of 1.250% through 1999, 1.875% through 2000 and 5% through September 30, 2001.
On November 30, 2001, all of the loans outstanding will be repayable. The
making of each loan under the Credit Facility is subject to the satisfaction of
certain conditions, including (i) meeting a certain "borrowing base"
calculation based on the number of paying subscribers and households within the
rural DirecTv markets served by the Company, (ii) maintaining minimum
subscriber penetration and Annualized Contribution (as defined therein) per
paying subscriber, and (iii) maintaining defined annualized operating cash flow
levels. In addition, the Company is required to make mandatory prepayments of
the Credit Facility from, subject to certain exceptions, the net proceeds of
certain sales or other dispositions of material assets by the Company or any of
its subsidiaries. At December 31, 1996, the borrowing base, as defined, was
approximately $92.5 million and approximately $80.0 million was available under
the Credit Facility.
Borrowings under the Credit Facility are secured by (i) an equal and
ratable pledge of all of the equity interests in the Company, DTS Management
and the Operating Subsidiaries, (ii) a first priority security interest in all
of their assets, and (iii) a collateral pledge of the Company's NRTC Member
Agreements.
The Company may elect that all or a portion of the borrowings under the
Credit Facility bear interest at a rate per annum based on the base rate of the
Canadian Imperial Bank of Commerce ("CIBC") or the Eurodollar rate, in each
case plus an applicable margin as defined in the Credit Facility.
At December 31, 1996, borrowings under the Credit Facility accrued
interest at the rate of 9%.
At any time when the Company is in default of the payment of any amount
due under the Credit Facility, the principal of all loans made under the Credit
Facility is subject to acceleration and will bear interest at 2% per annum
above the rate otherwise applicable thereto.
F-35
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
5. Long-Term Debt -- (Continued)
The Company has paid and will pay a commitment fee on the unused amounts
under the Credit Facility calculated at a rate of .375% to .50% per annum,
payable quarterly in arrears. The Company also paid the arrangers of the Credit
Facility a customary structuring and syndication fee and paid certain agency
fees to the agents.
The Credit Facility contains a number of significant covenants that, among
other things, limit the ability of the Company and its subsidiaries to incur
additional indebtedness and guaranty obligations; create liens and other
encumbrances; make certain payments, investments, loans and advances; pay
dividends or make other distributions in respect to its equity interests; sell
or otherwise dispose of assets; make capital expenditures; merge or consolidate
with another entity; make amendments to its organizational documents; or
transact with affiliates. In addition, the Credit Facility requires the
maintenance of certain specified financial and operating covenants, including
minimum interest coverage and leverage ratios and limits on general and
administrative expenses as a percentage of revenue.
Installment Notes
The installment notes represent notes payable to certain financial
institutions for certain property and equipment. The notes are payable in equal
monthly installments through May 2000 and bear interest at rates ranging from
8.5% to 10.3%.
Unamortized Discount
The Company has discounted the Senior Subordinated Notes, the DTS
California Note, the South Carolina I Note, the South Carolina II Note and the
seller notes issued in conjunction with the acquisitions of certain Rural
DirecTv markets in Georgia to reflect the fair market value based on average
interest rates available to the Company. The estimated fair value interest rate
used to record the discount was 12.75% for the Senior Subordinated Notes and 9%
for the seller notes. The unamortized discount is being amortized over the life
of the notes using the effective interest method. Amortization expense,
included in interest expense in the accompanying statement of operations, is
$268,544 and $799,746 for the period from inception (January 30, 1996) through
December 31, 1996 and for the nine months ended September 30, 1997,
respectively.
Future maturities of long-term debt are as follows at December 31, 1996:
1997 ...................................................... $ 6,130,183
1998 ...................................................... 9,004,332
1999 ...................................................... 7,111
2000 ...................................................... 0
2001 ...................................................... 9,400,000
-----------
$24,541,626
===========
F-36
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
6. Commitments and Contingencies
Leases
The Company leases office and retail space and certain equipment under
noncancelable operating leases which expire in various years through 2001.
Future minimum lease payments for noncancelable operating leases in effect at
December 31, 1996 are as follows:
1997 ....................................... $ 298,000
1998 ....................................... 297,000
1999 ....................................... 300,000
2000 ....................................... 148,000
2001 ....................................... 106,000
----------
Total future minimum lease payments ...... $1,149,000
==========
Rental expense charged to operations totaled approximately $83,000 and
$455,369 during the period from inception (January 30, 1996) through December
31, 1996 and during the nine months ended September 30, 1997, respectively, and
is included in general and administrative expense in the accompanying
consolidated statement of operations.
Minimum Subscribers
As part of the NRTC Member Agreements, the Company is required to pay
certain programming fees based on a minimum number of subscribers in each of
its Rural DirecTv Markets (such minimum number of subscribers being equal to up
to 5% of the households in each such Rural DirecTv Market) and the requirements
of certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement with
respect to such Rural DirecTv Market if the Company fails to obtain such
minimum number of subscribers in such Rural DirecTv Market prior to such time.
Six of the Operating Subsidiaries had achieved the minimum subscriber
requirement at December 31, 1996. Two of the Operating Subsidiaries had
achieved approximately 75% of the minimum subscriber requirement at December
31, 1996. Based on the subscriber growth rates of these two Operating
Subsidiaries to date, management anticipates that the two Operating
Subsidiaries will meet the minimum subscriber requirement prior to the fourth
year of operations of the related NRTC Member Agreements and therefore does not
expect to be required to pay such fees.
7. Members' Equity Units
There are four classes of equity interests in the Company, denominated as
"Class A Units," "Class B Units," "Class C Units," and "Class D Units." The
classes have different voting and distribution rights per the Company's Limited
Liability Company Agreement (the "LLC Agreement").
Class A Units are held by the Equity Investors. Each Class A Unit
represents the contribution by its holder of $22.50 to the Company. Class A
Units constitute approximately 37% of the units outstanding at September 30,
1997 (assuming issuance of 180,000 Class D Units pursuant to the Employee Unit
Plan). In addition to the special voting rights defined in the LLC Agreement,
the Class A Unit holders are entitled to certain preemptive rights and
protection against dilution. The Class A Units rank senior to the other classes
of Units with respect to interim and liquidating distributions. On February 10,
1997, the Company sold 1,333,333 Class A Units to the Equity Investors, raising
$30 million of equity capital. No Class A Units and 1,333,333 Class A Units
were outstanding at December 31, 1996 and September 30, 1997, respectively.
Class B Units are held by Columbia DBS, Inc. and Columbia DBS Investors,
L.P., which are affiliates of Columbia, and by certain senior executives of the
Company. Each Class B Unit represents an interest in the
F-37
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
7. Members' Equity Units -- (Continued)
Company received in exchange for the contribution of $10. Class B Units
constitute approximately 57% of the units outstanding at September 30, 1997
(assuming issuance of 180,000 Class D Units pursuant to the Employee Unit
Plan). Class B Units are entitled to certain preemptive rights and rank senior
with respect to interim and liquidating distributions to the Class C and Class
D Units and junior to the Class A Units. Columbia and senior management of the
Company purchased 205,902 Class B Units on January 2, 1997 for a total
investment of $2,059,000. At December 31, 1996 and September 30, 1997,
1,844,098 and 2,050,000 Class B Units, respectively were outstanding.
Class C Units are held by certain senior executives of the Company and are
subject to certain vesting requirements related to employment. Each Class C
Unit represents a restricted interest in the Company received in exchange for
the performance of services. Class C Units constitute approximately 2% of the
units outstanding at September 30, 1997 (assuming issuance of 180,000 Class D
Units pursuant to the Employee Unit Plan). Class C Units are entitled to
certain preemptive rights. The Class C Units rank senior to the Class D Units
with respect to interim and liquidating distributions and junior to the Class A
and Class B Units. At December 31, 1996 and September 30, 1997, 87,049 Class C
Units had been issued. Of these, a total of 34,876 Class C Units were vested at
December 31, 1996 and a total of 68,302 were vested at September 30, 1997.
Employee Unit Plan
In March 1997, DTS Management adopted an Employee Unit Plan (the "Employee
Unit Plan") pursuant to which up to 180,000 Class D Units (or such larger
number of Units as may be approved by the Company and the holders of at least
70% of the Class A Units) may be issued to employees or independent contractors
of DTS Management or the Subsidiaries at prices equal to the market value
thereof as of the date of issuance and pursuant to such terms and conditions
(including vesting) as the Company shall determine. As of September 30, 1997,
124,000 Class D Units have been issued pursuant to the Employee Unit Plan. Such
Units will vest 25% annually commencing March 1998 through May 2001, subject to
acceleration under certain circumstances.
Distributions
Tax Distributions: The Company intends to pay cash distributions in
amounts approximately equal to the income tax liabilities of the members
resulting from the pass-through of taxable income to the members ("Tax
Distributions"). Tax Distributions will be made quarterly.
Other Interim Distributions: The holders of the Class A Units are entitled
to a cumulative compounded annual rate of return equal to 8% applied to their
Class A Capital (defined as the aggregate capital contributions of holders of
Class A Units, less aggregate distributions in return of such capital) (the
"Preferred Return").
Once the holders of Class A Units have received their Preferred Return,
the holders of the Class A and Class B Units are entitled to distributions in
proportion to such units held by them until they have received cumulative
distributions equal to $10 per such unit. Distributions are then made to the
holders of the Class A Units, Class B Units, and Class C Units in proportion to
such Units held by them until they have received cumulative distributions equal
to $12.50 per such unit. Finally, distributions are made to all members in
proportion to the number of units held.
Class A Unit Liquidation Preference and Dissolution Rights: Upon the
dissolution of the Company after distributions are made to the Company's
creditors in satisfaction of liabilities of the Company, distributions in
liquidation are made first to the holders of the Class A Units in an amount
equal to the remaining balance of their Class A capital and accumulated unpaid
Preferred Return. Any remaining amounts available for distribution to the
members are distributed in the same manner as interim distributions.
F-38
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
7. Members' Equity Units -- (Continued)
If, after February 6, 2003, $7.5 million or more of the Class A capital
remains unreturned, then upon the vote of the holders of at least a majority of
the Class A Units, the Company shall be dissolved. If such a dissolution will
result in an event of default under any existing indebtedness of the Company or
any of the Company's subsidiaries with an outstanding balance of $10 million or
more, then such a vote will not cause the dissolution of the Company but,
rather, will be considered a notice by the holders of the Class A Units to the
Company that the holders desire that the Company promptly arrange for the sale
of the Company (including its subsidiaries) or sale of substantially all of its
assets.
Allocations
Losses are first allocated (the "Initial Losses") to the members in
proportion to their units until the cumulative losses allocated equal the
cumulative prior allocations of profits, next (the "Additional Losses") to the
holders of Class B Units (and to the holders of Class C and Class D Units to
the extent that they may have positive capital accounts) in proportion to such
units until their capital account balances are reduced to zero, and finally
(the "Final Losses") to the holders of the Class A Units in proportion to such
units until their capital account balances are reduced to zero.
Profits are first allocated to the holders of Class A Units in proportion
to their units until the cumulative profits allocated equal the cumulative
prior allocations of the Final Losses, next to the holders of Class B Units
(and to the holders of Class C Units and Class D Units if they have been
allocated Additional Losses) until the cumulative profits allocated equal the
cumulative prior allocation of the Additional Losses, next to the holders of
Class A Units in proportion to such units until the cumulative profits
allocated equal the cumulative distributions of the Preferred Return, and next
to the holders of Class B Units and Class C Units in proportion to such units
until the cumulative amount allocated equals the cumulative distributions with
respect to Class B Units and Class C Units. All remaining profits are allocated
to the members in accordance with their relative total units.
Corporate Conversions
Under the Company's LLC Agreement, DTS Management, the sole manager of the
Company, has the authority to convert the Company from a Delaware limited
liability company into a Delaware corporation in connection with the
consummation of a qualified initial public offering ("Qualified IPO"). In such
a case, all of the equity interests of the Company would be converted into
common stock in amounts specified in the LLC Agreement. DTS Management also has
authority to convert the Company from a Delaware limited liability company to a
Delaware corporation other than in connection with the consummation of a
Qualified IPO. In such case, the Class A Units would be converted into
convertible payment-in-kind preferred stock and the other units would be
converted into common stock in amounts specified in the LLC Agreement.
8. Employee Benefits
Employment Agreements
DTS Management has entered into employment agreements with certain
executive officers of DTS Management (the "Employment Agreements"). The initial
term of the Employment Agreements are one year, with automatic extensions of
one year unless terminated by DTS Management or the executive. The Employment
Agreements provide for base salaries and bonuses at the discretion of the board
of managers of DTS Management.
Pursuant to the Employment Agreements, the Company issued the executives
an aggregate of 87,049 Class C Units, which vest based on the Company's
reaching defined numbers of subscribers and/or on defined vesting dates. Any
units not vested at the earlier of (i) the date on which the Company completes
an initial public offering; (ii) the date upon which Columbia and its officers,
directors,stockholders and employees cease to own,
F-39
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
8. Employee Benefits -- (Continued)
directly or indirectly, in the aggregate at least 50% of the equity interests
of the Company held by them on November 19, 1996; or (iii) March 31, 1998 shall
become fully vested and cease to be restricted so long as the executive has
remained employed by DTS Management through such date. No value was assigned to
the Class C Units on the date of grant due to the subordinated nature of any
distributions which may be made to such units (Note 7).
The Employment Agreements also permit the executives to purchase Class B
Units at a price of $10 per unit. Pursuant to rights under the Employment
Agreements and the Company's LLC Agreement, the executives have purchased an
aggregate of 100,500 Class B Units through September 30, 1997.
The Employment Agreements provide that the Company has the option to
repurchase all of the Class C Units held by an executive which have vested and
all of the Class B Units held by an executive if the executive's employment is
terminated voluntarily or with cause (as defined) prior to April 1, 1998. At
such time, all unvested Class C Units of the executive shall be forfeited. If
the executive is terminated for any reason other than cause, the executive's
Class C Units will become fully vested and unrestricted.
Simultaneous with the execution of the Employment Agreements, the subject
executive officers also entered into loan agreements with Columbia for an
aggregate of $430,000 to fund a portion of the equity purchases by the
executives. The loans bear interest at 10% per annum and mature on the earlier
of April 1, 2001 or receipt by the executive of proceeds from the sale of the
purchased units. The loans are secured by a portion of the executive's
purchased Class B Units.
Digital Television Services 401(k) Plan
In January 1997, the Company established the Digital Television Services
401(k) Plan (the "Plan") covering all of its employees. As part of the Plan,
the Company provides matching contributions of 20% of the participant's
contributions up to a maximum of 5% of the participant's pay. The Plan also
provides for additional contributions at the discretion of the Company. The
Company incurs the cost of administering this plan.
9. Reliance on DirecTv and the NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the Company for these services on a monthly
basis. These fees are recorded as service fees in the accompanying statement of
operations. The NRTC also sells DSS(R) equipment to its members.
Because the Company is, through the NRTC, a distributor of DIRECTV
Services, the Company would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes(the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the Company would
have the right to acquire DIRECTV Services directly from DirecTv. The NRTC has
contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized remittance processing
services. If the NRTC is unable to provide these services for whatever reason,
the Company would be required to acquire the services from other sources. There
can be no assurance that the cost to the Company to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
F-40
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
9. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
The Company would also be adversely affected by the termination of the
NRTC Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the Company
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the Company would be able to obtain similar DBS services from
other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the Company will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While the Company believes it will have access to DIRECTV Services
following the expiration of the current Hughes Agreement by virtue of the
NRTC's right of first refusal in the Hughes Agreement and the Company's
existing contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the Company from Hughes or
the NRTC, and, if available, there can be no assurance with regard to the
financial and other terms under which the Company could acquire the services.
The Company's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the Company's DBS business.
DirecTv, and therefore the Company, is dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and have
different renewal and cancellation provisions. There can be no assurance that
any such agreements will be renewed or will not be canceled prior to expiration
of their original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment, without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
10. Subsequent Events
The Offering
Subsequent to year-end, the Company sold, in a transaction exempt from
registration under the Securities Act, $155.0 million senior subordinated notes
(the "Private Notes"). The Notes are the joint and several obligations of the
Company and DTS Capital. DTS Capital has nominal assets, does not conduct any
operations and will not provide any additional security for the Notes. DTS
Capital was formed solely to provide a corporate co-issuer in addition to a
limited liability company issuer (the Company). Accordingly, financial
information for DTS Capital is not provided. The Notes mature in 2007. The
Company raised approximately $146.0 million, net of underwriting discount and
estimated expenses, through the issuance of the Notes. The Company used the net
proceeds to fund the Interest Escrow Account and to repay outstanding
indebtedness under the Company's Credit Facility (Note 5) as described
elsewhere in this Prospectus.
The Company plans to proceed with an offering (the "Exchange Offer") to
exchange the Private Notes with new senior subordinated notes (the "Exchange
Notes") registered under the Securities Act of 1933, as amended (the
"Securities Act"). The terms of the Exchange Notes will be identical in all
material respects (including principal amount, interest rate, maturity,
security and ranking) to the terms of the Private Notes (which they replace),
except that the Exchange Notes: (i) will bear a Series B designation, (ii) will
have been registered under the Securities Act and, therefore, will not bear
legends restricting their transfer, and (iii) will not be entitled to certain
registration rights and certain liquidated damages which were applicable to the
Private Notes in certain circumstances under the Registration Rights Agreement.
F-41
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
The Exchange Notes will be unconditionally guaranteed, on a senior
subordinated basis, as to payment of principal, premium, if any, and interest,
jointly and severally, by all direct and indirect subsidiaries of DTS (the
"Guarantors"). The Guarantors consist of all of the subsidiaries of DTS, except
DTS Capital, which is a co-issuer of the Exchange Notes and has no separate
assets or operations. DTS does not have assets or operations apart from the
assets and operations of the subsidiaries. Accordingly, separate financial
information for the Guarantors is not provided because management of the
Company has determined that such information would not be material to
investors.
Restated Credit Facility
The Company is a party to an Amended and Restated Credit Agreement dated
as of July 30, 1997 (the "Restated Credit Facility") by and among the Company,
the banks and other lenders party from time to time thereto (the "Lenders"),
CIBC, as Administrative Agent, CIBC Wood Gundy Securities Corp. ("CIBCWG"), as
Arranger, Morgan, as Syndication Agent, and Fleet, as Documentation Agent,
which provides for a revolving credit facility in the amount of $70.0 million,
with a $50.0 million sublimit for letters of credit, and a $20.0 million term
loan facility. The proceeds of the Restated Credit Facility may be used (i) to
refinance certain existing indebtedness, (ii) prior to December 31, 1998, to
finance the acquisition of certain Rural DirecTv Markets and related costs and
expenses, (iii) to finance capital expenditures of the Company and its
subsidiaries and (iv) for the general corporate purposes and working capital
needs of the Company and its subsidiaries.
The $20.0 million term loan facility must be drawn within 12 months of the
closing of the Restated Credit Facility and any amounts not so drawn by that
date will be cancelled. The term loan shall be repaid in 20 consecutive
quarterly installments of $200,000 each commencing September 30, 1998 with the
remaining balance due July 31, 2003. Borrowings under the revolving credit
facility established pursuant to the Restated Credit Facility will be available
to the Company until July 31, 2003; however, if the then unused portion of the
commitments exceeds $10.0 million on December 31, 1998, the commitments will be
reduced on such date by an amount equal to the unused portion of such
commitments minus $10.0 million. Thereafter, the commitments thereunder will
reduce quarterly commencing on September 30, 1999 at a rate of 3.50% through
1999, 5.75% in 2000, 7.0% in 2001, 9.0% in 2002 and 3.0% until June 30, 2003.
All of the loans outstanding will be repayable on July 31, 2003. The making of
each loan under the Restated Credit Facility is subject to the satisfaction of
certain conditions, including not exceeding a certain "borrowing base" based on
the number of paying subscribers and households within the Rural DirecTv
Markets served by the Company; maintaining minimum subscriber penetration
throughout the term of the Restated Credit Facility; maintaining annualized
contribution per paying subscriber throughout the term of the Restated Credit
Facility based on net income plus certain sales, administrative and payroll
expenses; maintaining a maximum ratio of total debt to equity beginning in the
first quarter of 2000 and continuing throughout the term of the Restated Credit
Facility; maintaining a maximum ratio of total senior debt to annualized
operating cash flow and a ratio of total debt to annualized operating cash flow
beginning in the first quarter of 2000 and continuing throughout the term of
the Restated Credit Facility; maintaining a maximum ratio of total debt to
adjusted annualized operating cash beginning in the first quarter of 1999 and
continuing until the last quarter of 2000; and maintaining a maximum percentage
of general and administrative expenses to revenues beginning in the first
quarter of 1998 and continuing for the duration of the Restated Credit
Facility. The Company is in compliance with those covenants with which it is
required to comply as of the date hereof. In addition, the Restated Credit
Facility provides that the Company will be required to make mandatory
prepayments of the Restated Credit Facility from, subject to certain
exceptions, the net proceeds of certain sales or other dispositions by the
Company or any of its subsidiaries of material assets and with 50% of any
excess operating cash flow with respect to any fiscal year after the fiscal
year ending December 31, 1998.
Borrowings by the Company under the Restated Credit Facility are
unconditionally guaranteed by each of the Company's direct and indirect
subsidiaries, and such borrowings are secured by (i) an equal and ratable
pledge of all of the equity interests in the Company's subsidiaries, (ii) a
first priority security interest in all of their assets, and (iii) a collateral
pledge of the Company's NRTC Member Agreements.
F-42
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
The Restated Credit Facility provides that the Company may elect that all
or a portion of the borrowings under the Restated Credit Facility bear interest
at a rate per annum equal to either (i) the CIBC Alternate Base Rate plus the
Applicable Margin or (ii) the Eurodollar Rate plus the Applicable Margin. When
applying the CIBC Alternate Base Rate with respect to borrowings pursuant to
the revolving credit facility, the Applicable Margin will be (w) 2.25% per
annum (when the ratio of total indebtedness of the Company to annualized
operating cash flow (the "Leverage Ratio")) is greater than or equal to 6.75 to
1.00), (x) 2.00% (when the Leverage Ratio is less than 6.75 to 1.00 but greater
than or equal to 6.25 to 1.00), (y) 1.50% (when the Leverage Ratio is less than
6.25 to 1.00 but greater than or equal to 5.75 to 1.00) or (z) 1.25% (when the
Leverage Ratio is less than 5.75 to 1.00). When applying the Eurodollar Rate
with respect to borrowings pursuant to the revolving credit facility,
Applicable Margin will be (w) 3.50% per annum (when the Leverage Ratio is
greater than or equal to 6.75 to 1.00), (x) 3.25% (when the Leverage Ratio is
less than 6.75 to 1.00 but greater than or equal to 6.25 to 1.00), (y) 2.75%
(when the Leverage Ratio is less than 6.25 to 1.00 but greater than or equal to
5.75 to 1.00) or (z) 2.50% (when the Leverage Ratio is less than 5.75 to 1.00).
The Applicable Margin for borrowings pursuant to the term loan facility will be
the Applicable Margin for borrowings pursuant to the revolving credit facility,
plus 0.25%. As used herein, "CIBC Alternate Base Rate" means the higher of (i)
CIBC's prime rate and (ii) the federal funds effective rate from time to time
plus 1/2% per annum. As used herein, "Eurodollar Rate" means the rate at which
eurodollar deposits for one, two, three and six months (as selected by the
Company) are offered to CIBC in the interbank eurodollar market. The Restated
Credit Facility will also provide that at any time when the Company is in
default in the payment of any amount due thereunder, the principal of all loans
made under the Restated Credit Facility will bear interest at 2% per annum
above the rate otherwise applicable thereto and overdue interest and fees will
bear interest at a rate of 2% per annum over the CIBC Alternative Base Rate.
The Restated Credit Facility will also contain a number of significant
covenants that, among other things, limit the ability of the Company and its
subsidiaries to incur additional indebtedness and guaranty obligations, create
liens and other encumbrances, make certain payments, investments, loans and
advances, pay dividends or make other distributions in respect of its equity
interests, sell or otherwise dispose of assets, make capital expenditures,
merge or consolidate with another entity, make amendments to its organizational
documents or transact with affiliates. In addition, the Restated Credit
Facility will require the maintenance of certain specified financial and
operating covenants, including minimum interest coverage ratios and limits on
general and administrative expenses as a percentage of revenue.
The Company will pay a commitment fee on the unused amounts under the
Restated Credit Facility calculated at 0.5% per annum, payable quarterly in
arrears.
Pursuant to a recent amendment to the NRTC Member Agreements, the Company
and all other NRTC Members whose monthly obligations to the NRTC have exceeded
$500,000 in the past six months are required to keep and maintain in full force
and effect a standby letter of credit in favor of the NRTC to secure their
respective payment obligations to the NRTC under the NRTC Member Agreements.
The amount of the letter of credit issued at the request of the Company
pursuant to the Restated Credit Facility, is equal to three times the Company's
single largest monthly invoice from the NRTC, exclusive of amounts payable for
DSS(R) equipment purchased by the Company from the NRTC, or $6.3 million, and
must be increased as the Company makes additional acquisitions of Rural DirecTv
Markets and when the Company's obligations to the NRTC exceed the amount of the
original letter of credit by 167%.
NRTC Member Agreements
Pursuant to a recent amendment to the NRTC Member Agreements, the Company
and all other NRTC Members whose monthly obligations to the NRTC have exceeded
$500,000 in the past six months are required to keep and maintain in full force
and effect a standby letter of credit in favor of the NRTC to secure their
respective payment obligations to the NRTC under the NRTC Member Agreements.
The initial amount of the
F-43
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
letter of credit issued at the request of the Company will be equal to three
times the Company's single largest monthly invoice from the NRTC, exclusive of
amounts payable for DSS(R) equipment purchased by the Company from the NRTC,
and must be increased as the Company makes additional acquisitions of Rural
DirecTv Markets and when the Company's obligations to the NRTC exceed the
amount of the original letter of credit by 167%. This letter of credit to the
NRTC was issued pursuant to the Existing Credit Facility in May 1997 and has an
initial stated amount of approximately $6.3 million.
Corporate Conversion
Prior to October 10, 1997, DTS was a limited liability company (the "LLC")
organized under the laws of the State of Delaware. On October 10, 1997, the
Company converted to corporate form in a transaction (the "Corporate
Conversion") contemplated in the Indenture and described in the limited
liability company agreement of the LLC pursuant to which the LLC merged with
and into WEP Intermediate Corp., a Delaware corporation ("WEP"), in which (i)
the member interests in the LLC held by WEP were canceled, (ii) all of the
outstanding capital stock of WEP was converted into Series A Preferred Stock of
the Company, (iii) the member interests in the LLC evidenced by the Class A
Units (the "Class A Units") (other than those held by WEP) were converted into
Series A Preferred Stock of the Company, (iv) the member interests in the LLC
evidenced by the Class B Units (the "Class B Units") were converted into Common
Stock of the Company, (v) the member interests in the LLC evidenced by the
Class C Units (the "Class C Units"), together with such Class C Unit holders'
promissory notes in the principal amount of $10.00 per share, were exchanged
for shares of Common Stock of the Company, (vi) the member interests in the LLC
evidenced by the Class D Units (the "Class D Units") were converted into
warrants to purchase Common Stock of the Company, (vii) all of the resulting
capital stock of the Company became subject to the Stockholders Agreement (as
defined herein), (viii) the surviving entity changed its name to "Digital
Television Services, Inc." and (ix) Digital Television Services, Inc. assumed
by operation of law and supplemental indenture all of the obligations of the
LLC under the Notes and the Indenture.
Subsequent to the Corporate Conversion, substantially all of the
outstanding shares of the resulting corporation will be owned by the holders of
the equity interests in the LLC. Therefore, the Corporate Conversion will be
treated for accounting purposes as the acquisition of WEP by the LLC. The LLC's
assets and liabilities will be recorded at historical cost and WEP's assets and
liabilities will be recorded at fair value. However, given that WEP's only
asset consisted of its investment in the LLC, no goodwill would be recognized.
Following the Corporate Conversion, the historical financial statements of the
LLC shall become the historical financial statements of WEP and shall include
the businesses of both companies. The historical audited financial statements
of the LLC and WEP before the Corporate Conversion are on pages F-10 through
F-34 and F-35 through F-39, respectively. Pro forma information giving effect
to the Corporate Conversion, as if it had occurred on January 1, 1996 (for pro
forma statement of operations purposes) or September 30, 1997 (for pro forma
balance sheet purposes) is included on pages F-4 through F-9.
As a result of the Corporate Conversion, the stockholders' equity of the
Company is as follows:
Common Stock. The Company is authorized to issue up to 10,000,000 shares
of Common Stock, par value $.01 per share. As of October 15, 1997, there were
issued and outstanding 2,137,049 shares of Common Stock, held of record by five
stockholders.
Preferred Stock. The authorized capital stock of the Company includes
10,000,000 shares of preferred stock, par value $.01 per share. A total of
5,000,000 of such shares have been designated "Series A Payment-in-Kind
Convertible Preferred Stock" (the "Series A Preferred Stock"). As of October
15, 1997, there were issued and outstanding 1,404,056 shares of Series A
Preferred Stock, held of record by six stockholders.
The Board is authorized by the Amended and Restated Certificate of
Incorporation to issue one or more additional series of preferred stock from
time to time, without further stockholder action, in one or more series
F-44
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
and, with respect to such series, to fix the designation and number of shares
to be issued, the voting rights of the shares, the dividend rights, if any, the
redemption rights, if any, sinking fund requirements, if any, rights upon the
liquidation, dissolution or winding up of the Company or upon the distribution
of the assets of the Company, the terms of the conversion or exchange into any
other class or series of shares, if provided for, and other powers,
preferences, rights, qualifications, limitations or restrictions thereof. Under
the Stockholders Agreement dated as of October 10, 1997 among the Company, the
holders of the Common Stock and the holders of the Series A Preferred Stock
(the "Stockholders Agreement"), stockholder approval may be required in order
to take certain of these actions.
Each holder of shares of the Series A Preferred Stock will have the right,
exercisable at any time and from time to time, to convert all or any such
shares of Series A Preferred Stock into shares of Common Stock, initially on a
share-for-share basis. The conversion ratio of the Series A Preferred Stock is
subject to adjustment in the event of (i) any subdivision or combination of the
Common Stock, (ii) any payment by the Company of a stock dividend to the
holders of the Common Stock, (iii) the issuance of rights to acquire equity to
holders of the Common Stock without issuing similar rights to the holders of
the Series A Preferred Stock, or (iv) the issuance of equity or rights to
acquire equity at a price per share less than $22.50 (as adjusted). In
addition, if the Company consolidates or merges with, or transfers all or
substantially all of its assets to, another corporation, and such transaction
requires the approval of the stockholders of the Company, then a holder of the
Series A Preferred Stock may convert some or all of such shares into shares of
Common Stock simultaneously with the record date for, or the effective date of,
such transaction so as to receive the rights, warrants, securities or assets
that a holder of shares of the Common Stock on that date may receive.
If the Company consummates an underwritten public offering of equity
securities resulting in gross proceeds to the Company of at least $25 million
and at a price per share equal to (i) at least $33.75, if such public offering
is consummated on or before July 31, 1998, (ii) at least $39.37, if such public
offering is consummated after July 31, 1998 but on or before July 31, 1999, and
(iii) at least $45.00, if such public offering is consummated at any time after
July 31, 1999 (a public offering meeting such requirements is referred to
herein as a "Qualified IPO"), then the Series A Preferred Stock shall be
converted automatically upon such consummation into shares of Common Stock at
an initial conversion rate of one-for-one, subject to adjustment as described
above.
In the event of any voluntary or involuntary dissolution, winding up or
liquidation of the Company, after payment or provision for payment of all of
the Company's debts and other liabilities, the holders of the Series A
Preferred Stock will be entitled to receive, out of the remaining net assets of
the Company and in preference to the holders of the Common Stock and any other
capital stock ranking junior to the Series A Preferred Stock, the amount of
$22.50 (the "Liquidation Preference") for each share of the Series A Preferred
Stock, plus any accrued and unpaid dividends up to the date for such
distribution, whether or not declared. If, upon any liquidation of the Company,
the assets distributable among the holders of the Series A Preferred Stock are
insufficient to permit the payment in full to the holders of the Series A
Preferred Stock and all other classes of preferred stock ranking (as to any
such distribution) senior to or on a parity with the Series A Preferred Stock,
of all preferential amounts payable to all such holders, then the entire assets
of the Company thus distributable will be distributed ratably among the holders
of the Series A Preferred Stock and all classes and series of capital stock
ranking (as to any such distribution) senior to or on a parity with the Series
A Preferred Stock in order of relative priority and, as to classes and series
ranking on a parity with one another, in proportion to the full preferential
amount that would be payable per share if such assets were sufficient to permit
payment in full. If, after payment of the Liquidation Preference to the holders
of the Series A Preferred Stock and the payment of the liquidation preference
with respect to any capital stock ranking (as to any such distribution) senior
to or on a
F-45
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
parity with the Series A Preferred Stock, assets remain in the Company, all
such remaining funds shall be distributed first to the holders of the Common
Stock, until such holders have received an amount per share equal to the
Liquidation Preference, subject to certain adjustments, and then on an equal
per share basis to holders of all capital stock of the Company on a pro rata,
as-if-converted to Common Stock basis.
The holders of the Series A Preferred Stock shall be entitled to receive
when, as and if declared by the Board cumulative dividends payable on the
shares of the Series A Preferred Stock for each quarterly dividend period,
commencing March 15, June 15, September 15 and December 15 of each year and
ending on the day next preceding the first day of the next quarterly dividend
period, at a rate of 8% per annum, compounded annually, in respect of the
Liquidation Preference. All such dividends shall be payable on March 15, June
15, September 15 and December 15 of each year. The Company may, at its option,
pay a certain portion of such dividends through the issuance of that number of
additional shares of Series A Preferred Stock having an aggregate Liquidation
Preference equal to the aggregate dollar amount of dividends to be paid on such
dividend payment date.
Except as provided by law, the holders of the Series A Preferred Stock are
entitled to only those voting rights set forth in the Stockholders Agreement.
Employee Stock Plan
In October 1997, the Company adopted the Digital Television Services, Inc.
1997 Stock Option Plan (the "Employee Stock Plan") pursuant to which up to
100,000 shares of Common Stock (or such larger number of shares as may be
approved by the Compensation Committee of the Board) may be issued to employees
or independent contractors of the Company or the Subsidiaries at prices equal
to the market value thereof as of the date of issuance and pursuant to such
terms and conditions (including vesting) as the Board shall determine. As of
the date hereof, incentive stock options have been granted with respect to
32,500 shares of Common Stock with an exercise price of $22.50 per share.
Employment Agreements
The Employment Agreements were amended as of October 10, 1997 to provide
for certain changes with respect to the severance provisions and the vesting of
applicable executive officers' shares of Common Stock received in exchange for
their Class C Units and warrants received in exchange for their Class D Units.
The Acquisition of the Company
On November 6, 1997, the Company entered into an agreement in principle
(the "Agreement in Principle") with Pegasus Communications Corporation
("Pegasus"), providing for the acquisition of all of the outstanding shares of
capital stock of the Company by Pegasus in exchange for approximately 5.5
million shares of Pegasus' Class A Common Stock (the "Pegasus Transaction").
Upon consummation of the Pegasus Transaction, the Company will become a wholly
owned subsidiary of Pegasus. Pegasus will not assume, guarantee or otherwise
have any liability for the Notes or any other liability of the Company or its
subsidiaries. At the closing of the Pegasus Transaction, and thereafter except
to the extent permitted under the Indenture, the Company will not assume,
guarantee or otherwise have any liability for any indebtedness or other
liability of Pegasus or any of its other subsidiaries.
The Pegasus Transaction is expected to be completed in the first quarter
of 1998 and is subject, among other things, to the execution of a definitive
agreement, approval of the Boards of Directors of Pegasus and the Company and
the stockholders of Pegasus and the Company, consents from the NRTC, DirecTv
and the Company's lenders, and other conditions customary in transactions of
this nature.
F-46
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
Upon the consummation of the Pegasus Transaction a Change of Control will
occur and the Issuers will be required to make an Offer to Purchase the Notes
at 101% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of purchase. Pegasus has covenanted in the
Agreement in Principle that upon the closing of the Pegasus Transaction and the
resulting Change of Control Pegasus shall cause the Issuers to make the Offer
to Purchase. In addition, the consummation of the Pegasus Transaction may also
constitute an event of default under the Restated Credit Facility due to a
change in control of the Company, permitting the lenders thereunder to
accelerate the repayment of indebtedness thereunder, in which case the
subordination provisions of the Notes would require the payment in full of the
outstanding amounts under the Restated Credit Facility and any other Senior
Indebtedness before the Issuers could distribute cash to purchase the Notes. A
condition to the closing of the Pegasus Transaction is that the Restated Credit
Facility be amended to permit such closing.
The Company has been informed by the management of Pegasus that, upon
consummation of the Pegasus Transaction, Pegasus would use the purchase method
of accounting to record the acquisition of the Company and would "push down"
the effects of the purchase price which would increase the Company's intangible
assets by approximately $83 million. Accordingly, the Company's amortization
expense would be increased with respect to periods subsequent to the
consummation of the Pegasus Transaction.
Pro Forma Information (Unaudited)
See pages F-4 through F-9 elsewhere in this Prospectus for condensed pro
forma information which includes the effects of the 1996 Acquisitions, the
Restated Credit Facility, the 1997 Acquisitions, the Pending Acquisition, the
1997 Equity, the Interest Escrow Account, the Corporate Conversion and the
Offering as if each transaction had occurred on January 1, 1996 (for pro forma
statement of operations purposes) or September 30, 1997 (for pro forma balance
sheet purposes).
F-47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
WEP Intermediate Corp.:
We have audited the accompanying balance sheet of WEP INTERMEDIATE CORP.
(a Delaware corporation) as of September 30, 1997 and the statement of cash
flows for the period from inception (January 28, 1997) to September 30, 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WEP Intermediate Corp. as
of September 30, 1997 and its cash flows for the period from inception (January
28, 1997) to September 30, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 10, 1997
F-48
<PAGE>
WEP INTERMEDIATE CORP.
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
INVESTMENT IN DIGITAL TELEVISION SERVICES, LLC .................................... $13,000,000
===========
STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY:
Common stock, no par value, 200 shares authorized, 10 shares issued and outstanding $13,000,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
WEP INTERMEDIATE CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JANUARY 28, 1997)
THROUGH SEPTEMBER 30, 1997
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Digital Television Services, LLC ...... $ (13,000,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock ........................ 13,000,000
-------------
NET CHANGES IN CASH ................................. 0
CASH AT BEGINNING OF PERIOD ........................... 0
-------------
CASH AT END OF PERIOD ................................. $ 0
=============
The accompanying notes are an integral part of these statement.
F-50
<PAGE>
WEP INTERMEDIATE CORP.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. Organization and Nature of Business
WEP Intermediate Corp. (the "Corporation") is a Delaware corporation
formed on January 28, 1997 under the General Corporation Law of Delaware. The
purpose of the Corporation is to hold the investment in Digital Television
Services, LLC ("DTS"), a limited liability company organized under the Delaware
Limited Liability Act and formerly known as DBS Holdings, L.P. DTS was formed
to acquire and operate the exclusive rights to distribute direct broadcast
satellite services offered by DirecTv, Inc. in certain rural markets and was
formed on January 30, 1996.
On February 10, 1997, the Corporation issued 10 shares of the
Corporation's common stock to Whitney Equity Partners, L.P., a Delaware limited
partnership, for $13,000,000. Whitney Equity Partners, L.P. is the sole
stockholder of the Corporation as of September 30, 1997.
Also on February 10, 1997, the Corporation purchased 577,778 Class A
Membership Units of DTS for $13,000,000 or $22.50 per unit. These units
represent approximately 16% of the outstanding units of DTS at September 30,
1997. The Class A Units of DTS are entitled to special voting rights, as
defined in the DTS Limited Liability Company Agreement, certain preemptive
rights, a cumulative compounded annual rate of return equal to 8% applied to
their Class A Capital, and protection against dilution. The Class A Units rank
senior to the Class B, C, and D Units of DTS with respect to interim and
liquidating distributions.
The Corporation had no employees and no substantive operations for the
period from inception (January 28, 1997) through September 30, 1997. Therefore,
there is no income statement included in the accompanying financial statements.
2. Summary of Significant Accounting Policies
Investments
The Corporation records its investment in DTS at cost. For an investment
of less than 20 percent, an investor is presumed not to have the ability to
exercise significant influence and therefore the cost method would be used.
Under this view, an investor is not entitled to recognize earnings on its
investment until a right to claim the earnings arises, and that claim arises
only to the extent dividends are declared. For the period from inception
(January 28, 1997) through September 30, 1997, DTS has not declared any
dividends. An investor is considered to have no earnings on its investment
unless it is in a position to control the distribution of earnings. Likewise,
an investment or an investor's operations are not affected by losses of an
investee unless those losses indicate a loss in value of the investment is
other than temporary and accordingly should be recognized. See discussion of
longlived assets below.
As required by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," investments in equity securities are classified into
one of three categories as follows: held to maturity securities (debt and
equity securities that the Corporation has the positive intent and ability to
hold to maturity that are reported at amortized cost), trading securities (debt
and equity securities that are bought and held principally for the purpose of
selling them in the near term that are reported at fair value, with unrealized
gains and losses included in earnings), or available-for-sale securities (debt
and equity securities not classified in either category as described above and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of retained earnings). The Corporation has
no trading or available-for-sale investment securities as of September 30,
1997.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that
F-51
<PAGE>
WEP INTERMEDIATE CORP.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
the carrying amount of an assets may not be recoverable. When events or changes
in circumstances occur related to long-lived assets, management estimates the
future cash flows expected to result from the use of the asset and its eventual
disposition. Having found no instances whereby the sum of expected future cash
flows (undiscounted and without interest charges) was less than the carrying
amount of the asset and thus requiring the recognition of an impairment loss,
management believes that the long-lived asset in the accompanying balance sheet
is appropriately valued.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and any reported amounts of revenues and expenses. Actual results
could differ from those estimates.
3. Subsequent Event
On October 10, 1997, the Corporation merged with DTS to form Digital
Television Services, Inc. The 577,778 Class A Units of DTS held by the
Corporation were canceled and the ten shares of the Corporation's common stock
issued and outstanding were converted into 608,424 shares of Preferred Stock of
Digital Television Services, Inc. The total investment by Whitney Equity
Partners, L.P. remained at $13,000,000 and the price per share changed to
$21.37.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Direct Programming
Services Limited Partnership:
We have audited the accompanying balance sheets of DIRECT PROGRAMMING
SERVICES LIMITED PARTNERSHIP (a Kentucky limited partnership) as of December
31, 1995 and 1996 and the related statements of operations, changes in
partners' capital, and cash flows for the years ended December 31, 1994, 1995
and 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Programming Services
Limited Partnership as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for the years ended December 31, 1994, 1995 and
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1997
F-53
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 242,260 $ 176,280
Trade accounts receivable, net of allowances for doubtful accounts of $50,000
and $123,574 at December 31, 1995 and 1996, respectively .................. 483,559 1,166,657
Inventory .................................................................. 33,715 89,007
Other, net (Note 2) ......................................................... 5,506 487,604
---------- ----------
Total current assets ...................................................... 765,040 1,919,548
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements ...................................................... -- 68,474
Furniture and equipment ...................................................... 138,959 197,070
---------- ----------
138,959 265,544
Less accumulated depreciation ............................................. (34,385) (59,939)
---------- ----------
104,574 205,605
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) .................................... 4,586,544 4,168,753
---------- ----------
$5,456,158 $6,293,906
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 582,133 $ 676,132
Accrued liabilities ......................................................... 228,099 625,049
Unearned revenue ............................................................ 337,742 1,219,798
Current maturities of long-term debt and obligations under capital leases ... 95,393 19,498
---------- ----------
Total current liabilities ................................................ 1,243,367 2,540,477
---------- ----------
OTHER LIABILITIES ............................................................ 51,850 191,207
---------- ----------
LONG-TERM DEBT and obligations under capital leases, less current maturities . 19,498 --
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 5) PARTNERS'
CAPITAL:
General Partner ............................................................ 690,620 519,071
Limited Partners ............................................................ 3,450,823 3,043,151
---------- ----------
Total partners' capital ................................................... 4,141,443 3,562,222
---------- ----------
$5,456,158 $6,293,906
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-54
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------------- -------------- --------------
<S> <C> <C> <C>
REVENUE:
Programming revenue ..................... $ 342,843 $ 3,645,040 $ 7,216,027
Equipment and installation revenue ...... 79,821 764,338 56,536
------------ ----------- -----------
Total revenue ........................ 422,664 4,409,378 7,272,563
------------ ----------- -----------
COST OF REVENUE:
Programming expense ..................... 187,725 1,528,547 3,454,540
Cost of equipment and installation ...... 111,064 714,753 20,891
Service fees ........................... 43,637 363,499 769,426
------------ ----------- -----------
Total cost of revenue .................. 342,426 2,606,799 4,244,857
------------ ----------- -----------
GROSS PROFIT .............................. 80,238 1,802,579 3,027,706
------------ ----------- -----------
OPERATING EXPENSES:
Sales and marketing ..................... 24,183 663,578 622,129
General and administrative ............... 633,566 1,437,885 1,973,947
Depreciation and amortization ............ 426,847 583,034 591,738
------------ ----------- -----------
Total operating expenses ............... 1,084,596 2,684,497 3,187,814
------------ ----------- -----------
OPERATING LOSS ........................... (1,004,358) (881,918) (160,108)
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ........................ (4,286) (19,003) (8,865)
Other income ........................... 16,888 30,815 39,752
------------ ----------- -----------
12,602 11,812 30,887
------------ ----------- -----------
NET LOSS ................................. $ (991,756) $ (870,106) $ (129,221)
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
-------------- --------------- ---------------
<S> <C> <C> <C>
BALANCE, December 31, 1993 ...... $1,001,102 $ 4,902,203 $ 5,903,305
Partner contributions ......... -- 100,000 100,000
Net loss ........................ (165,384) (826,372) (991,756)
---------- ------------ -----------
BALANCE, December 31, 1994 ...... 835,718 4,175,831 5,011,549
Net loss ........................ (145,098) (725,008) (870,106)
---------- ------------ -----------
BALANCE, December 31, 1995 ...... 690,620 3,450,823 4,141,443
Partnership distribution ...... (150,000) (300,000) (450,000)
Net loss ........................ (21,549) (107,672) (129,221)
---------- ------------ -----------
BALANCE, December 31, 1996 ...... $ 519,071 $ (3,043,151) $ 3,562,222
========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $ (991,756) $ (870,106) $ (129,221)
---------- ----------- ----------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ........................... 426,847 583,034 591,738
Changes in operating assets and liabilities:
Trade accounts receivable, net ........................... (130,660) (161,061) (683,098)
Inventory ................................................ (129,395) 95,680 (55,292)
Other, net ............................................. (794) (4,712) (482,098)
Accounts payable ....................................... 252,570 324,628 93,999
Accrued liabilities .................................... 354,494 (126,395) 396,950
Unearned revenue ....................................... 49,000 288,742 882,056
---------- ----------- ----------
Total adjustments .................................... 822,062 999,916 744,255
---------- ----------- ----------
Net cash (used in) provided by operating
activities ............................................. (169,694) 129,810 615,034
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net .................. (40,094) (58,375) (135,621)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit ............ -- 70,000 (70,000)
Proceeds from long-term debt .............................. -- 22,000 --
Repayments on long-term debt and obligations under
capital leases .......................................... (3,776) (10,783) (25,393)
Partnership contributions ................................. 100,000 -- --
Partnership distributions ................................. -- -- (450,000)
---------- ----------- ----------
Net cash provided by (used in) financing activities . 96,224 81,217 (545,393)
---------- ----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ................................................ (113,564) 152,652 (65,980)
CASH AND CASH EQUIVALENTS at beginning of
year ...................................................... 203,172 89,608 242,260
---------- ----------- ----------
CASH AND CASH EQUIVALENTS at end of year ..................... $ 89,608 $ 242,260 $ 176,280
========== =========== ==========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared ........................... $ -- $ 51,850 $ 139,357
========== =========== ==========
Capital lease obligations incurred ........................ $ 30,665 $ 6,785 $ --
========== =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest .................................... $ 4,286 $ 19,003 $ 8,866
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. Organization and Nature of Business
Direct Programming Services Limited Partnership (the "Partnership") is a
limited partnership organized in Kentucky. The Partnership was formed on
January 6, 1993 to acquire and operate rights to distribute direct broadcast
satellite ("DBS") services ("DIRECTV Services") offered by DirecTv, Inc.
("DirecTv").
The term of the Partnership is through December 31, 2042, unless
terminated sooner. The Partnership has a General Partner in addition to its
Limited Partners. The Limited Partners may not take part in the management of
the Partnership and are not liable for any debts, obligations or losses of the
Partnership in excess of their capital contributions and their shares of the
undistributed profits. The interest of the Limited Partners was divided into 60
units, each of which required a capital contribution of $100,000. Contributed
capital of the General Partner was $1,000,000. The ownership interests of the
Partnership at December 31, 1996 is as follows: General Partner, 14.71%;
Limited Partner, 85.29%.
The partnership agreement provides that net losses are allocated to the
General and Limited Partners in accordance with their respective percentage
interests; however, no net losses will be allocated to a Limited Partner in
excess of the balance of the Limited Partner's capital account. Such net losses
would be allocated to the General Partner. Net income is allocated first to the
General Partner until such time as net income specifically allocated to the
General Partner equals the net losses allocated to the General Partner, then
20% to the General Partner and 80% to the General and Limited Partners in
accordance with their respective percentage interests.
The Partnership obtained the rights to distribute DIRECTV Services in
certain rural markets in Kentucky pursuant to agreements (the "NRTC Member
Agreements") with the National Rural Telecommunications Cooperative ("NRTC") in
exchange for approximately $5.4 million.
In October 1996, the Partnership entered into an asset purchase agreement
(the "Agreement") with Digital Television Services of Kentucky, LLC ("DTS
Kentucky"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC. The Agreement provides that DTS Kentucky will
purchase the Partnership's NRTC Member Agreement and other assets used in
connection with the Partnership's business, as defined in the Agreement, and
will assume certain liabilities of the Partnership, as defined in the
Agreement. The purchase price is subject to an adjustment for working capital
at the date of closing of the Agreement.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Partnership earns programming revenue by providing DIRECTV Services to
its subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under monthly, annual or seasonal subscriptions; and movies and events
programming available on a pay-per-view basis. Programming purchased on a
monthly, quarterly, annual or seasonal basis, including premium programming, is
billed in advance and recorded as unearned revenue. All programming revenue is
recognized when earned.
F-58
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Equipment and installation revenue primarily consists of the sale of
DSS(R)equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the Partnership and
is recognized upon delivery of the equipment. Installation revenue is
recognized when the equipment is installed and represent the amounts paid by
the customers to the Partnership for such services.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the Partnership's subscribers. These costs include the direct
wholesale cost of purchasing related programming from DirecTv (through the NRTC
[Note 5]); monthly subscriber maintenance fees charged by DirecTv, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Cost of equipment and installation represents the
actual cost of the equipment to the Partnership plus the costs to install the
equipment.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Inventories
The Partnership maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Other Current Assets
Other current assets consist of the following at December 31, 1995 and
1996:
1995 1996
-------- ---------
Deferred promotional costs, net ...... $ -- $484,957
Other ................................. 5,506 2,647
------ --------
$5,506 $487,604
====== ========
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the Partnership for the credit. The Partnership defers
both the programming revenue and the cost of this credit and amortizes them
over the one-year contract period. In addition, as a part of this program, the
Partnership receives $1 per month for up to five years from the NRTC for each
subscriber whose account remains active. Such amounts are recorded as a
reduction in selling expenses in the accompanying statements of operations.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment is provided using the straight-line
method over the estimated
F-59
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
useful lives of the respective assets, ranging from three to seven years.
Depreciation expense for the years ended December 31, 1994, 1995 and 1996 was
$8,642, $25,428 and $34,590, respectively. Upon retirement or disposal of
assets, the cost and related accumulated depreciation are removed from the
balance sheet and any gain or loss is reflected in earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1995 and 1996:
1995 1996
-------------- ---------------
Contract rights ............... $5,434,948 $ 5,434,948
Organization costs ............ 70,557 70,557
---------- ------------
5,505,505 5,505,505
Accumulated amortization ...... (975,811) (1,532,959)
---------- ------------
4,529,694 3,972,546
NRTC patronage capital ......... 51,850 191,207
Other ........................ 5,000 5,000
---------- ------------
$4,586,544 $ 4,168,753
========== ============
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization on the accompanying
statements of operations, for the years ended December 31, 1994, 1995 and 1996
was $407,621, $543,495 and $543,495, respectively. Accumulated amortization at
December 31, 1995 and 1996 was $951,116 and $1,494,611, respectively.
Organization Costs: Organization costs are costs associated with the
formation of the Partnership and are being amortized over five years.
Amortization expense, included in depreciation and amortization on the
accompanying statements of operations, for the years ended December 31, 1994,
1995 and 1996 was $10,584, $14,111, and $13,653. Accumulated amortization at
December 31, 1995 and 1996, was $24,695 and $38,348.
NRTC Patronage Capital: The Partnership is an affiliate of the NRTC. While
affiliates have no vote, they do have an interest in the NRTC in proportion to
their prior patronage. NRTC patronage capital represents the non-cash portion
of NRTC patronage income. Under its bylaws, the NRTC declares a patronage
dividend of its excess of revenues over expenses each year. Of the total
patronage dividend, 20% is paid in cash and recognized as income when received
and is netted against programming expense in the accompanying statements of
operations. The remaining 80% is distributed in the form of non-cash patronage
capital, which will be redeemed in cash only at the discretion of the NRTC. The
Partnership includes non-cash patronage capital as other assets, with an
offsetting deferred patronage income amount included in other liabilities on
the accompanying balance sheets. The patronage capital will be recognized as
income when cash distributions are declared by the NRTC.
Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1995 and
1996:
1995 1996
----------- ----------
Accrued commissions ...... $ 148,460 $ 153,907
Accrued service fees ...... 59,224 108,788
Other ..................... 20,415 362,354
--------- ---------
$ 228,099 $ 625,049
========= =========
F-60
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Income Taxes
The Partnership is not considered a taxable entity for federal and state
income tax purposes. All taxable income or loss is allocated to the partners in
accordance with the terms of the partnership agreement. Accordingly, no
provision for income taxes is included in the accompanying financial
statements.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1996, management does not believe any significant concentration of credit risk
exists.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
3. Commitments and Contingencies
Leases
The Partnership leases office and warehouse space under cancelable leases
and certain equipment under noncancelable operating leases which expire through
1998. Future minimum lease payments for noncancelable operating leases in
effect at December 31, 1996 are as follows:
1997 ....................................... $5,520
1998 ....................................... 2,300
------
Total future minimum lease payments ...... $7,820
======
Rental expense charged to general and administrative expenses in the
accompanying statements of operations for the years ended December 31, 1994,
1995 and 1996 totaled $11,218, $46,739 and $68,705, respectively.
Minimum Subscribers
As part of the NRTC Member Agreements, the Partnership is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the
Partnership's Rural DirecTv Market, or up to 16,914 subscribers) and the
requirements of certain programming agreements between DirecTv and providers of
programming, beginning in the fourth year of operation of the NRTC Member
Agreement if the Partnership fails to obtain such minimum number of subscribers
prior to such time. The Partnership had achieved the minimum subscriber
requirement at December 31, 1996 and is therefore not required to pay such
fees.
Litigation
The Partnership is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Partnership's
financial position and results of operations.
F-61
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
4. Long-Term Debt
In September 1994, the Partnership obtained a line of credit from a bank
in the amount of $400,000. Borrowings under this line of credit were $70,000 at
December 31, 1995. Amounts due under the line of credit were repaid during 1996
and the line of credit is no longer outstanding. The Partnership also had notes
payable and obligations under capital leases of $18,029 and $26,873,
respectively, outstanding at December 31, 1995. The notes payable were repaid
during 1996 and $19,498 remained outstanding under the capital leases. The
capital leases accrued interest at 11.07% at December 31, 1996 and were repaid
subsequent to year-end. The carrying amount of long-term debt approximates fair
value based on borrowing rates available to the Partnership.
5. Reliance on DirecTv and the NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the Company for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements
of operations. The NRTC also sells DSS(R) equipment to its members.
Because the Partnership is, through the NRTC, a distributor of DIRECTV
Services, the Partnership would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission (the "FCC") licenses to transmit
radio frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes (the "Hughes Agreement"), and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the Partnership
would have the right to acquire DIRECTV Services directly from DirecTv. The
NRTC has contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized remittance processing
services. If the NRTC is unable to provide these services for whatever reason,
the Partnership would be required to acquire the services from other sources.
There can be no assurance that the cost to the Partnership to obtain these
services elsewhere would not exceed the amounts currently payable to the NRTC.
The Partnership would also be adversely affected by the termination of the
NRTC Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the
Partnership would no longer have the right to provide DIRECTV Services. There
can be no assurance that the Partnership would be able to obtain similar DBS
services from other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the Partnership will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While the Partnership believes that it will have access to DIRECTV
Services following the expiration of the current Hughes Agreement by virtue of
the NRTC's right of first refusal in the Hughes Agreement and the Partnership's
existing contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the Partnership from Hughes
or the NRTC; and, if available, there can be no assurance with regard to the
financial and other terms under which the Partnership could acquire the
services.
The Partnership's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the Partnership's DBS business.
F-62
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
DirecTv, and therefore the Partnership, is dependent on third parties to
provide high quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and different
renewal and cancellation provisions. There can be no assurance that any such
agreements will be renewed or will not be canceled prior to expiration of their
original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment, without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
F-63
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Kansas DBS, L.L.C.:
We have audited the accompanying balance sheets of KANSAS DBS, L.L.C. (a
Kansas limited liability company) as of December 31, 1995 and 1996 and the
related statements of operations and changes in accumulated deficit, and cash
flows for the years ended December 31, 1995, and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kansas DBS, L.L.C. as of
December 31, 1995 and 1996 and the results of its operations and its cash flows
for the years ended December 31, 1995, and 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1997
F-64
<PAGE>
KANSAS DBS, L.L.C.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 89,436 $ 462,263
Trade accounts receivable, net of allowances of
$24,873 and $29,426 at December 31, 1995 and
1996, respectively .................................... 246,166 417,973
Current portion of lease receivables, net of allowances
of $16,635 and $54,732, at December 31, 1995 and
1996, respectively .................................... 129,609 63,316
Inventory ............................................. 332,114 191,891
Other ................................................... 25,373 254,773
------------ ------------
Total current assets ................................. 822,698 1,390,216
------------ ------------
LEASE RECEIVABLES, net of current portion .................. 383,392 320,428
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Vehicles ................................................ 42,238 32,537
Showroom and demonstration equipment .................. 108,792 54,953
Furniture, fixtures, and equipment ..................... 78,141 80,090
------------ ------------
229,171 167,580
Less accumulated depreciation ........................... (73,424) (67,918)
------------ ------------
155,747 99,662
------------ ------------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) .................. 2,224,834 2,017,828
------------ ------------
$ 3,586,671 $ 3,828,134
============ ============
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable ....................................... $ 200,241 $ 347,522
Accrued liabilities .................................... 175,172 170,489
Book overdraft .......................................... 243,614 --
Unearned revenue ....................................... 128,644 467,890
Current portion of long-term debt ..................... 176,732 4,285,046
------------ ------------
Total current liabilities ........................... 924,403 5,270,947
OTHER LIABILITIES .......................................... 48,659 102,980
LONG-TERM DEBT ............................................. 3,723,012 --
COMMITMENTS AND CONTINGENCIES (Notes 2, 5,
and 6)
ACCUMULATED DEFICIT ....................................... (1,109,403) (1,545,793)
------------ ------------
$ 3,586,671 $ 3,828,134
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-65
<PAGE>
KANSAS DBS, L.L.C.
STATEMENTS OF OPERATIONS AND CHANGES IN ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------------- ----------------
<S> <C> <C>
REVENUE:
Programming revenue ..................... $ 1,502,154 $ 3,156,791
Equipment and installation revenue ...... 1,580,245 1,036,929
------------ ------------
Total revenue ........................ 3,082,399 4,193,720
------------ ------------
COST OF REVENUE:
Programming expense ..................... 775,323 1,662,627
Cost of equipment and installation ...... 1,277,652 973,470
Service fees .............................. 139,407 292,828
------------ ------------
Total cost of revenue .................. 2,192,382 2,928,925
------------ ------------
GROSS PROFIT ................................. 890,017 1,264,795
------------ ------------
OPERATING EXPENSES:
Sales and marketing ..................... 451,473 416,731
General and administrative ............... 770,296 798,060
Depreciation and amortization ............ 308,220 303,090
------------ ------------
Total operating expenses ............... 1,529,989 1,517,881
------------ ------------
OPERATING LOSS .............................. (639,972) (253,086)
OTHER INCOME (EXPENSE):
Interest expense ........................ (240,403) (278,768)
Other income .............................. 36,793 95,464
------------ ------------
(203,610) (183,304)
------------ ------------
NET LOSS .................................... (843,582) (436,390)
ACCUMULATED DEFICIT, beginning of year ...... (402,218) (1,109,403)
CAPITAL CONTRIBUTION ........................ 136,397 --
------------ ------------
ACCUMULATED DEFICIT, end of year ............ $ (1,109,403) $ (1,545,793)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
KANSAS DBS, L.L.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (843,582) $ (436,390)
------------ ----------
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization .............................. 308,220 303,090
Amortization of deferred promotional costs .................. -- 33,800
Changes in operating assets and liabilities:
Trade accounts receivable, net .............................. (109,457) (171,807)
Inventory ................................................... 387,218 140,223
Other ...................................................... 24,467 (225,103)
Accounts payable .......................................... (266,202) 147,281
Accrued liabilities ....................................... 84,636 (4,683)
Unearned revenue .......................................... 27,711 339,246
------------ ----------
Total adjustments ....................................... 456,593 562,047
------------ ----------
Net cash (used in) provided by operating activities ...... (386,989) 125,657
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................... (46,009) (44,471)
Disposals of property and equipment ........................... 52,808 58,793
Additions to lease receivables ................................. (565,437) (186,973)
Collections of lease receivables .............................. 35,801 278,133
------------ ----------
Net cash (used in) provided by investing activities ...... (522,837) 105,482
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed from long term debt .................................... 4,349,920 550,000
Repayments of long term debt ................................. (3,813,085) (164,698)
Book overdraft ................................................ 243,614 (243,614)
Capital contribution .......................................... 136,397 --
------------ ----------
Net cash provided by financing activities ............... 916,846 141,688
------------ ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 7,020 372,827
CASH AND CASH EQUIVALENTS at beginning of year .................. 82,416 89,436
------------ ----------
CASH AND CASH EQUIVALENTS at end of year ........................ $ 89,436 $ 462,263
============ ==========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared .............................. $ 48,659 $ 54,321
============ ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ....................................... $ 190,590 $ 339,252
============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. Organization and Nature of Business
Kansas DBS, L.L.C. (the "Company") is a limited liability company
organized in Kansas. The Company was formed in September 1993 by five members
of the NRTC to acquire and operate rights to distribute direct broadcast
satellite ("DBS") services ("DIRECTV Services") offered by DirecTv, Inc.
("DirecTv").
The term of the Company is through October 2018, unless terminated sooner.
The operating agreement of the Company provides that distributions, profits,
and losses shall be allocated among the members in proportion to their
respective ownership percentages.
In October and November 1993, the Company obtained the rights to
distribute DIRECTV Services in certain markets in Kansas pursuant to agreements
(the "NRTC Member Agreements") with the National Rural Telecommunications
Cooperative ("NRTC") in exchange for approximately $2.6 million.
In November 1996, the Company entered into an asset purchase agreement
(the "Agreement") with Digital Television Services of Kansas, LLC ("DTS
Kansas"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC. The Agreement provides that DTS Kansas will
purchase the Company's NRTC Member Agreements and other assets used in
connection with the Company's business, as defined in the Agreement, and will
assume certain liabilities of the Company, as defined in the Agreement. The
purchase price is subject to an adjustment for working capital at the date of
closing of the Agreement.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under monthly, annual, or seasonal subscriptions; and movies and events
programming available on a pay-per-view basis. Programming purchased on a
monthly, quarterly, annual, or seasonal basis, including premium programming,
is billed in advance and is recorded as unearned revenue. All programming
revenue is recognized when earned.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the Company and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the Company.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the Company's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the NRTC [Note
6]); monthly subscriber maintenance fees charged by DirecTv, such as security
fees, ground service fees, system authorization fees, and fees for subscriber
billings; costs of equipment and installation; and certain subscriber operating
costs. Cost of equipment and installation represents the actual cost of the
equipment to the Company plus the costs to install the equipment.
F-68
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Inventories
The Company maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Other Current Assets
Other current assets consist of the following at December 31, 1995 and
1996:
1995 1996
--------- ---------
Deferred promotional costs, net ...... $ -- $236,800
Other ................................. 25,373 17,973
------- --------
$25,373 $254,773
======= ========
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the Company for the credit. The Company defers both the
programming revenue and the cost of credit and amortizes them over the one-year
contract period. In addition, as a part of this program, the Company receives
$1 per month for up to five years from the NRTC for each subscriber whose
account remains active. Such amounts are recorded as received as a reduction in
selling expenses in the accompanying statement of operations and changes in
accumulated deficit.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment is provided using the straight-line
method over the estimated useful lives of the respective assets, ranging from
three to seven years. Depreciation expense for the years ended December 31,
1995 and 1996 was $46,893 and $41,763, respectively. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the balance sheet and any gain or loss is reflected in earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1995 and 1996:
1995 1996
-------------- --------------
Contract rights ............... $2,574,949 $2,574,949
Organization costs ............ 16,659 16,659
---------- ----------
2,591,608 2,591,608
Accumulated amortization ...... (415,433) (676,760)
---------- ----------
2,176,175 1,914,848
NRTC patronage capital ......... 48,659 102,980
---------- ----------
$2,224,834 $2,017,828
========== ==========
F-69
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services less net tangible assets acquired. Contract rights
are being amortized over ten years, the estimated remaining useful life of the
satellites operated by DirecTv which provide service under the related
contracts. Amortization expense, included in depreciation and amortization on
the accompanying statements of operations and changes in accumulated deficit,
for the years ended December 31, 1995 and 1996 was $257,995, and $257,995,
respectively. Accumulated amortization at December 31, 1995 and 1996 was
$408,492 and $666,487, respectively.
Organization Costs: Organization costs are costs associated with the
formation of the Company and are being amortized over five years. Amortization
expense, included in depreciation and amortization on the accompanying
statements of operations and changes in accumulated deficit, for the years
ended December 31, 1995 and 1996 was $3,332 and $3,332, respectively.
Accumulated amortization at December 31, 1995 and 1996 was $6,941 and $10,273,
respectively.
NRTC Patronage Capital: The Company is a voting member of the NRTC with an
ownership interest in the NRTC in proportion to its prior patronage. NRTC
patronage capital represents the noncash portion of NRTC patronage income.
Under its bylaws, the NRTC declares a patronage dividend of its excess of
revenues over expenses each year. Of the total patronage dividend, 20% is paid
in cash and recognized as income when received and is netted against
programming expense in the accompanying statements of operations and changes in
accumulated deficit. The remaining 80% is distributed in the form of noncash
patronage capital, which will be redeemed in cash only at the discretion of the
NRTC. The Company includes noncash patronage capital as other assets, with an
offsetting deferred patronage income amount included in other liabilities in
the accompanying balance sheets. The patronage capital will be recognized as
income when cash distributions are declared by the NRTC.
Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Accrued interest .................................... $ 60,484 $ --
Accrued NRTC programming costs and service fees ...... 72,430 41,107
Other ................................................ 42,258 129,382
-------- --------
$175,172 $170,489
======== ========
</TABLE>
Income Taxes
The Company is not considered a taxable entity for federal and state
income tax purposes. All taxable income or loss is allocated to the members in
accordance with the terms of the Company's operating agreement. Accordingly, no
provision for income taxes is included in the accompanying financial
statements.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1996, management does not believe any significant concentration of credit risk
exists.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate
F-70
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
that the carrying amount of an asset may not be recoverable. When events or
changes in circumstances occur related to long-lived assets, management
estimates the future cash flows expected to result from the use of the asset
and its eventual disposition. Having found no instances whereby the sum of
expected future cash flows (undiscounted and without interest charges) was less
than the carrying amount of the asset and thus requiring the recognition of an
impairment loss, management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
401(K) Profit-Sharing Plan
Effective January 1, 1994, the Company offered its employees a
contributory 401(k) profit-sharing plan. Under the plan, the Company matches a
portion of participant contributions. Company contributions to the plan were
$340 and $3,467 for the years ended December 31, 1995, and 1996, respectively.
3. Receivables under Sales-Type Leases
The Company leases DSS(R) equipment to customers through long-term
sales-type leases, collateralized by the equipment. The leases range from three
to five years and are discounted at 9.75%. Receivables under sales-type leases
consist of the following at December 31, 1995 and 1996:
1995 1996
------------- -------------
Minimum lease payments receivables ......... $ 665,376 $ 548,943
Less unearned interest income ............ (135,740) (110,467)
Less allowance for doubtful accounts ...... (16,635) (54,732)
---------- ----------
513,001 383,744
Less current portion ..................... 129,609 63,316
---------- ----------
$ 383,392 $ 320,428
========== ==========
4. Long-Term Debt
Long-term debt at December 31, 1995 and 1996 consisted of notes payable to
National Cooperative Services Corporation which provided for borrowings of up
to $4,875,000 with interest at the lender's variable rate (6.25% at December
31, 1996). These notes were repaid subsequent to year-end in connection with
the Agreement (Note 1) and, therefore, are classified as current in the
accompanying balance sheets. The carrying amount of long-term debt approximates
fair value based on borrowing rates available to the Company.
5. Commitments and Contingencies
As part of the NRTC Member Agreements, the Company is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the
Company's Rural DirecTv Market, or up to 11,442 subscribers) and the
requirements of certain programming agreements between DirecTv and providers of
programming, beginning in the fourth year of operation of the NRTC Member
Agreement if the Company fails to obtain such minimum number of subscribers
prior to such time. The Company had achieved approximately 75% of the minimum
subscriber requirement at December 31, 1996. Based on the subscriber growth
rate of the Company to date, management anticipates that the Company will meet
the minimum subscriber requirement prior to the fourth year of operations of
the NRTC Member Agreement and therefore does not expect to be required to pay
such fees.
6. Reliance on DirecTv and the NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the Company for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements
of operations and changes in accumulated deficit. The NRTC also sells DSS(R)
equipment to its members.
F-71
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
6. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
Because the Company is, through the NRTC, a distributor of DIRECTV
Services, the Company would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the Company would
have the right to acquire DIRECTV Services directly from DirecTv. The NRTC has
contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized remittance processing
services. If the NRTC is unable to provide these services for whatever reason,
the Company would be required to acquire the services from other sources. There
can be no assurance that the cost to the Company to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The Company would also be adversely affected by the termination of the
NRTC Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the Company
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the Company would be able to obtain similar DBS services from
other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the Company will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While the Company believes that it will have access to DIRECTV Services
following the expiration of the current Hughes Agreement by virtue of the
NRTC's right of first refusal in the Hughes Agreement and the Company's
existing contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the Company from Hughes or
the NRTC, and, if available, there can be no assurance with regard to the
financial and other terms under which the Company could acquire the services.
The Company's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the Company's DBS business.
DirecTv, and therefore the Company, is dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and different
renewal and cancellation provisions. There can be no assurance that any such
agreements will be renewed or will not be canceled prior to expiration of their
original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment, without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
F-72
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Mitchell Electric
Membership Corporation:
We have audited the accompanying statements of assets and liabilities and
accumulated deficit of the DBS OPERATIONS OF NRTC SYSTEM NO. 0422 (an
unincorporated division of Mitchell Electric Membership Corporation, a Georgia
corporation) as of December 31, 1995 and 1996 and the related statements of
expenses over revenues and changes in accumulated deficit and cash flows for
the years then ended. These financial statements are the responsibility of the
System's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DBS Operations of NRTC
System No. 0422 as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1997
F-73
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
STATEMENTS OF ASSETS AND LIABILITIES AND ACCUMULATED DEFICIT
DECEMBER 31, 1995, 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1995 1996 1997
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 35,689 $ 253,269 $ 209,005
Trade accounts receivable, net of allowance for doubtful
accounts of $9,368, $24,375 and $42,819 at December
31, 1995, 1996 and March 31, 1997, respectively ...... 178,738 310,436 254,058
Inventory ............................................. 246,653 62,815 42,642
Deferred promotional costs, net (Note 2) ............... -- 38,433 26,283
---------- ---------- ----------
Total current assets ................................. 461,080 664,953 531,988
---------- ---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ................................. 5,075 5,075 5,075
Less accumulated depreciation ........................ (2,030) (3,045) (3,300)
---------- ---------- ----------
3,045 2,030 1,775
---------- ---------- ----------
LEASED EQUIPMENT, at cost:
Leased equipment ....................................... 1,047,081 2,312,534 2,312,534
Less accumulated depreciation ........................ (87,257) (367,225) (483,188)
---------- ---------- ----------
959,824 1,945,309 1,829,346
---------- ---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ............... 1,532,245 1,396,530 1,344,288
---------- ---------- ----------
$2,956,194 $4,008,822 $3,707,397
========== ========== ==========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable ....................................... $ 38,153 $ 45,724 $ --
Accrued liabilities .................................... 56,236 145,381 155,291
Related-party payable ................................. 3,471,320 4,470,539 4,177,369
Unearned revenue ....................................... 65,546 233,554 240,745
---------- ---------- ----------
Total current liabilities ........................... 3,631,255 4,895,198 4,573,405
---------- ---------- ----------
OTHER LIABILITIES ....................................... 31,547 89,102 89,102
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 4 and 5) ACCUMULATED DEFICIT .................. (706,608) (975,478) (955,110)
---------- ---------- ----------
$2,956,194 $4,008,822 $3,707,397
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-74
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
STATEMENTS OF EXPENSES OVER REVENUES
AND CHANGES IN ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, March 31,
1995 1996 1997
-------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C>
REVENUE:
Programming revenue ........................... $ 867,894 $ 2,375,636 $ 865,850
Equipment and installation revenue ............ 958,400 995,674 232,690
----------- ----------- -----------
Total revenue .............................. 1,826,294 3,371,310 1,098,540
----------- ----------- -----------
COST OF REVENUE:
Programming expense ........................... 408,654 1,106,938 323,877
Cost of equipment and installation. ............ 925,496 435,337 124,304
Service fees ................................. 103,817 299,515 128,404
----------- ----------- -----------
Total cost of revenue. ..................... 1,437,967 1,841,790 576,585
----------- ----------- -----------
GROSS PROFIT. ................................. 388,327 1,529,520 521,955
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing ........................... 204,024 290,275 46,801
General and administrative. .................. 314,108 1,033,862 286,326
Depreciation and amortization .................. 281,542 474,253 168,460
----------- ----------- -----------
Total operating expenses ..................... 799,674 1,798,390 501,587
----------- ----------- -----------
EXPENSES OVER REVENUES. ........................ (411,347) (268,870) 20,368
ACCUMULATED DEFICIT at beginning of year. ...... (295,261) (706,608) (975,478)
----------- ----------- -----------
ACCUMULATED DEFICIT at end of year. ............ $ (706,608) $ (975,478) $ (955,110)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-75
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, March 31,
1995 1996 1997
-------------- -------------- -------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Expenses over revenues. ................................. $ (411,347) $ (268,870) $ 20,368
----------- ----------- ----------
Adjustments to reconcile expenses over revenues to net cash
provided by operating activities:
Depreciation and amortization. ........................ 281,542 474,253 168,460
Amortization of deferred promotional costs. ............ -- 10,167 --
Changes in operating assets and liabilities:
Trade accounts receivable, net ........................ (80,301) (131,698) 56,378
Inventory. ............................................. 481,081 183,838 20,173
Deferred promotional costs ........................... -- (48,600) 12,150
Accounts payable ....................................... (45,615) 7,571 (45,724)
Related-party payable. ................................. 822,511 999,219 (293,170)
Accrued liabilities. ................................. (52,349) 89,145 9,910
Unearned revenue ....................................... 49,217 168,008 7,191
----------- ----------- ----------
Total adjustments .................................... 1,456,086 1,751,903 (64,632)
----------- ----------- ----------
Net cash provided by operating activities. ......... 1,044,739 1,483,033 (44,264)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ..................... (1,047,081) (1,265,453) --
----------- ----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................. (2,342) 217,580 (44,264)
CASH AND CASH EQUIVALENTS at beginning of year. ............ 38,031 35,689 253,269
CASH AND CASH EQUIVALENTS at end of year. .................. $ 35,689 $ 253,269 $ 209,005
=========== =========== ==========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared ........................... $ 31,547 $ 57,555 $ --
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-76
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED)
1. Organization and Nature of Business
The DBS Operations of NRTC System No. 0422 (the "System") is an
unincorporated division of Mitchell Electric Membership Corporation ("Mitchell
EMC"), a Georgia corporation. The System operates the exclusive rights to
distribute direct broadcast satellite ("DBS") services ("DIRECTV Services")
offered by DirecTv, Inc. ("DirecTv") in certain rural markets in Georgia. The
accompanying financial statements present the financial position and excess of
expenses over revenues of the System.
Mitchell EMC obtained the rights to distribute DIRECTV Services in the
System's territory pursuant to an agreement (the "NRTC Member Agreement") with
the National Rural Telecommunications Cooperative ("NRTC"). Under the provision
of the NRTC Member Agreement, Mitchell EMC has the exclusive right to provide
DIRECTV Services within certain rural territories in Georgia.
In January 1997, Mitchell EMC entered into an asset purchase agreement
(the "Agreement") with Digital Television Services of Georgia, LLC ("DTS
Georgia"), a subsidiary of DTS Management, LLC ("DTS"), and DTS is a subsidiary
of Digital Television Services, LLC (a Delaware limited liability company). The
agreement provides that DTS Georgia will purchase Mitchell EMC's NRTC Member
Agreement and other assets used in connection with the System's business, as
defined in the Agreement, and will assume certain liabilities of the System, as
defined in the Agreement. The purchase price is subject to an adjustment for
working capital at the date of closing of the Agreement. The closing of the
Agreement occurred in May 1997.
2. Summary of Significant Accounting Policies
Presentation
The System is not a separate subsidiary of Mitchell EMC nor has it been
operated as a separate division of Mitchell EMC. The financial statements of
the System have been derived from the records of Mitchell EMC and have been
prepared to present its financial position, excess of expenses over revenues,
and cash flows on a stand-alone basis. Accordingly, the accompanying financial
statements include certain costs and expenses which have been allocated to the
System from Mitchell EMC. The costs and expenses have been allocated to the
system based on actual amounts relative to DBS services or percentages as
determined by management through an analysis of DBS activity in the applicable
accounts. The System's management believes that the methodology used is
reasonable. Such allocated expenses may not be indicative of what such expenses
would have been had the System been operated as a separate entity.
Revenue Recognition
The System earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under monthly, annual, or seasonal subscriptions; and movies and events
programming available on a pay-per-view basis. Programming purchased on a
monthly, quarterly, annual, or seasonal basis, including premium programming,
is billed in advance and is recorded as unearned revenue. All programming
revenue is recognized when earned.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the System and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the System.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the System's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the
F-77
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (Continued)
NRTC [Note 5]); monthly subscriber maintenance fees charged by DirecTv, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Cost of equipment and installation represents the
actual cost of the equipment to the System plus the costs to install the
equipment.
Inventories
The System maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Deferred Promotional Costs
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the System for the credit. The System defers both the
programming revenue and the cost of this credit and amortizes them over the
one-year contract period. In addition, as a part of this program, the System
receives $1 per month for up to five years from the NRTC for each subscriber
whose account remains active. Such amounts are recorded as a reduction in sales
and marketing expense in the accompanying statements of expenses over revenues
and changes in accumulated deficit.
Property and Equipment and Leased Equipment
Property and equipment and leased equipment are stated at cost. Major
property additions, replacements, and betterments are capitalized, while
maintenance and repairs which do not extend the useful lives of these assets
are expensed currently. The System leases DSS(R) equipment to subscribers under
cancellable operating leases. Depreciation for property and equipment and
leased equipment is provided using the straight-line method over the estimated
useful lives of the respective assets, ranging from five to six years.
Depreciation expense for the year ended December 31, 1995, 1996 and for the
three months ended March 31, 1997 was $88,272, $280,983 and $116,218,
respectively. Upon retirement or disposal of assets, the cost and related
accumulated depreciation are removed from the statements of assets and
liabilities and accumulated deficit and any gain or loss is reflected in
earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Contract rights ............... $1,841,352 $1,841,352 $1,841,352
Organization costs ............ 45,674 45,674 45,674
---------- ---------- ----------
1,887,026 1,887,026 1,887,026
Accumulated amortization ...... (386,328) (579,598) (631,840)
---------- ---------- ----------
1,500,698 1,307,428 1,255,186
NRTC patronage capital ......... 31,547 89,102 89,102
---------- ---------- ----------
$1,532,245 $1,396,530 $1,344,288
========== ========== ==========
</TABLE>
F-78
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (Continued)
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statements of expenses over revenues and changes in accumulated deficit, was
$184,135, $184,135 and $52,242 for the year ended December 31, 1995, 1996 and
three months ended March 31, 1997, respectively. Accumulated amortization at
December 31, 1995, 1996 and three months ended March 31, 1997 was $368,270,
$552,405 and $598,439, respectively.
Organization Costs: Organization costs are costs associated with the
formation of the System and are being amortized over five years. Amortization
expense, included in depreciation and amortization in the accompanying
statements of expenses over revenues and changes in accumulated deficit, was
$9,135, $9,135 and $1,264 for the year ended December 31, 1995, 1996 and the
three months ended March 31, 1997, respectively. Accumulated amortization at
December 31, 1995, 1996 and for the three months ended March 31, 1997 was
$18,058, $27,193 and $28,335, respectively.
NRTC Patronage Capital: Mitchell EMC is a voting member of the NRTC with
an ownership interest in the NRTC in proportion to its prior patronage. NRTC
patronage certificates represent the noncash portion of NRTC patronage income.
Under its bylaws, the NRTC declares a patronage dividend of its excess of
revenues over expenses each year. Of the total patronage dividend, 20% is paid
in cash and is recognized as income when received and is netted against
programming expense in the accompanying statements of expenses over revenues
and changes in accumulated deficit. The remaining 80% is distributed in the
form of noncash patronage capital, which will be redeemed in cash only at the
discretion of the NRTC. The System includes noncash patronage capital as other
assets, with an offsetting deferred patronage income amount included in other
liabilities in the accompanying statements of assets and liabilities and
accumulated deficit. The patronage capital will be recognized as income when
cash distributions are declared by the NRTC.
Income Taxes
Mitchell EMC, and thus the System, is not considered a taxable entity for
federal and state income tax purposes, as it is a not-for-profit corporation.
Accordingly, no provision for income taxes is included in the accompanying
financial statements.
Cash and Cash Equivalents
The System considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at March 31, 1997,
management does not believe any significant concentration of credit risk
exists.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the
F-79
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (Continued)
asset and its eventual disposition. Having found no instances whereby the sum
of expected future cash flows (undiscounted and without interest charges) was
less than the carrying amount of the asset and thus requiring the recognition
of an impairment loss, management believes that the long-lived assets in the
accompanying statements of assets and liabilities and accumulated deficit are
appropriately valued.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Related-Party Transactions
Certain administrative services are performed by Mitchell EMC on behalf of
the System. Costs attributable to these support functions are included in
general and administrative expenses in the accompanying statements of expenses
over revenues and changes in accumulated deficit. The costs allocated to the
System were approximately $279,000, $810,000 and $211,000 for the year ended
December 31, 1995, 1996 and for the three months ended March 31, 1997,
respectively. Such allocations do not necessarily represent actual and/or
ongoing expenses of the System.
Mitchell EMC either advances funds to or borrows funds from the System.
Included in the accompanying statements of assets and liabilities and
accumulated deficit is a net payable to Mitchell EMC representing amounts due
for the initial purchase of contract rights and net operating activities as
funded by Mitchell EMC.
4. Commitments and Contingencies
As part of the NRTC Member Agreements, the System is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the System's
Rural DirecTv Market, or up to 6,958 subscribers) and the requirements of
certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement if the
System fails to obtain such minimum number of subscribers prior to such time.
The System had achieved the minimum subscriber requirement at March 31, 1997
and is therefore not required to pay such fees.
5. Reliance on DirecTv and the NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the System for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements
of expenses over revenues and changes in accumulated deficit. The NRTC also
sells DSS(R) equipment to its members.
Because the System is, through the NRTC, a distributor of DIRECTV
Services, the System would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers
F-80
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
5. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
in certain rural DirecTv markets. In general, upon default by the NRTC under
the Hughes Agreement, the System would have the right to acquire DIRECTV
Services directly from DirecTv. The NRTC has contracted with third parties to
provide the NRTC members with certain services, including billing services and
centralized remittance processing services. If the NRTC is unable to provide
these services for whatever reason, the System would be required to acquire the
services from other sources. There can be no assurance that the cost to the
System to obtain these services elsewhere would not exceed the amounts
currently payable to the NRTC.
The System would also be adversely affected by the termination of the NRTC
Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the System
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the System would be able to obtain similar DBS services from
other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the System will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While management believes that it will have access to DIRECTV Services
following the expiration of the current Hughes Agreement by virtue of the
NRTC's right of first refusal in the Hughes Agreement and the System's existing
contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the System from Hughes or the
NRTC, and, if available, there can be no assurance with regard to the financial
and other terms under which the System could acquire the services.
The System's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the System's DBS business.
DirecTv, and therefore the System, is dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and different
renewal and cancellation provisions. There can be no assurance that any such
agreements will be renewed or will not be canceled prior to expiration of their
original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment, without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
F-81
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Washington Electric
Membership Corporation:
We have audited the accompanying statement of assets and liabilities and
accumulated earnings of the DBS OPERATIONS OF NRTC SYSTEM NO. 0073 (an
unincorporated division of Washington Electric Membership Corporation) as of
December 31, 1996 and the related statements of revenues over expenses and
changes in accumulated earnings and cash flows for the year then ended. These
financial statements are the responsibility of the System's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DBS Operations of NRTC
System No. 0073 as of December 31, 1996 and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1997
F-82
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
STATEMENTS OF ASSETS AND LIABILITIES AND ACCUMULATED EARNINGS
DECEMBER 31, 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 18,811 $ 29,742
Trade accounts receivable, net of allowance for doubtful accounts of $14,820
and $0 at December 31, 1996 and March 31, 1997, respectively ............ 183,444 166,493
Inventory .................................................................. 44,282 55,025
Deferred promotional costs, net (Note 2) ................................. 57,533 50,250
---------- -----------
Total current assets ................................................ 304,070 301,510
---------- -----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ................................................... 16,197 16,197
Less accumulated depreciation ............................................. (10,798) (12,148)
---------- -----------
5,399 4,049
---------- -----------
LEASED EQUIPMENT, at cost:
Leased equipment ......................................................... 206,066 209,212
Less accumulated depreciation ............................................. (35,060) (44,136)
---------- -----------
171,006 165,076
---------- -----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ................................. 842,951 816,341
---------- -----------
$1,323,426 $1,286,976
========== ===========
LIABILITIES AND ACCUMULATED EARNINGS
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 98,644 $ 1,448
Accrued liabilities ...................................................... 119,036 70,919
Related-party payable ...................................................... 656,004 704,956
Unearned revenue ......................................................... 209,288 202,837
---------- -----------
Total current liabilities ............................................. 1,082,972 980,160
---------- -----------
OTHER LIABILITIES ......................................................... 44,637 44,637
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, and 5)
ACCUMULATED EARNINGS ...................................................... 195,817 262,179
---------- -----------
$1,323,426 $1,286,976
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
STATEMENTS OF REVENUES OVER EXPENSES AND CHANGE
IN ACCUMULATED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1996 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
REVENUE:
Programming revenue. ........................ $1,605,660 $479,917
Equipment and installation revenue ............ 370,888 74,545
---------- --------
Total revenue. .............................. 1,976,548 554,462
---------- --------
COST OF REVENUE:
Programming expense. ........................ 826,714 271,395
Cost of equipment and installation ............ 200,066 51,897
Service fees ................................. 157,469 51,693
---------- --------
Total cost of revenue. ..................... 1,184,249 374,985
---------- --------
GROSS PROFIT ................................. 792,299 179,477
---------- --------
OPERATING EXPENSES:
Sales and marketing. ........................ 57,752 3,500
General and administrative .................. 310,931 72,579
Depreciation and amortization. ............... 143,675 37,036
---------- --------
Total operating expenses .................. 512,358 113,115
---------- --------
REVENUES OVER EXPENSES ........................ 279,941 66,362
ACCUMULATED DEFICIT at beginning of year ...... (84,124) 195,817
---------- --------
ACCUMULATED EARNINGS at end of year. ......... $ 195,817 $262,179
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-84
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1996 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Revenues over expenses ................................................ $ 279,941 $ 66,362
---------- ---------
Adjustments to reconcile revenues over expenses to net cash provided by
operating activities:
Depreciation and amortization ....................................... 143,675 10,436
Amortization of deferred promotional costs. ........................ 9,467 26,610
Changes in operating assets and liabilities:
Trade accounts receivable, net. .................................... (82,517) 16,951
Related-party payable ............................................. (439,143) 48,952
Inventory ......................................................... 70,343 (10,743)
Deferred promotional costs. ....................................... (67,000) 7,283
Accounts payable. ................................................ 34,392 (97,196)
Accrued liabilities ................................................ 74,401 (48,117)
Unearned revenue. ................................................ 123,134 (6,451)
---------- ---------
Total adjustments. ............................................. (133,248) (52,275)
---------- ---------
Net cash provided by operating activities. ..................... 146,693 14,087
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. ................................. (141,022) (3,156)
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS. ........................... 5,671 10,931
CASH AND CASH EQUIVALENTS at beginning of year ........................ 13,140 18,811
---------- ---------
CASH AND CASH EQUIVALENTS at end of year .............................. $ 18,811 $ 29,742
========== =========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared. .................................... $ 31,110 $ --
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-85
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED)
1. Organization and Nature of Business
The DBS Operations of NRTC System No. 0073 (the "System") is an
unincorporated division of Washington Electric Membership Corporation
("Washington EMC"), a Georgia corporation. The System operates the exclusive
rights to distribute direct broadcast satellite ("DBS") services ("DIRECTV
Services") offered by DirecTv, Inc. ("DirecTv") in certain rural markets in
Georgia. The accompanying financial statements present the financial position
and excess of revenues over expenses of the System.
Washington EMC obtained the rights to distribute DIRECTV Services in the
System's territory pursuant to an agreement (the "NRTC Member Agreement") with
the National Rural Telecommunications Cooperative ("NRTC"). Under the
provisions of the NRTC Member Agreement, Washington EMC has the exclusive right
to provide DIRECTV Services within certain rural territories in Georgia.
In March 1997, Washington EMC entered into an asset purchase agreement
(the "Agreement") with Digital Television Services of Georgia, LLC ("DTS
Georgia"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC. The agreement provides that DTS Georgia will
purchase Washington EMC's NRTC Member Agreement and other assets used in
connection with the System's business, as defined in the Agreement, and will
assume certain liabilities of the System, as defined in the Agreement. The
purchase price is subject to an adjustment for working capital at the date of
closing of the Agreement. The closing of the Agreement occurred in May 1997.
2. Summary of Significant Accounting Policies
Presentation
The System is not a separate subsidiary of Washington EMC nor has it been
operated as a separate division of Washington EMC. The financial statements of
the System have been derived from the records of Washington EMC and have been
prepared to present its financial position, results of operations, and cash
flows on a stand-alone basis. Accordingly, the accompanying financial
statements include certain costs and expenses which have been allocated to the
System from Washington EMC. The costs and expenses have been allocated to the
system based on actual amounts relative to DBS services or percentages as
determined by management through an analysis of DBS activity in the applicable
accounts. The System's management believes that the methodology used is
reasonable. Such allocated expenses may not be indicative of what such expenses
would have been had the System been operated as a separate entity.
Revenue Recognition
The System earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under monthly, annual, or seasonal subscriptions; and movies and events
programming available on a pay-per-view basis. Programming purchased on a
monthly, quarterly, annual, or seasonal basis, including premium programming,
is billed in advance and is recorded as unearned revenue. All programming
revenue is recognized when earned.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the System and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the System.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the System's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the
F-86
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (Continued)
NRTC [Note 5]); monthly subscriber maintenance fees charged by DirecTv, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Cost of equipment and installation represents the
actual cost of the equipment to the System plus the costs to install the
equipment.
Inventories
The System maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Deferred Promotional Costs
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the System for the credit. The System defers both the
programming revenue and the cost of this credit and amortizes them over the
one-year contract period. In addition, as a part of this program, the System
receives $1 per month for up to five years from the NRTC for each subscriber
whose account remains active. Such amounts are recorded as a reduction in sales
and marketing expense in the accompanying statement of revenues over expenses
and change in accumulated earnings.
Property and Equipment and Leased Equipment
Property and equipment and leased equipment are stated at cost. Major
property additions, replacements, and betterments are capitalized, while
maintenance and repairs which do not extend the useful lives of these assets
are expensed currently. The System leases DSS(R) equipment to subscribers under
cancellable operating leases. Depreciation for property and equipment and
leased equipment is provided using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to six years.
Depreciation expense for the year ended December 31, 1996 and for the three
months ended March 31, 1997 was $37,235 and $10,426, respectively. Upon
retirement or disposal of assets, the cost and related accumulated depreciation
are removed from the statement of assets and liabilities and accumulated
earnings and any gain or loss is reflected in earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following:
December 31, March 31,
1996 1997
-------------- --------------
Contract rights ............... $1,064,414 $1,064,414
Accumulated amortization ...... (266,100) (292,710)
---------- ----------
798,314 771,704
NRTC patronage capital ......... 44,637 44,637
---------- ----------
$ 842,951 $ 816,341
========== ==========
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statement of revenues over expenses and change in accumulated earnings, for the
year ended December 31, 1996 and for the three months ended March 31, 1997 is
$106,440 and $26,610, respectively.
F-87
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (Continued)
NRTC Patronage Capital: Washington EMC is a voting member of the NRTC with
an ownership interest in the NRTC in proportion to its prior patronage. NRTC
patronage certificates represent the noncash portion of NRTC patronage income.
Under its bylaws, the NRTC declares a patronage dividend of its excess of
revenues over expenses each year. Of the total patronage dividend, 20% is paid
in cash and is netted against programming expense in the accompanying statement
of revenues over expenses and change in accumulated earnings when received. The
remaining 80% is distributed in the form of noncash patronage capital, which
will be redeemed in cash only at the discretion of the NRTC. The System
includes noncash patronage capital as other assets, with an offsetting deferred
patronage income amount included in other liabilities in the accompanying
statement of assets and liabilities and accumulated earnings. The patronage
capital will be recognized as income when cash distributions are declared by
the NRTC.
Income Taxes
The System is not considered a taxable entity for federal and state income
tax purposes, as it is a not-for profit-corporation. Accordingly, no provision
for income taxes is included in the accompanying financial statements.
Cash and Cash Equivalents
The System considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1996, management does not believe any significant concentration of credit risk
exists.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying statement of assets and liabilities and accumulated
earnings are appropriately valued.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Related-Party Transactions
Certain administrative services are performed by Washington EMC on behalf
of the System. Costs attributable to these support functions are included in
general and administrative expenses in the accompanying statement of revenues
over expenses and change in accumulated earnings. The costs allocated to the
System were approximately $235,000 and $55,000 for the year ended December 31,
1996 and for the three months ended March 31, 1997, respectively. Such
allocations do not necessarily represent actual and/or ongoing expenses of the
System.
F-88
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Related-Party Transactions -- (Continued)
Washington EMC either advances funds to or borrows funds from the System.
Included in the accompanying statement of assets and liabilities and
accumulated earnings is a net payable to Washington EMC representing amounts
due for the initial purchase of contract rights and net operating activities as
funded by Washington EMC.
4. Commitments and Contingencies
As part of the NRTC Member Agreements, the System is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the System's
Rural DirecTv Market, or up to 3,100 subscribers) and the requirements of
certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement if the
System fails to obtain such minimum number of subscribers prior to such time.
The System had achieved the minimum subscriber requirement at December 31, 1996
and is therefore not required to pay such fees.
5. Reliance on DirecTv and the NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the System for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements
of revenues over expenses and change in accumulated earnings. The NRTC also
sells DSS(R) equipment to its members.
Because the System is, through the NRTC, a distributor of DIRECTV
Services, the System would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the System would
have the right to acquire DIRECTV Services directly from DirecTv. The NRTC has
contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized remittance processing
services. If the NRTC is unable to provide these services for whatever reason,
the System would be required to acquire the services from other sources. There
can be no assurance that the cost to the System to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The System would also be adversely affected by the termination of the NRTC
Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the System
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the System would be able to obtain similar DBS services from
other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the System will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While management believes that it will have access to DIRECTV Services
following the expiration of the current Hughes Agreement by virtue of the
NRTC's right of first refusal in the Hughes Agreement and the System's existing
contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the System from Hughes or the
NRTC, and, if available, there can be no assurance with regard to the financial
and other terms under which the System could acquire the services.
F-89
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
The System's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the System's DBS business.
DirecTv, and therefore the System, is dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and different
renewal and cancellation provisions. There can be no assurance that any such
agreements will be renewed or will not be canceled prior to expiration of their
original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment, without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
F-90
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Partners
Northeast DBS Enterprises, L.P.
T/A Digital One Television
Williston, Vermont
We have audited the accompanying balance sheets of NORTHEAST DBS
ENTERPRISES, L.P., T/A Digital One Television as of December 31, 1995 and 1994,
and the related statements of operations and partners' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northeast DBS Enterprises,
L.P., T/A Digital One Television as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
February 23, 1996
F-91
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ......................................................... $ 245,639 $ 1,286,240
Accounts receivable -- Net of allowance for doubtful accounts of
$12,157 -- 1995 and $3,000 -- 1994 ........................... 361,890 138,116
Inventory ...................................................... 371,795 451,434
Due from partners ............................................. 28,315
Prepaid expenses and other current assets ..................... 43,866 2,963
------- -----------
Total current assets ....................................... 1,023,190 1,907,068
--------- -----------
EQUIPMENT HELD FOR RENTAL ....................................... 487,866 --
Less accumulated depreciation ................................. 97,573 --
--------- -----------
390,293 --
--------- -----------
OTHER PROPERTY AND EQUIPMENT .................................... 395,301 256,441
Less accumulated depreciation and amortization ............... 164,395 57,387
--------- -----------
230,906 199,054
--------- -----------
FRANCHISE COSTS ................................................... 3,624,514 3,624,514
Less accumulated amortization ................................. 543,676 181,225
--------- -----------
3,080,838 3,443,289
--------- -----------
OTHER ASSETS
NRTC patronage capital ....................................... 30,649
Note receivable -- Partner .................................... 35,035 31,850
Deposits ...................................................... 4,040 3,590
Unamortized organization costs ................................. 29,672 19,600
--------- -----------
99,396 55,040
--------- -----------
$ 4,824,623 $ 5,604,451
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term notes payable ..................... $ 10,390 $ 5,316
Accounts payable ............................................. 774,650 417,912
Accrued expenses and other current liabilities ............... 474,257 72,661
Unearned income and customer deposits ........................ 248,104 62,968
----------- -----------
Total current liabilities ................................. 1,507,401 558,857
----------- -----------
OTHER LIABILITIES ................................................ 30,649 --
----------- -----------
LONG-TERM NOTES PAYABLE -- Net of current portion ............... 16,356 8,980
----------- -----------
COMMITMENTS (Notes 7 and 8)
PARTNERS' EQUITY -- 565.72834 Units -- 1995 and 546.89676
Units -- 1994
Capital contributions .......................................... 6,968,080 6,710,087
Private placement costs ....................................... (263,704) (244,346)
Accumulated deficit .......................................... (3,434,159) (1,429,127)
----------- -----------
3,270,217 5,036,614
----------- -----------
$ 4,824,623 $ 5,604,451
=========== ===========
</TABLE>
See notes to financial statements.
F-92
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
Year Ended December 31,
-------------------------------
1995 1994
--------------- -------------
OPERATING INCOME
Programming. ........................... $ 2,670,015 $ 110,422
Equipment sales and installation ...... 2,025,501 671,122
Rental ................................. 106,663 144,343
------------ ----------
4,802,179 925,887
------------ ----------
DIRECT COSTS
Programming. ........................... 1,611,657 66,405
Equipment sales and installation ...... 1,720,634 566,610
Rental ................................. 97,573 118,627
------------ ----------
3,429,864 751,642
------------ ----------
GROSS PROFIT
Programming. ........................... 1,058,358 44,017
Equipment sales and installation ...... 304,867 104,512
Rental ................................. 9,090 25,716
------------ ----------
1,372,315 174,245
------------ ----------
OPERATING EXPENSES
Marketing and selling. ............... 1,697,782 232,565
Administrative ........................ 1,223,003 641,015
Amortization of franchise costs. ...... 362,451 181,225
Depreciation and amortization. ......... 118,151 102,395
------------ ----------
3,401,387 1,157,200
------------ ----------
LOSS FROM OPERATIONS .................. (2,029,072) (982,955)
------------ ----------
OTHER INCOME (EXPENSES)
Interest income. ..................... 41,018 97,212
Interest expense ..................... (9,478) (97,545)
Loan commitment fees .................. (7,500) --
------------ ----------
24,040 (333)
------------ ----------
NET LOSS .............................. (2,005,032) (983,288)
PARTNERS' EQUITY -- BEGINNING. ......... 5,036,614 1,108,561
PARTNERS' CAPITAL CONTRIBUTIONS. ...... 257,993 5,155,687
PRIVATE PLACEMENT COSTS INCURRED ...... (19,358) (244,346)
------------ ----------
PARTNERS' EQUITY -- ENDING ............ $ 3,270,217 $5,036,614
============ ==========
See notes to financial statements.
F-93
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................................... $ (2,005,032) $ (983,288)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization of property and equipment. ........................ 204,581 54,028
Amortization of other assets. ................................................... 373,594 229,592
Amortized discount on notes payable ............................................. -- 15,069
Accrued interest on note receivable -- Partner. ................................. (3,185) --
Increase in accounts receivable ................................................... (223,774) (138,116)
(Increase) decrease in inventory. ................................................ 79,639 (451,434)
(Increase) decrease in prepaid expenses and other current assets .................. (41,528) 7,258
Increase in deposits. ............................................................ (450) (3,590)
Organization costs incurred ...................................................... (20,590) (2,000)
Increase in accounts payable, accrued expenses and other current liabilities ...... 758,334 319,183
Increase in unearned income and customer deposits ................................. 185,136 --
------------ ------------
Net cash used in operating activities. .......................................... (693,275) (953,298)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in due from partners .......................................... 28,315 (8,528)
Purchase of equipment held for rental. ............................................. (487,866)
Purchase of other property and equipment .......................................... (118,658) (219,537)
Proceeds from disposition of equipment ............................................. -- 2,484
Franchise costs incurred ............................................................ -- (518,016)
Decrease in franchise costs payable. ................................................ -- (1,082,523)
------------ ------------
Net cash used in investing activities. .......................................... (578,209) (1,826,120)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term notes payable. .................................... (7,752) (2,476)
Principal payments on notes payable -- Other ....................................... -- (513,705)
Partners' capital contributions. ................................................... 257,993 4,454,622
Private placement costs incurred ................................................... (19,358) (178,869)
------------ ------------
Net cash provided by financing activities. ....................................... 230,883 3,759,572
------------ ------------
NET INCREASE (DECREASE) IN CASH. ................................................... (1,040,601) 980,154
CASH -- BEGINNING. .................................................................. 1,286,240 306,086
------------ ------------
CASH -- ENDING ..................................................................... $ 245,639 $ 1,286,240
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest ............................................. $ 1,983 $ 147,220
============ ============
</TABLE>
See notes to financial statements.
F-94
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
STATEMENTS OF CASH FLOWS -- (Continued)
YEAR ENDED DECEMBER 31, 1995
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Long-term notes payable of $20,202 and $16,772 were incurred for the
purchase of property and equipment during the years ended December 31, 1995 and
1994, respectively.
During the year ended December 31, 1995, NRTC patronage capital of $30,649
was recorded, representing deferred patronage dividends.
During the year ended December 31, 1994, the amount due from partners was
increased by $20,000 and a note receivable -- partner of $31,850 was issued in
connection with the issuance of Partnership Units (recorded as partners'
capital contributions).
During the year ended December 31, 1994, franchise costs of $350,614 were
incurred, recorded as a reduction of the note receivable of $140,496 and
partners' capital contributions of $210,118.
During the year ended December 31, 1994, notes payable of $422,063 were
converted to Partnership Units (recorded as partners' capital contributions).
During the year ended December 31, 1994, private placement costs of
$17,034 were incurred in connection with the issuance of Partnership Units
(recorded as partners' capital contributions).
See notes to financial statements.
F-95
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. Summary of Significant Accounting Policies
A. Organization and Nature of Business
Northeast DBS Enterprises, L.P. is a limited partnership under the laws of
the State of Vermont. The Partnership provides direct broadcast satellite
("DBS") television distribution services and sells related equipment in rural
territories franchised in conjunction with the National Rural
Telecommunications Cooperative ("NRTC") and DIRECTV, a subsidiary of G.M.
Hughes Electronics, Inc. In the normal course of business, the Partnership
grants credit to its customers, in the form of accounts receivable, who are
located in Vermont and New Hampshire.
Unearned income on programming contracts is recognized as earned over the
term of the contracts.
The Company also leases certain equipment to customers under four-year
cancelable operating leases with rental income reported as earned over the
lease term.
The financial statements include only those assets, liabilities and
results of operations which relate to the business of the Partnership. The
statements do not include any assets, liabilities, income or expenses
attributable to the partners' individual activities.
B. Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
C. Cash
The Partnership maintains cash balances at several financial institutions.
Accounts at certain institutions are insured by the Federal Deposit Insurance
Corporation up to $100,000. Temporary cash balances are invested on a daily
basis in a money market fund backed by U.S. Government obligations.
D. Inventory
Inventory, consisting of DBS systems and related parts and supplies, is
stated at the lower of cost (first-in, first-out method) or market.
E. Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Expenditures for additions,
renewals and betterments are capitalized; expenditures for maintenance and
repairs are charged to expense as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation or amortization are eliminated
from the accounts and the resulting gain or loss is credited or charged to
operations. Depreciation and amortization are provided using the straight-line
and declining balance methods over the estimated useful lives of the assets.
F. NRTC Patronage Capital
The Partnership is an affiliate of the NRTC. While affiliates have no
vote, they do have an interest in the NRTC in proportion to their prior
patronage. NRTC patronage capital represents the noncash portion of NRTC
patronage dividends. Under its bylaws, the NRTC declares a patronage dividend
equal to the excess of its revenues over its expenses each year. Of the total
patronage dividend, 20% is paid in cash and recognized as income when received
and is netted against programming expense in the accompanying statement of
operations. The remaining 80% is distributed on the form of noncash patronage
capital which will be redeemed in cash only at the discretion of the NRTC, and
is recorded as deferred patronage dividends which will be recognized as income
only when cash distributions are declared by the NRTC.
F-96
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. Summary of Significant Accounting Policies -- (Continued)
G. Franchise Costs and Amortization
The Partnership purchased the rights to distribute DBS services in twelve
counties in Vermont and two counties in New Hampshire. These rights have been
granted by the NRTC under its agreement with DIRECTV. The DBS services which
the Partnership distributes are video and audio entertainment and information
programming transmitted by a satellite operated by DIRECTV. The franchise costs
paid to NRTC are being amortized over the minimum term of the contract with
NRTC of ten years.
H. Private Placement Costs
Costs incurred in connection with the private placement offering are
reflected as a reduction of partners' equity.
I. Advertising
Advertising costs are charged to operations when the advertising first
takes place.
J. Income Taxes
Income taxes are not payable by, or provided for, the Partnership. All tax
effects of the Partnership's income or losses are passed through to the
partners.
K. Allocation of Patnership Profits and Losses
Partnership profits and losses are allocated as follows:
All losses are allocated 99% to the Limited Partners and 1% to the General
Partner.
All profits are allocated as follows:
First, 100% to Partners who have previously been allocated losses in
proportion to previously allocated losses until each Partner has been allocated
profits equal to previously allocated losses.
Second, 100% to all Partners, pro rata based on the number of Partnership
Units ("Units") owned, until each Partner has been allocated $1,000 per year
per Unit, cumulatively (the "Preferred Return").
Third, 80% to all Partners, pro rata based on the number of Units owned,
and 20% to the General Partner until each of the Partners has been allocated
aggregate profits equal to a 35% per year compounded return on their initial
capital contribution (the "Fixed Return").
After the aggregate allocated profits to each of the Partners exceeds the
Fixed Return, net profits will be allocated 65% to all Partners, pro rata based
on the number of Units owned, and 35% to the General Partner.
2. Other Property and Equipment
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Demonstration equipment .............................. $ 23,290 $ 8,966
Office furniture and equipment ..................... 339,151 220,386
Leasehold improvements .............................. 32,860 27,089
-------- --------
395,301 256,441
Less accumulated depreciation and amortization ...... 164,395 57,387
-------- --------
$230,906 $199,054
======== ========
</TABLE>
F-97
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consists of the following:
1995 1994
---------- ---------
Sales taxes payable ........................ $ 24,062 $ 34,847
Accrued programming fees .................. 144,189 17,000
Accrued payroll and related expenses ...... 115,552 --
Accrued commissions ........................ 131,105 8,500
Other .................................... 59,349 12,314
-------- --------
$474,257 $ 72,661
======== ========
4. Long-Term Notes Payable
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Payable in monthly installments of $537 including interest at 9.5%; final
payment due in June, 1997; collateralized by related equipment ......... $ 8,980 $14,296
Payable in monthly installments of $520 including interest at 10.75%; final
payment due in May, 1999; collateralized by related equipment ............ 17,766 --
------- -------
26,746 14,296
Less current portion ...................................................... 10,390 5,316
------- -------
$16,356 $ 8,980
======= =======
</TABLE>
Principal payments on long-term notes payable are due as follows: Year
ending December 31, 1996 -- $10,390, 1997 -- $8,195, 1998 -- $5,631 and 1999 --
$2,530.
5. Partners' Equity
At December 31, 1995 and 1994, warrants are outstanding to purchase 33.81
Units and 31.31 Units, respectively, of the Partnership at prices ranging from
$10,000 to $25,000 per Unit. The warrants are exercisable (except as described
in Note 7), and expire at various dates from November, 1998, through October,
2000.
6. Major Supplier
The Partnership purchases substantially all of its programming, inventory
and equipment held for rental from NRTC (see Note 1-a).
7. Related Party Transactions
The note receivable -- partner bears interest at 10%; the principal
balance and accrued interest are due on or before July 1, 1997, based on the
occurrence of certain events per the agreement.
At December 31, 1995, the Partnership has a $500,000 line of credit with a
company affiliated by common ownership and management; the agreement expires
October 1, 1996, and contains an option to extend the agreement for an
additional year. Loans outstanding, if any, bear interest at 15%. Interest
expense, commitment fees, and financing costs incurred under this agreement
were $343, $7,500 and $2,500, respectively, for the year ended December 31,
1995. As part of the agreement, the Partnership issued to the affiliate a
warrant to purchase one Unit at a price of $25,000 which is exercisable
immediately, and a warrant to purchase 1.5 Units at a price of $25,000 per Unit
exercisable as defined in the agreement based on amounts borrowed. If the
agreement is extended to October 1, 1997, the Partnership will issue a warrant
to purchase two additional Units at a price of $25,000 per Unit exercisable as
defined in the agreement.
F-98
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS -- (Continued)
7. Related Party Transactions -- (Continued)
Companies affiliated by common ownership and management charge the
Partnership for expenses incurred by the Affiliates on behalf of the
Partnership. Total expenses of $38,008 and $63,375 were charged to the
Partnership for the years ended December 31, 1995 and 1994, respectively.
8. Lease Commitment
The Partnership leases its office facilities under a noncancelable
operating lease expiring in January, 1997; the lease contains a two-year
renewal option. Future minimum annual rentals under this lease are as follows:
Year Ending
December 31,
-------------
1996 ................................................ $34,661
1997 ................................................ 2,896
-------
$37,557
=======
Rent expense under all operating leases was $39,111 and $44,415 for the
years ended December 31, 1995 and 1994, respectively.
F-99
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Northeast DBS Enterprises, L.P.:
We have audited the accompanying balance sheet of NORTHEAST DBS
ENTERPRISES, L.P. (a Vermont limited partnership) as of December 31, 1996 and
the related statements of operations, changes in partners' capital, and cash
flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northeast DBS Enterprises,
L.P. as of December 31, 1996 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1997
F-100
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 128,589
Trade accounts receivable, net of allowance for doubtful accounts of $25,061 887,547
Due from partners ......................................................... 35,035
Inventory .................................................................. 268,179
Other, net (Note 2) ...................................................... 341,890
----------
Total current assets ................................................ 1,661,240
----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ................................................... 483,793
Less accumulated depreciation ............................................. (241,426)
----------
242,367
----------
LEASED EQUIPMENT, at cost:
Leased equipment ......................................................... 934,822
Less accumulated depreciation ............................................. (220,932)
----------
713,890
----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ................................. 2,967,427
----------
$5,584,924
==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 932,120
Accrued liabilities ...................................................... 969,781
Notes payable ............................................................ 1,209,917
Unearned revenue ......................................................... 1,052,611
----------
Total current liabilities ............................................. 4,164,429
----------
OTHER LIABILITIES ......................................................... 140,529
----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 5)
PARTNERS' CAPITAL:
Class A units, 565.72834 units issued and outstanding ..................... 1,279,966
Class B units, 9.5 units issued and outstanding ........................... --
----------
Total partners' capital ............................................. 1,279,966
----------
$5,584,924
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-101
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
REVENUE:
Programming revenue ..................... $ 6,545,998
Equipment and installation revenue ...... 3,139,093
------------
Total revenue ..................... 9,685,091
------------
COST OF REVENUE:
Programming expense ..................... 3,453,667
Cost of equipment and installation ...... 2,399,483
Service fees ........................... 697,128
------------
Total cost of revenue ............... 6,550,278
------------
GROSS PROFIT .............................. 3,134,813
------------
OPERATING EXPENSES:
Sales and marketing ..................... 2,804,769
General and administrative ............... 1,570,979
Depreciation and amortization ............ 592,732
------------
Total operating expenses ............ 4,968,480
------------
OPERATING LOSS ........................... (1,833,667)
------------
OTHER INCOME (EXPENSE):
Interest expense ........................ (177,617)
Other income ........................... 21,033
------------
(156,584)
------------
NET LOSS ................................. $ (1,990,251)
============
The accompanying notes are an integral part of this statement.
F-102
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Limited Partners
General ---------------------------
Partner Class A Class B Total
------------ --------------- --------- ---------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 ...... $ 11,195 $ 3,259,022 $ -- $ 3,270,217
Net loss ..................... (19,903) (1,970,348) -- (1,990,251)
--------- ------------ ------- ------------
BALANCE, December 31, 1996 ...... $ (8,708) $ 1,288,674 $ -- $ 1,279,966
========= ============ ======= ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-103
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (1,990,251)
------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 592,732
Amortization of capitalized debt costs and debt discount ............... 12,120
Changes in operating assets and liabilities:
Accounts receivable, net ............................................. (525,657)
Inventory ............................................................ 103,616
Other, net ............................................................ (302,464)
Accounts payable ...................................................... 157,470
Accrued liabilities ................................................... 495,524
Unearned revenue ...................................................... 804,507
------------
Total adjustments ................................................... 1,337,848
------------
Net cash used in operating activities .............................. (652,403)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and lease equipment, net ............ (439,231)
Increase in amounts due from partners .................................... --
------------
Net cash used in investing activities .............................. (439,231)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable ................................. 1,285,000
Repayment of notes payable ................................................ (205,299)
Other assets ............................................................ (105,117)
------------
Net cash provided by financing activities ........................... 974,584
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (117,050)
CASH AND CASH EQUIVALENTS at beginning of year ........................... 245,639
------------
CASH AND CASH EQUIVALENTS at end of year ................................. $ 128,589
============
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared .......................................... $ 103,470
============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ................................................... $ 127,531
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-104
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Organization and Nature of Business
Northeast DBS Enterprises, L.P. (the "Partnership") (d.b.a. Digital One
Television) is a limited partnership organized in Vermont. The Partnership was
formed on January 1, 1993 to acquire and operate rights to distribute direct
broadcast satellite ("DBS") services ("DIRECTV Services") offered by DirecTv,
Inc. ("DirecTv"). The Partnership is a continuation of a general partnership
which was known as Northeast DBS Enterprises.
The Partnership shall continue until terminated in accordance with
provisions defined in the partnership agreement. The Partnership has a general
partner in addition to its limited partners. The limited partners may not take
part in the management of the Partnership and are not liable for any debts,
obligations or losses of the Partnership in excess of their capital
contributions and their shares of the undistributed profits.
The partnership agreement provides that net losses are allocated 99% to
the limited partners and 1% to the general partner; however, no net losses will
be allocated to a limited partner in excess of the balance of the limited
partner's capital account. Profits are allocated (1) first to those partners
(the general and limited partners collectively) who have previously been
allocated losses in proportion to the excess of the amount of such losses
previously allocated to each partner over the profits previously allocated to
each partner until the aggregate amount of profits allocated equal the
aggregate amount of allocated losses; (2) next, 100% to the partners pro rata
in accordance with the number of units owned until aggregate profits have been
allocated equal $1,000 per unit per year; (3) next, 80% to the partners, pro
rata in accordance with the number of units owned by the partners and 20% to
the general partner until each of the partners has been allocated for the
current year and all prior years aggregate profits equal to 35% per year
compounded return on their initial capital contribution (the "Fixed Return");
and (4) finally, after the aggregate of all profits allocated to the partners
exceeds the Fixed Return, 65% to the Partners on a pro rata basis in accordance
with the number of units owned by the partners and 35% to the general partner.
The Partnership obtained the rights to distribute DIRECTV Services in
certain rural markets in Vermont and New Hampshire pursuant to agreements (the
"NRTC Member Agreements") with the National Rural Telecommunications
Cooperative ("NRTC") in exchange for approximately $3.6 million.
In November 1996, the Partnership entered into an asset purchase agreement
(the "Agreement") with DTS Management, LLC ("DTS"), which was subsequently
amended by an amendment dated February 11, 1997 by and among the Partnership,
DTS and Digital Television Services of Vermont, LLC ("DTS Vermont"), a
subsidiary of DTS. DTS is a subsidiary of Digital Television Services, LLC. The
Agreement provides that DTS Vermont will purchase the Partnership's NRTC Member
Agreement and other assets used in connection with the Partnership's business,
as defined in the Agreement, and will assume certain liabilities of the
Partnership, as defined in the Agreement. The purchase price is subject to an
adjustment based on the number of subscribers and working capital at the date
of closing of the Agreement.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Partnership earns programming revenue by providing DIRECTV Services to
its subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under
F-105
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
monthly, annual, or seasonal subscriptions; and movies and events programming,
including premium programming, available on a pay-per-view basis. Programming
purchased on a monthly, quarterly, annual, or seasonal basis is billed in
advance and is recorded as unearned revenue. All programming revenue is
recognized when earned.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue is recognized upon delivery of the equipment to the customer.
Installation revenue is recognized when the equipment is installed and
represents the amount paid by the customer.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the Partnership's subscribers. These costs include the direct
wholesale cost of purchasing related programming from DirecTv (through the NRTC
[Note 5]); monthly subscriber maintenance fees charged by DirecTV, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Costs of equipment and installation represents the
actual cost of the equipment to the Partnership plus the costs to install the
equipment.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Inventories
The Partnership maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Other Current Assets
Other current assets consist of the following at December 31, 1996:
Deferred promotional costs, net. ...... $310,667
Other. ................................. 31,223
--------
$341,890
========
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the Partnership for the credit. The Partnership defers
both the programming revenue and the cost of credit and amortizes them over the
one-year contract period. In addition, as a part of this program, the
Partnership receives $1 per month up to five years from the NRTC for each
subscriber whose account remains active. Such amounts are recorded as received
as a reduction in selling expenses in the accompanying statement of operations.
Property and Equipment and Leased Equipment
Property and equipment and leased equipment are stated at cost. Major
property additions, replacements, and betterments are capitalized, while
maintenance and repairs which do not extend the useful lives of these
F-106
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
assets are expensed currently. Depreciation for property and equipment and
leased equipment is provided using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to seven years.
Depreciation expense for the year ended December 31, 1996 was $219,763. Upon
retirement or disposal of assets, the cost and related accumulated depreciation
are removed from the balance sheet and any gain or loss is reflected in
earnings.
At December 31, 1996, future minimum rental revenues to be received from
operating leases of DSS(R) equipment are due as follows:
1997 ...................................................... $ 411,742
1998 ...................................................... 403,821
1999 ...................................................... 327,002
2000 ...................................................... 67,754
----------
$1,210,319
==========
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1996:
Contract rights. ............................................. $3,624,514
Organization costs .......................................... 34,292
----------
3,658,806
Accumulated amortization .................................... (939,563)
----------
2,719,243
NRTC patronage capital ....................................... 140,529
Debt issuance costs, net .................................... 103,215
Other. ...................................................... 4,440
----------
$2,967,427
==========
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statement of operations, for the year ended December 31, 1996 was $362,451.
Accumulated amortization at December 31, 1996 was $906,127.
Organization Costs: Organization costs are costs associated with the
formation of the Partnership and are being amortized over five years.
Amortization expense, included in depreciation and amortization in the
accompanying statement of operations, for the year ended December 31, 1996 was
$10,518. Accumulated amortization at December 31, 1996 was $33,436.
Debt Issuance Costs: Debt issuance costs are amortized over the term of
the related long-term debt facility. Amortization expense, included in interest
expense in the accompanying statement of operations, for the year ended
December 31, 1996 was $12,120 and accumulated amortization at December 31, 1996
was $12,120.
NRTC Patronage Capital: The Partnership is an affiliate of the NRTC. While
affiliates have no vote, they do have an interest in the NRTC in proportion to
their prior patronage. NRTC patronage capital represents the noncash portion of
NRTC patronage income. Under its bylaws, the NRTC declares a patronage dividend
of its
F-107
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
excess of revenues over expenses each year. Of the total patronage dividend,
20% is paid in cash and is recognized as income when received and is netted
against programming expense in the accompanying statement of operations. The
remaining 80% is distributed in the form of noncash patronage capital, which
will be redeemed in cash only at the discretion of the NRTC. The Partnership
includes noncash patronage capital as other assets, with an offsetting deferred
patronage income amount included in other liabilities in the accompanying
balance sheet. The patronage capital will be recognized as income when cash
distributions are declared by the NRTC.
Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1996:
Accrued programming expense................................. $325,462
Accrued salaries and wages ................................. 251,128
Accrued commissions. ....................................... 132,717
Other. ................................................... 260,474
--------
$969,781
========
Income Taxes
The Partnership is not considered a taxable entity for federal and state
income tax purposes. All taxable income or loss is allocated to the partners in
accordance with the terms of the partnership agreement. Accordingly, no
provision for income taxes is included in the accompanying financial
statements.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1996, management does not believe any significant concentration of credit risk
exists.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying balance sheet are appropriately valued.
3. Commitments and Contingencies
Leases
The Partnership leases office and warehouse space and certain equipment
under noncancelable operating leases which expire through 1999. Future minimum
lease payments for noncancelable operating leases in effect at December 31,
1996 are as follows:
1997 .......................................... $46,430
1998 .......................................... 38,211
1999 .......................................... 2,958
-------
Total future minimum lease payments. ...... $87,599
=======
F-108
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Commitments and Contingencies -- (Continued)
Rental expense charged to general and administrative expenses in the
accompanying statement of operations for the year ended December 31, 1996
totaled $34,760.
Warrants
The Partnership has issued warrants to purchase 34.31 partnership units at
prices ranging from $10,000 to $25,000 per unit at December 31, 1996, no
warrants had been exercised.
NRTC
As part of the NRTC Member Agreements, the Partnership is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the
Partnership's Rural DirecTv Market, or up to 10,168 subscribers) and the
requirements of certain programming agreements between DirecTv and providers of
programming, beginning in the fourth year of operation of the NRTC Member
Agreement if the Partnership fails to obtain such minimum number of subscribers
prior to such time. The Partnership has achieved the minimum subscriber
requirement at December 31, 1996 and is therefore not required to pay such
fees.
Litigation
The Partnership is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Partnership's
financial position or results of operations.
4. Notes Payable
In October 1995, the Partnership entered into a credit agreement with one
of its limited partners providing for borrowings up to $500,000 through October
1, 1996 with interest at 15%. No borrowings were made under this agreement;
however, the limited partner was given warrants related to this agreement. No
warrants were exercised under this agreement. The Partnership paid commitment
fees of $22,500 to the limited partner under this agreement during 1996.
In August 1996, the Partnership entered into a loan agreement with a bank
in the form of a $500,000 line of credit ("LOC") and a $500,000 overline credit
facility ("OL Facility"). No borrowings were outstanding under the OL Facility
at year-end. Borrowings outstanding under the LOC at December 31, 1996 were
$434,900 and bear interest at 10.25%. Borrowings under the LOC became current
at year-end due to the pending change in ownership under the Agreement (Note
1). As part of the LOC and OL Facility, the Company issued warrants to the bank
which can be exercised for 2 partnership units at a price of $25,000 per unit.
No warrants had been exercised at December 31, 1997 (Note 3).
The Partnership obtained a $750,000 loan from a financing company at an
interest rate of 18%. Outstanding borrowings under this agreement were $655,180
at December 31, 1996. As part of this agreement, the Partnership also
discounted certain subscriber equipment leases with the financing company.
Subsequent to year-end, the Partnership repaid $758,650 to the financing
company, representing the outstanding loan balance as well as the settlement of
the outstanding leases. The lease liability of $103,470 is also included in
notes payable at December 31, 1996.
At December 31, 1996, the Partnership also had $16,367 in outstanding
notes payable with interest rates ranging from 9.5% to 10.75% and payable in
monthly installments.
All outstanding notes payable and lease obligations are included as
current liabilities in the accompanying balance sheet. The carrying amount of
notes payable approximates fair value due to the relatively short period to
maturity of these instruments.
F-109
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Reliance on DirecTv and the NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the Partnership for these services on a
monthly basis. These fees are recorded as service fees in the accompanying
statement of operations. The NRTC also sells DSS(R) equipment to its members.
Because the Partnership is, through the NRTC, a distributor of DIRECTV
Services, the Partnership would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the Partnership
would have the right to acquire DIRECTV Services directly from DirecTv. The
NRTC has contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized remittance processing
services. If the NRTC is unable to provide these services for whatever reason,
the Partnership would be required to acquire the services from other sources.
There can be no assurance that the cost to the Partnership to obtain these
services elsewhere would not exceed the amounts currently payable to the NRTC.
The Partnership would also be adversely affected by the termination of the
NRTC Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the
Partnership would no longer have the right to provide DIRECTV Services. There
can be no assurance that the Partnership would be able to obtain similar DBS
services from other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the Partnership will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While the Partnership believes that it will have access to DIRECTV
Services following the expiration of the current Hughes Agreement by virtue of
the NRTC's right of first refusal in the Hughes Agreement and the Partnership's
existing contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the Partnership from Hughes
or the NRTC; and, if available, there can be no assurance with regard to the
financial and other terms under which the Partnership could acquire the
services.
The Partnership's DBS business is a new business with a limited
operating history. There are numerous risks associated with satellite
transmission technology. There can be no assurance as to the longevity of the
satellites or that loss, damage, or changes in the satellites will not occur
and have a material adverse effect on DirecTv and the Partnership's DBS
business.
DirecTv, and therefore the Partnership, is dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and different
renewal and cancellation provisions. There can be no assurance that any such
agreements will be renewed or will not be canceled prior to expiration of their
original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment, without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
F-110
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Pee Dee
Electricom, Inc.:
We have audited the accompanying statements of assets and liabilities and
accumulated deficit of the DBS OPERATIONS OF NRTC SYSTEM NO. 0001 (an
unincorporated division of Pee Dee Electricom, Inc., a South Carolina
corporation) as of December 31, 1995 and November 26, 1996 and the related
statements of expenses over revenues and changes in accumulated deficit and
cash flows for the year ended December 31, 1995 and for the period from January
1, 1996 through November 26, 1996. These financial statements are the
responsibility of the System's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DBS Operations of NRTC
System No. 0001 as of December 31, 1995 and November 26, 1996 and the results
of its operations and its cash flows for the year ended December 31, 1995 and
for the period from January 1, 1996 through November 26, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 4, 1997
F-111
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
STATEMENTS OF ASSETS AND LIABILITIES AND ACCUMULATED DEFICIT
DECEMBER 31, 1995 AND NOVEMBER 26, 1996
<TABLE>
<CAPTION>
1995 1996
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 114,485 $ 166,325
Trade accounts receivable net of allowance for doubtful accounts of
$5,200 and $17,396 at December 31, 1995 and November 26, 1996,
respectively ................................................... 147,506 306,305
Inventory ......................................................... 155,425 51,758
Deferred promotional costs, net (Note 2) ........................ -- 39,000
---------- ----------
Total current assets .......................................... 417,416 563,388
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment .......................................... 6,636 19,441
Less accumulated depreciation .................................... (2,262) (6,394)
---------- ----------
4,374 13,047
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ........................ 1,515,920 1,371,940
---------- ----------
$1,937,710 $1,948,375
========== ==========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable ................................................ $ 247,227 $ 186,027
Accrued liabilities ............................................. 17,449 13,685
Related-party payable ............................................. 1,757,438 1,757,438
Unearned revenue ................................................ 76,755 171,899
---------- ----------
Total current liabilities .................................... 2,098,869 2,129,049
---------- ----------
OTHER LIABILITIES ................................................ 7,450 24,572
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, and 5)
ACCUMULATED DEFICIT ................................................ (168,609) (205,246)
---------- ----------
$1,937,710 $1,948,375
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
F-112
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
STATEMENTS OF EXPENSES OVER REVENUES
AND CHANGES IN ACCUMULATED DEFICIT FOR THE
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM JANUARY 1, 1996 THROUGH
NOVEMBER 26, 1996
<TABLE>
<CAPTION>
1995 1996
--------------- --------------
<S> <C> <C>
REVENUE:
Programming revenue ........................... $ 626,029 $ 1,442,380
Equipment and installation revenue ............ 386,519 161,474
----------- -----------
Total revenue .............................. 1,012,548 1,603,854
----------- -----------
COST OF REVENUE:
Programming expense ........................... 293,071 727,843
Cost of equipment and installation ............ 317,205 164,689
Service fees .................................... 56,039 113,253
----------- -----------
Total cost of revenue ........................ 666,315 1,005,785
----------- -----------
GROSS PROFIT .................................... 346,233 598,069
----------- -----------
OPERATING EXPENSES:
Sales and marketing ........................... 64,084 110,926
General and administrative ..................... 181,950 358,546
Depreciation and amortization .................. 177,275 165,234
----------- -----------
Total operating expenses ..................... 423,309 634,706
----------- -----------
EXPENSES OVER REVENUES ........................... (77,076) (36,637)
ACCUMULATED DEFICIT at beginning of period ...... (91,533) (168,609)
----------- -----------
ACCUMULATED DEFICIT at end of period ............ $ (168,609) $ (205,246)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-113
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 THROUGH NOVEMBER 26, 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Expenses over revenues ................................................ $ (77,076) $ (36,637)
---------- ----------
Adjustments to reconcile expenses over revenues to net cash provided by
operating activities:
Depreciation and amortization .................................... 177,275 165,234
Amortization of deferred promotional costs ........................ -- 7,800
Changes in operating assets and liabilities:
Trade accounts receivable, net ................................. (115,007) (158,799)
Inventory ...................................................... 145,296 103,667
Deferred promotional costs ....................................... -- (46,800)
Accounts payable ................................................ (102,138) (61,200)
Accrued liabilities ............................................. 12,405 (3,764)
Unearned revenue ................................................ 69,948 95,144
---------- ----------
Total adjustments ............................................. 187,779 101,282
---------- ----------
Net cash provided by operating activities ..................... 110,703 64,645
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................. (198) (12,805)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .............................. 110,505 51,840
CASH AND CASH EQUIVALENTS at beginning of period ..................... 3,980 114,485
---------- ----------
CASH AND CASH EQUIVALENTS at end of period ........................... $ 114,485 $ 166,325
========== ==========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared ....................................... $ 7,450 $ 17,122
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-114
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND NOVEMBER 26, 1996
1. Organization and Nature of Business
The DBS Operations of NRTC System No. 0001 (the "System") is an
unincorporated division of Pee Dee Electricom, Inc. ("Pee Dee"), a South
Carolina corporation. Pee Dee is a wholly-owned subsidiary of Pee Dee Electric
Cooperative, Inc. ("Pee Dee EC"), a South Carolina cooperative association (Pee
Dee and Pee Dee EC collectively referred to as the "Sellers"). The System
operates the exclusive rights to distribute direct broadcast satellite ("DBS")
services ("DIRECTV Services") offered by DirecTv, Inc. ("DirecTv") in certain
rural markets in South Carolina. The accompanying financial statements present
the financial position and excess of expenses over revenues of the System.
The Sellers obtained the rights to distribute DIRECTV Services in the
System's territory pursuant to an agreement (the "NRTC Member Agreement") with
the National Rural Telecommunications Cooperative ("NRTC"). Under the
provisions of the NRTC Member Agreement, Pee Dee has the exclusive right to
provide DIRECTV Services within certain rural territories in South Carolina.
In October 1996, the Sellers entered into an asset purchase agreement (the
"Agreement") with Digital Television Services of South Carolina I, LLC ("DTS
SCI"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC. The agreement provides that DTS SCI will
purchase Pee Dee's NRTC Member Agreement and other assets used in connection
with the System's business, as defined in the Agreement, and will assume
certain liabilities of the System, as defined in the Agreement. The purchase
price was subject to an adjustment for working capital at the date of closing
of the Agreement and new subscribers acquired by the Sellers between November
1, 1996 through the date of the closing of the Agreement. The closing date of
the Agreement was November 26, 1996.
2. Summary of Significant Accounting Policies
Presentation
The System is not a separate subsidiary of Pee Dee nor has it been
operated as a separate division of Pee Dee. The financial statements of the
System have been derived from the records of Pee Dee and have been prepared to
present its financial position, excess of expenses over revenues, and cash
flows on a stand-alone basis. Accordingly, the accompanying financial
statements include certain costs and expenses which have been allocated to the
System from Pee Dee EC. The costs and expenses have been allocated to the
system based on actual amounts relative to DBS services or percentages as
determined by management through an analysis of DBS activity in the applicable
accounts. The System's management believes that the methodology used is
reasonable. Such allocated expenses may not be indicative of what such expenses
would have been had the System been operated as a separate entity.
Revenue Recognition
The System earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under monthly, annual, or seasonal subscriptions; and movies and events
programming available on a pay-per-view basis. Programming purchased on a
monthly, quarterly, annual, or seasonal basis, including premium programming,
is billed in advance and is recorded as unearned revenue. All programming
revenue is recognized when earned.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents amounts paid by customers to the System and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the System.
F-115
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the System's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the NRTC [Note
5]); monthly subscriber maintenance fees charged by DirecTv, such as security
fees, ground service fees, system authorization fees, and fees for subscriber
billings; costs of equipment and installation; and certain subscriber operating
costs. Cost of equipment and installation represents the actual cost of the
equipment to the System plus the costs to install the equipment.
Inventories
The System maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Deferred Promotional Costs
Deferred promotional costs consist of costs deferred under a subscriber
rebate program sponsored by DirecTv. Under the program, new subscribers who
agree to prepay for one year of programming service receive a credit which is
applied toward the one-year's programming subscription. Subscribers under this
program may choose to net the credit on their first bill or pay the full amount
and receive a refund from the System for the credit. The System defers both the
program revenue and the cost of this credit and amortizes them over the one-year
contract period. In addition, as a part of this program, the System receives $1
per month from DirecTv for each customer for each month the subscriber remains
an active subscriber up to five years. Such amounts are recorded as a reduction
in sales and marketing expense in the accompanying statements of expenses over
revenues and changes in accumulated deficit.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment is provided using the straight-line
method over the estimated useful lives of the respective assets, ranging from
three to five years. Depreciation expense for the year ended December 31, 1995
and for the period from January 1, 1996 through November 26, 1996 was $1,531
and $4,132, respectively. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from the statements of assets and
liabilities and accumulated deficit and any gain or loss is reflected in
earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1995 and November 26, 1996:
1995 1996
-------------- --------------
Contract rights ............... $1,757,438 $1,757,438
Accumulated amortization ...... (248,968) (410,070)
---------- ----------
1,508,470 1,347,368
NRTC patronage capital ......... 7,450 24,572
---------- ----------
$1,515,920 $1,371,940
========== ==========
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated
F-116
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
by DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statements of expenses over revenues and changes in accumulated deficit, for
the year ended December 31, 1995 and for the period from January 1, 1996
through November 26, 1996 was $175,744 and $161,102, respectively.
NRTC Patronage Capital: Pee Dee EC is a voting member of the NRTC with an
ownership interest in the NRTC in proportion to its prior patronage. NRTC
patronage certificates represent the noncash portion of NRTC patronage income.
Under its bylaws, the NRTC declares a patronage dividend of its excess of
revenues over expenses each year. Of the total patronage dividend, 20% is paid
in cash and is recognized as income when received and is netted against
programming expense in the accompanying statement of expenses over revenues and
changes in accumulated deficit. The remaining 80% is distributed in the form of
noncash patronage capital, which will be redeemed in cash only at the
discretion of the NRTC. The System includes noncash patronage capital as other
assets, with an offsetting deferred patronage income amount included in other
liabilities in the accompanying statements of assets and liabilities and
accumulated deficit. The patronage capital will be recognized as income when
cash distributions are declared by the NRTC.
Income Taxes
Pee Dee, and thus the System, is not considered a taxable entity for
federal and state income tax purposes as it is a not-for-profit corporation.
Accordingly, no provision for income taxes is included in the accompanying
financial statements.
Cash and Cash Equivalents
The System considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at November 26,
1996, management does not believe any significant concentration of credit risk
exists.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying statements of assets and liabilities and accumulated
deficit are appropriately valued.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-117
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Related-Party Transactions
Certain administrative services are performed by Pee Dee EC on behalf of
the System. Costs attributable to these support functions are included in
general and administrative expenses in the accompanying statements of expenses
over revenues and changes in accumulated deficit. The costs allocated to the
System were approximately $64,000 and $124,000 for the year ended December 31,
1995 and the period from January 1, 1996 through November 26, 1996,
respectively. Such allocations do not necessarily represent actual and/or
ongoing expenses of the System.
Pee Dee EC either advances funds to or borrows funds from the System.
Included in the accompanying statements of assets and liabilities and
accumulated deficit is a net payable to Pee Dee EC representing amounts due for
the initial purchase of contract rights and net operating activities as funds
by Pee Dee EC.
4. Commitments and Contingencies
As part of the NRTC Member Agreements, the System is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the System's
Rural DirecTv Market, or up to 5,817 subscribers) and the requirements of
certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement if the
System fails to obtain such minimum number of subscribers prior to such time.
The System had achieved approximately 75% of the minimum subscriber requirement
at December 31, 1996. Based on the subscriber growth rate of the System to
date, management anticipates that the System will meet the minimum subscriber
requirement prior to the fourth year of operations of the NRTC Member
Agreements and is therefore not required to pay such fees.
5. Reliance on DirecTv and NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the System for these services on a monthly
basis. These fees are recorded as service fees in the accompanying statements
of expenses over revenues and changes in accumulated deficit. The NRTC also
sells DSS(R) Equipment to its members.
Because the System is, through the NRTC, a distributor of DIRECTV
Services, the System would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the System would
have the right to acquire DIRECTV Services directly from DirecTv. The NRTC has
contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized remittance processing
services. If the NRTC is unable to provide these services for whatever reason,
the System would be required to acquire the services from other sources. There
can be no assurance that the cost to the System to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The System would also be adversely affected by the termination of the NRTC
Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the System
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the System would be able to obtain similar DBS services from
other sources.
F-118
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Reliance on DirecTv and NRTC and Other Matters -- (Continued)
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the System will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While management believes that it will have access to DIRECTV Services
following the expiration of the current Hughes Agreement by virtue of the
NRTC's right of first refusal in the Hughes Agreement and the System's existing
contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the System from Hughes or the
NRTC, and, if available, there can be no assurance with regard to the financial
and other terms under which the System could acquire the services.
The System's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the System's DBS business.
DirecTv, and therefore the System, is dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and different
renewal and cancellation provisions. There can be no assurance that any such
agreements will be renewed or will not be canceled prior to expiration of their
original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment, without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
F-119
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Teg DBS
Services, Inc.:
We have audited the accompanying statements of assets and liabilities and
accumulated deficit of the DBS OPERATIONS OF NRTC SYSTEM NO. 1025 (an
unincorporated division of Teg DBS Services, Inc., a Nevada corporation) as of
December 31, 1995 and August 28, 1996 and the related statements of expenses
over revenues and changes in accumulated deficit and cash flows for the period
from March 10, 1995 (inception) through December 31, 1995 and the period from
January 1, 1996 through August 28, 1996. These financial statements are the
responsibility of the System's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DBS Operations of NRTC
System No. 1025 as of December 31, 1995 and August 28, 1996 and the results of
its operations and its cash flows for the period from March 10, 1995
(inception) through December 31, 1995 and the period from January 1, 1996
through August 28, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 4, 1997
F-120
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
STATEMENTS OF ASSETS AND LIABILITIES AND ACCUMULATED DEFICIT
DECEMBER 31, 1995 AND AUGUST 28, 1996
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 100,158 $ 59,247
Accounts receivable:
Trade ....................................... 99,759 112,598
Other, net ................................. 48,226 37,111
---------- ----------
Total current assets ..................... 248,143 208,956
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ........................ 4,694 6,895
Less accumulated depreciation .................. (931) (2,261)
---------- ----------
3,763 4,634
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ...... 2,609,648 2,326,613
---------- ----------
$2,861,554 $2,540,203
========== ==========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable .............................. $ 325,704 $ 262,887
Accrued liabilities ........................... 13,602 --
Related-party payable ........................ 1,367,206 2,080,169
Unearned revenue .............................. -- 63,323
Current maturities of note payable ............ 800,000 840,000
---------- ----------
Total current liabilities ............... 2,506,512 3,246,379
---------- ----------
LONG-TERM NOTE PAYABLE ........................ 800,000 --
COMMITMENTS AND CONTINGENCIES (Notes 2, 5 and 6)
ACCUMULATED DEFICIT ........................... (444,958) (706,176)
---------- ----------
$2,861,554 $2,540,203
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
F-121
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
STATEMENTS OF EXPENSES OVER REVENUES
AND CHANGES IN ACCUMULATED DEFICIT
FOR THE PERIOD FROM MARCH 10, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 THROUGH AUGUST 28, 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
REVENUE:
Programming revenue ........................... $ 486,108 $ 689,229
Equipment and installation revenue ............ 219,962 --
---------- ----------
Total revenue .............................. 706,070 689,229
---------- ----------
COST OF REVENUE:
Programming expense ........................... 243,206 340,218
Cost of equipment and installation ............ 201,964 --
Service fees .................................... 48,459 67,789
---------- ----------
Total cost of revenue ..................... 493,629 408,007
---------- ----------
GROSS PROFIT .................................... 212,441 281,222
---------- ----------
OPERATING EXPENSES:
Sales and marketing ........................... 29,057 38,604
General and administrative ..................... 217,625 141,965
Depreciation and amortization .................. 264,289 288,630
---------- ----------
Total operating expenses .................. 510,971 469,199
---------- ----------
OPERATING LOSS ................................. (298,530) (187,977)
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense .............................. (146,428) (80,146)
Other income .................................... -- 6,905
---------- ----------
(146,428) (73,241)
---------- ----------
EXPENSES OVER REVENUES ........................... (444,958) (261,218)
ACCUMULATED DEFICIT at beginning of period ...... -- (444,958)
---------- ----------
ACCUMULATED DEFICIT at end of period ............ $ (444,958) $ (706,176)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-122
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM MARCH 10, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 THROUGH AUGUST 28, 1996
<TABLE>
<CAPTION>
1995 1996
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Expenses over revenues ................................................ $ (444,958) $ (261,218)
------------ ----------
Adjustments to reconcile expenses over revenues to net cash provided by
operating activities:
Depreciation and amortization ....................................... 264,289 288,630
Changes in operating assets and liabilities:
Trade accounts receivable, net .................................... (99,759) (12,839)
Other assets ...................................................... (48,226) 11,115
Related-party payable ............................................. 1,367,206 712,963
Accounts payable ................................................... 325,704 (62,817)
Accrued liabilities ................................................ 13,602 (13,602)
Unearned revenue ................................................... -- 63,323
------------ ----------
Total adjustments ................................................ 1,822,816 986,773
------------ ----------
Net cash provided by operating activities ........................ 1,377,858 725,555
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................. (4,694) (2,201)
Increase in other assets ............................................. (2,873,006) (4,265)
------------ ----------
Net cash used in investing activities ........................... (2,877,700) (6,466)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable ............................................. 1,600,000 --
Repayment of notes payable .......................................... -- (760,000)
------------ ----------
Net cash provided by (used in) financing activities ............ 1,600,000 (760,000)
------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. 100,158 (40,911)
CASH AND CASH EQUIVALENTS at beginning of period ..................... -- 100,158
------------ ----------
CASH AND CASH EQUIVALENTS at end of period ........................... $ 100,158 $ 59,247
============ ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ................................................ $ 146,428 $ 80,146
============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-123
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND AUGUST 28, 1996
1. Organization and Nature of Business
The DBS Operations of NRTC System No. 1025 (the "System") is an
unincorporated division of Teg DBS Services, Inc. ("Teg"), a Nevada
corporation, which began operations March 10, 1995. The System operates the
exclusive rights to distribute direct broadcast satellite ("DBS") services
("DIRECTV Services") offered by DirecTv, Inc. ("DirecTv") in certain rural
markets in New Mexico. The accompanying financial statements present the
financial position and excess of expenses over revenues of the System.
Teg obtained the rights to distribute DIRECTV Services in the System's
territory pursuant to an agreement (the "NRTC Member Agreement") with the
National Rural Telecommunications Cooperative ("NRTC"). Under the provisions of
the NRTC Member Agreement, Teg has the exclusive right to provide DIRECTV
Services within certain rural territories in New Mexico.
In June 1996, Teg entered into an asset purchase agreement (the
"Agreement") with Digital Television Services of New Mexico, LLC ("DTS New
Mexico"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC (a Delaware limited liability company). The
Agreement provides that DTS New Mexico will purchase Teg's NRTC Member
Agreement and other assets used in connection with the System's business, as
defined in the Agreement, and will assume certain liabilities of the System, as
defined in the Agreement, for a purchase price which is subject to an
adjustment for working capital at the date of closing of the Agreement. The
closing date of the Agreement was August 28, 1996.
2. Summary of Significant Accounting Policies
Presentation
The System is not a separate subsidiary of Teg nor has it been operated as
a separate division of Teg. The financial statements of the System have been
derived from the records of Teg and have been prepared to present its financial
position, excess of expenses over revenues and changes in accumulated deficit,
and cash flows on a stand-alone basis. Accordingly, the accompanying financial
statements include certain costs and expenses which have been allocated to the
System from Teg. The costs and expenses have been allocated to the system based
on actual amounts relative to DBS services or percentages as determined by
management through an analysis of DBS activity in the applicable accounts. The
System's management believes that the methodology used is reasonable. Such
allocated expenses may not be indicative of what such expenses would have been
had the System been operated as a separate entity.
Revenue Recognition
The System earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under monthly, annual, or seasonal subscriptions; and movies and events
programming available on a pay-per-view basis. Programming purchased on a
monthly, quarterly, annual, or seasonal basis, including premium programming,
is billed in advance and is recorded as unearned revenue. All programming
revenue is recognized when earned.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the System and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the System.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the System's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the
F-124
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
NRTC [Note 6]); monthly subscriber maintenance fees charged by DirecTv, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Cost of equipment and installation represents the
actual cost of the equipment to the System plus the costs to install the
equipment.
Inventories
The System maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment is provided using the straight-line
method over the estimated useful lives of the respective assets, ranging from
five to six years. Depreciation expense for the period from March 10, 1995
(inception) through December 31, 1995 and for the period from January 1, 1996
through August 28, 1996 was $931 and $1,330, respectively. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the statements of assets and liabilities and accumulated deficit and any
gain or loss is reflected in earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1995 and August 28, 1996:
1995 1996
-------------- --------------
Contract rights ............... $2,873,006 $2,873,006
Accumulated amortization ...... (263,358) (550,658)
---------- ----------
2,609,648 2,322,348
Other ........................ -- 4,265
---------- ----------
$2,609,648 $2,326,613
========== ==========
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statements of expenses over revenues and changes in accumulated deficit, for
the period from March 10, 1995 (inception) through December 31, 1995 and the
period from January 1, 1996 through August 28, 1996 was $263,358 and $287,300,
respectively.
Income Taxes
Teg, and thus the System, is a taxable entity for federal and state income
tax purposes. No benefit or deferred tax assets have been recorded for the
System as of December 31, 1995 or August 28, 1996 or for the periods then
ended, as the realization of deferred tax assets associated with net operating
loss carryforwards is dependent upon generating sufficient taxable income prior
to their expiration, and management believes that there is a risk that these
net operating loss carryforwards may expire unused.
Cash and Cash Equivalents
The System considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
F-125
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at August 28,
1996, management does not believe any significant concentration of credit risk
exists.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying statements of assets and liabilities and accumulated
deficit are appropriately valued.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Related-Party Transactions
Certain administrative services are performed by Teg on behalf of the
System on the accompanying statements of expenses over revenues and changes in
accumulated deficit. Costs attributable to these support functions are included
in general and administrative expenses. The costs allocated to the System were
approximately $36,000 and $11,000 for the period from March 10, 1995
(inception) through December 31, 1995 and the period from January 1, 1996
through August 28, 1996, respectively. Such allocations do not necessarily
represent actual and/or ongoing expenses of the System.
Teg either advances funds to or borrows funds from the System. Included in
the accompanying statements of assets and liabilities and accumulated deficit
is a net payable to Teg representing amounts due for the initial purchase of
contract rights and net operating activities as funded by Teg.
4. Note Payable
In connection with Teg's acquisition of the NRTC Member Agreement, Teg
entered into a promissory note dated April 1, 1995 payable to Multimedia
Development Corporation in the amount of $1,600,000, of which $800,000 was due
on April 1, 1996 with the balance due on April 1, 1997. The note bears interest
at 11% per annum, payable monthly. This note was repaid subsequent to August
28, 1996 in connection with the Agreement (Note 1) and, therefore, is
classified as current at August 28, 1996 in the accompanying statements of
assets and liabilities and accumulated deficit.
5. Commitments and Contingencies
As part of the NRTC Member Agreements, the System is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the System's
Rural DirecTv Market, or up to 2,945 subscribers) and the requirements of
certain
F-126
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Commitments and Contingencies -- (Continued)
programming agreements between DirecTv and providers of programming, beginning
in the fourth year of operation of the NRTC Member Agreement if the System
fails to obtain such minimum number of subscribers prior to such time. The
System had achieved the minimum subscriber requirement at December 31, 1996 and
is therefore not required to pay such fees.
6. Reliance on DirecTV and the NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the System for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements
of expenses over revenues and changes in accumulated deficit. The NRTC also
sells DSS(R) equipment to its members.
Because the System is, through the NRTC, a distributor of DIRECTV
Services, the System would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the System would
have the right to acquire DIRECTV Services directly from DirecTv. The NRTC has
contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized remittance processing
services. If the NRTC is unable to provide these services for whatever reason,
the System would be required to acquire the services from other sources. There
can be no assurance that the cost to the System to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The System would also be adversely affected by the termination of the NRTC
Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the System
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the System would be able to obtain similar DBS services from
other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the System will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While management believes that it will have access to DIRECTV Services
following the expiration of the current Hughes Agreement by virtue of the
NRTC's right of first refusal in the Hughes Agreement and the System's existing
contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the System from Hughes or the
NRTC, and, if available, there can be no assurance with regard to the financial
and other terms under which the System could acquire the services.
The System's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the System's DBS business.
DirecTv, and therefore the System, is dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and different
renewal and cancellation provisions. There can be no assurance that any such
agreements will be renewed or will not be canceled prior to expiration of their
original terms.
F-127
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (Continued)
6. Reliance on DirecTV and the NRTC and Other Matters -- (Continued)
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment, without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
F-128
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Satellite Television Services, Inc.
Plainfield, Indiana
We have audited the accompanying balance sheets of Satellite Television
Services, Inc. (a wholly-owned subsidiary of Clay County Rural Telephone
Cooperative, Inc.) as of September 30, 1996 and 1997, and the related
statements of operations, shareholder's equity, and cash flows for each of the
three years in the period ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Satellite Television Services, Inc. as of
September 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Indianapolis, Indiana
November 10, 1997
F-129
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
------------------------------
1996 1997
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. ............................................. $ 457,109 $ 308,903
Certificates of deposit. ................................................ 304,325
Trade accounts receivable, net .......................................... 403,610 374,495
Refundable income taxes. ................................................ 236,031
Inventory. ............................................................... 16,278 34,160
Deferred promotional costs ............................................. 60,320 211,825
---------- ----------
Total current assets ................................................... 937,317 1,469,739
---------- ----------
PROPERTY AND EQUIPMENT:
Furniture and fixtures ................................................... 13,617 16,540
Computers and equipment. ................................................ 12,068 20,623
Vehicles ............................................................... 54,148 54,148
Leasehold improvements ................................................... 52,000
---------- ----------
79,833 143,311
Less accumulated depreciation. .......................................... (24,145) (37,056)
---------- ----------
55,688 106,255
---------- ----------
OTHER ASSETS:
Contract rights (net of accumulated amortization of $354,358 and $496,107,
respectively). ......................................................... 1,041,561 899,812
Deferred taxes ......................................................... 76,613 108,415
NRTC patronage capital ................................................... 52,756 90,943
---------- ----------
Total other assets ................................................... 1,170,930 1,099,170
---------- ----------
$2,163,935 $2,675,164
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ................................. $ 441,631 $ 689,347
Unearned revenue ......................................................... 307,026 511,043
---------- ----------
Total current liabilities. ............................................. 748,657 1,200,390
---------- ----------
SHAREHOLDER'S EQUITY:
Common stock -- without par value; 1,000 shares authorized, issued and
outstanding. ......................................................... 1,480,056 1,280,056
Retained earnings (deficit). ............................................. (64,778) 194,718
---------- ----------
Total shareholder's equity ............................................. 1,415,278 1,474,774
---------- ----------
$2,163,935 $2,675,164
========== ==========
</TABLE>
See notes to financial statements.
F-130
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ (36,734) $ 180,517 $ 259,496
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for deferred tax ................................. (23,554) 29,008 (31,802)
Depreciation and amortization .............................. 150,660 154,956 155,835
NRTC patronage capital declared .............................. (17,744) (47,515) (54,553)
Changes in operating assets and liabilities:
Trade accounts receivable, net .............................. (258,374) (119,989) 29,115
Inventory ................................................... (125,683) 170,744 (17,882)
Deferred promotional costs ................................. (60,320) (151,505)
Accounts payable and accrued liabilities .................. 247,935 47,062 320,535
Income taxes payable or receivable ........................ 16,343 55,264 (308,850)
Unearned revenue .......................................... 107,294 177,157 204,017
---------- ---------- ----------
Net cash provided by operating activities ............... 60,143 586,884 404,406
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificates of deposit ........................... (304,325)
Purchase of property and equipment ........................... (23,533) (23,717) (64,653)
Receipt of patronage capital ................................. 3,000 9,503 16,366
Refund of contract rights .................................... 21,527
---------- ---------- ----------
Net cash provided by (used in) investing activities ...... (20,533) 7,313 (352,612)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ........................... 156,495 (298,901)
Note repayments to related party .............................. (75,000) (91,444)
Return of capital ............................................. (21,527) (200,000)
---------- ---------- ----------
Net cash provided by (used in) financing activities ...... 81,495 (411,872) (200,000)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .......................................... 121,105 182,325 (148,206)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR ............................................. 153,679 274,784 457,109
---------- ---------- ----------
END OF YEAR ................................................... $ 274,784 $ 457,109 $ 308,903
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes .................................... $ 4,350 $ 63,750 $ 588,020
========== ========== ==========
Cash paid for interest ....................................... $ 17,820 $ 42,282 $ --
========== ========== ==========
</TABLE>
See notes to financial statements.
F-131
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUE:
Programming revenue ..................... $1,136,436 $2,697,404 $4,677,992
Equipment and installation revenue ...... 499,605 337,073 262,764
---------- ---------- ----------
Total revenue ........................ 1,636,041 3,034,477 4,940,756
---------- ---------- ----------
COST OF REVENUE:
Programming expense ..................... 527,629 1,296,294 2,161,935
Cost of equipment and installation ...... 457,663 349,272 476,320
Service fees ........................... 172,737 476,208 903,211
---------- ---------- ----------
Total cost of revenue .................. 1,158,029 2,121,774 3,541,466
---------- ---------- ----------
GROSS PROFIT .............................. 478,012 912,703 1,399,290
---------- ---------- ----------
OPERATING EXPENSES:
Promotional .............................. 330,270
General and administrative ............... 388,969 498,019 566,411
Depreciation and amortization ............ 150,660 154,956 155,835
---------- ---------- ----------
Total operating expenses ............... 539,629 652,975 1,052,516
---------- ---------- ----------
OPERATING INCOME (LOSS) .................. (61,617) 259,728 346,774
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense ........................ (25,141) (27,593)
Other income ........................... 26,846 62,024 71,347
---------- ---------- ----------
1,705 34,431 71,347
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES ......... (59,912) 294,159 418,121
INCOME TAXES .............................. 23,178 (113,642) (158,625)
---------- ---------- ----------
NET INCOME (LOSS) ........................ $ (36,734) $ 180,517 $ 259,496
========== ========== ==========
</TABLE>
See notes to financial statements.
F-132
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Retained Total
-------------- -------------- ---------------
<S> <C> <C> <C>
October 1, 1994 ........................... $ (208,561) $ (208,561)
Conversion of debt to equity (Note 1) ...... $1,501,583 1,501,583
Net loss .................................... (36,734) (36,734)
---------- ---------- -----------
September 30, 1995 ........................ 1,501,583 (245,295) 1,256,288
Net income ................................. 180,517 180,517
Return of capital ........................... (21,527) (21,527)
---------- ---------- -----------
September 30, 1996 ........................ 1,480,056 (64,778) 1,415,278
Net income ................................. 259,496 259,496
Return of capital ........................... (200,000) (200,000)
---------- ---------- -----------
September 30, 1997 ........................ $1,280,056 $ 194,718 $ 1,474,774
========== ========== ===========
</TABLE>
See notes to financial statements.
F-133
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Satellite Television Services, Inc. ("STS" or the "Company") was
incorporated under the laws of the State of Indiana in February 1993, and is a
wholly-owned subsidiary of Clay County Rural Telephone Cooperative, Inc.
("CCRTC"). STS was formed to acquire and operate the exclusive rights to
distribute direct broadcast satellite ("DBS") services ("DIRECTV Services")
offered by DirecTv, Inc. ("DirecTv") in certain rural counties of Indiana.
Effective October 1, 1994, CCRTC converted to equity certain of its outstanding
notes receivable, including accrued interest, from STS.
STS obtained the rights to distribute DIRECTV Services in its territories
pursuant to agreements (the "NRTC Member Agreements") with the National Rural
Telecommunications Cooperative, Inc. (the "NRTC"). Under the provisions of the
NRTC Member Agreements the Company has the exclusive right to provide DIRECTV
Services within its territories in the State of Indiana.
In October 1997, CCRTC entered into an asset purchase agreement (the
"Agreement") with Digital Television Services of Indiana, LLC ("DTS Indiana"),
a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of Digital
Television Services, LLC. The agreement provides that DTS Indiana will purchase
STS's NRTC Member Agreements and other assets used in connection with STS's
business, as defined in the Agreement, and will assume certain liabilities of
STS, as defined in the Agreement. The purchase price is subject to an
adjustment for working capital at the date of closing which is anticipated to
occur in December 1997.
2. Summary of Significant Accounting Policies
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue recognition -- The Company earns programming revenue by providing
DIRECTV Services to its subscribers. Programming revenue includes DIRECTV
Services purchased by subscribers in monthly, quarterly, or annual
subscriptions; additional premium programming available on an a la carte basis;
sports programming available under monthly, annual, or seasonal subscriptions;
and movies and events programming available on a pay-per-view basis.
Programming purchased on a monthly, quarterly, annual, or seasonal basis,
including premium programming, is billed in advance and is recorded as unearned
revenue. All programming revenue is recognized as service is provided.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales are recognized upon delivery of the equipment to the customer.
Installation revenue is recognized when the equipment is installed.
Cost of revenue -- Cost of revenue includes the cost associated with
providing DIRECTV Services to the Company's subscribers. These costs include
the direct wholesale cost of purchasing related programming from DirecTv
(through the NRTC (Note 5)); monthly subscriber maintenance fees charged by
DirecTv and the NRTC, such as security fees, ground service fees, system
authorization fees, and fees for subscriber billings; costs of equipment and
installation; and certain subscriber operating costs. Cost of equipment and
installation represents the actual cost of the equipment to the Company plus
the costs to install the equipment.
Inventories -- The Company maintains inventories consisting of DSS(R)
equipment and related accessories. Inventory is valued at the lower of cost or
market, generally on an average cost basis.
Deferred promotional costs -- Deferred promotional costs consist of costs
related to a subscriber rebate program sponsored by DirecTv. Under the program,
new subscribers who agree to prepay for one year of programming service receive
a credit which can be applied toward the one year's programming subscription.
F-134
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Subscribers under this program may choose to net the credit on their first
bill or pay the full amount and receive a refund from the Company for their
credit. In each case the Company defers the cost of this credit and amortizes
it over the one-year contract period. In addition, as a part of this program,
the Company receives $1 per month for up to five years from the NRTC for each
subscriber whose account remains active.
Property and equipment -- Property and equipment are stated at cost. Major
property additions, replacements, and betterments are capitalized, while
maintenance and repairs which do not extend the useful lives of these assets
are expensed currently. Depreciation for property and equipment is provided
using the straight-line method over the estimated useful lives (five years) of
the respective assets. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from the balance sheet and any
gain or loss is reflected in earnings. Depreciation expense of approximately
$5,000, $13,000 and $14,000 was recorded in fiscal 1995, 1996, and 1997,
respectively.
Contract rights -- Contract rights represent the cost of acquiring rights
to distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization expense
totalled approximately $142,000 during 1995, 1996, and 1997.
NRTC patronage capital -- The Company is a member of the NRTC. NRTC
patronage capital represents the noncash portion of NRTC patronage income.
Under its bylaws, the NRTC declares a patronage dividend of the excess of its
revenues over expenses each year. Of the total patronage dividend, 15% to 30%
is paid in cash and the remaining 70% to 85% is distributed in the form of
noncash patronage capital, which may be redeemed in cash, but only at the
discretion of the NRTC. The total allocation is recorded as other income when
allocated.
Cash and cash equivalents -- The Company considers all highly liquid
investments purchased with an initial maturity of three months or less to be
cash equivalents.
Certificates of deposit -- The Company has three $100,000 certificates of
deposit at September 30, 1997 which are due January 25, April 25, and July 11,
1998 and bear interest at 4.76%, 5.5%, and 5.2%, respectively.
Income taxes -- Deferred income tax assets and liabilities are computed
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted income tax rates. Deferred income tax
expense or benefit is based on the change in deferred tax assets and
liabilities from period to period, subject to an ongoing assessment of
realization of deferred tax assets.
Concentration of credit risk -- Concentration of credit risk with respect
to trade accounts receivable is due to the geographic proximity of the
Company's subscribers.
Long-Lived Assets -- Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. When events or changes in circumstances occur related to
long-lived assets, management estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. Having found no
instances whereby the sum of expected future cash flows (undiscounted and
without interest charges) was less than the carrying amount of the asset and
thus requiring the recognition of an impairment loss, management believes that
the long-lived assets in the accompanying balance sheets are appropriately
valued.
Commitments and contingencies -- As part of the NRTC Member Agreements,
the Company is required to pay certain programming fees based on a minimum
number of subscribers (such minimum number of subscribers being equal to up to
5% of the households in the Company's Rural DirecTv Market, or up to 5,885
subscribers) and the requirements of certain programming agreements between
DirecTv and providers of programming,
F-135
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
beginning in the fourth year of operation of the NRTC Member Agreement if the
Company fails to obtain such minimum number of subscribers prior to such time.
The Company has achieved the minimum subscriber requirement as of September 30,
1997 and is therefore not required to pay such fees.
3. Income Taxes
The tax provision for the year ended September 30 consists of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- ------------
<S> <C> <C> <C>
Current:
Federal. ................................. $ 75,096 $ 166,224
State. .................................... $ 376 9,538 24,203
--------- -------- ---------
Total current provision. .................. 376 84,634 190,427
Deferred ................................. (23,554) 29,008 (31,802)
--------- -------- ---------
Total income tax provision (benefit) ...... $ (23,178) $113,642 $ 158,625
========= ======== =========
</TABLE>
The difference between the income tax provision computed at the federal
statutory rate and the reported tax provision is comprised primarily of state
income taxes.
Deferred taxes at September 30 are comprised of the following:
1996 1997
----------- ------------
Deferred tax assets:
Service rights amortization. ...... $ 73,707 $107,726
Other. ........................... 5,145 2,572
-------- --------
Total deferred tax assets. ...... 78,852 110,298
Deferred tax liabilities ............ (2,239) (1,883)
-------- --------
Net deferred tax assets. ............ $ 76,613 $108,415
======== ========
4. Reliance on DirecTv and the NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services. The NRTC bills the Company
for these services on a monthly basis. These fees are recorded as service fees
in the accompanying statements of operations. The NRTC also sells DSS(R)
equipment to its members.
Because the Company is, through the NRTC, a distributor of DIRECTV
Services, the Company would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the Company would
have the right to acquire DIRECTV Services directly from DirecTv. The NRTC has
contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized
F-136
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
4. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
remittance processing services. If the NRTC is unable to provide these services
for whatever reasons, the Company would be required to acquire the services
from other sources. There can be no assurance that the cost to the Company to
obtain these services elsewhere would not exceed the amounts currently payable
to the NRTC.
The Company would also be adversely affected by the termination of the
NRTC Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the Company
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the Company would be able to obtain similar DBS services from
other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the Company will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While the Company believes it will have access to DIRECTV Services
following the expiration of the current Hughes Agreement by virtue of the
NRTC's right of first refusal in the Hughes Agreement and the Company's
existing contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the Company from Hughes or
the NRTC, and, if available, there can be no assurance with regard to the
financial and other terms under which the Company could acquire the services.
The Company's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the Company's DBS business.
DirecTv, and therefore the Company, is dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and have
different renewal and cancellation provisions. There can be no assurance that
any such agreements will be renewed or will not be canceled prior to expiration
of their original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment, without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
F-137
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Ocmulgee Communications, Inc.:
We have audited the accompanying balance sheet of OCMULGEE COMMUNICATIONS,
INC. (a Georgia corporation) as of December 31, 1996 and the related statement
of operations, changes in stockholders' deficit, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ocmulgee Communications,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 11, 1997
F-138
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. ................................................... $ 110,729 $ 124,411
Trade accounts receivable, net of allowance for doubtful accounts of $9,504 and
$5,841 at December 31, 1996 and September 30, 1997, respectively. ............ 179,779 160,228
Due from related parties ...................................................... 2,026 --
Inventory. ..................................................................... 19,178 22,152
---------- ----------
Total current assets ......................................................... 311,712 306,791
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land ........................................................................... 38,450 38,450
Building and improvements. ................................................... 128,787 128,787
Equipment. ..................................................................... 51,766 60,220
Furniture and fixtures ......................................................... 11,413 11,413
---------- ----------
230,416 238,870
---------- ----------
Less accumulated depreciation. ................................................ (43,487) (56,309)
---------- ----------
186,929 182,561
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS, NET (Note 3) ................................. 474,164 453,434
---------- ----------
$ 972,805 $ 942,786
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt .......................................... $ 536,551 $ 781,745
Notes payable to related parties (Note 5). .................................... 318,003 316,207
Accounts payable ............................................................... 8,649 4,469
Accrued liabilities. ......................................................... 193,870 107,073
Unearned revenue ............................................................... 192,463 140,502
Advance payments ............................................................... 21,442 22,368
---------- ----------
Total current liabilities. ................................................... 1,270,978 1,372,364
---------- ----------
LONG-TERM DEBT, less current maturities (Note 6) .............................. 308,542 3,337
---------- ----------
OTHER LIABILITIES. ............................................................ 140,448 152,783
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 9)
STOCKHOLDERS' DEFICIT:
Common stock, no par value, 10,000 shares authorized, 10,000 shares issued and
outstanding at December 31, 1996 and September 30, 1997 ..................... -- --
Additional paid-in capital ................................................... 124,787 111,840
Accumulated deficit. ......................................................... (871,950) (697,538)
---------- ----------
Total stockholders' deficit. ................................................ (747,163) (585,698)
---------- ----------
$ 972,805 $ 942,786
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-139
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30
-------------- ------------------------------
1996 1996 1997
-------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
REVENUE:
Programming revenue. ..................... $1,370,555 $ 975,665 $1,432,951
Equipment and installation revenue ......... 250,191 193,985 181,277
---------- --------- ----------
Total revenue. ........................... 1,620,746 1,169,650 1,614,228
---------- --------- ----------
COST OF REVENUE:
Programming expense and service fees ...... 841,967 576,812 731,020
Cost of equipment and installation ......... 186,601 146,340 239,500
Royalties. ................................. 162,461 107,778 97,573
---------- --------- ----------
Total cost of revenue. .................. 1,191,029 830,930 1,068,093
---------- --------- ----------
GROSS PROFIT. .............................. 429,717 338,720 546,135
---------- --------- ----------
OPERATING EXPENSES:
Sales and marketing. ..................... 126,164 103,640 38,915
General and administrative ............... 271,480 184,162 211,210
Depreciation and amortization. ............ 67,768 56,835 50,756
---------- --------- ----------
Total operating expenses ............... 465,412 344,637 300,881
---------- --------- ----------
OPERATING (LOSS) INCOME ..................... (35,695) (5,917) 245,254
OTHER (INCOME) EXPENSE:
Interest expense ........................... 103,488 66,910 75,567
Other income .............................. (59,899) (27,843) (4,725)
---------- --------- ----------
43,589 39,067 70,842
---------- --------- ----------
NET (LOSS) INCOME ........................... $ (79,284) $ (44,984) $ 174,412
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-140
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Stock
------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
-------- -------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 ............ 10,000 $-- $124,787 $ (792,666) $ (667,879)
Net loss. ........................... -- -- -- (79,284) (79,284)
------ ------ -------- ----------- ----------
BALANCE, DECEMBER 31, 1996 ............ 10,000 -- 124,787 (871,950) (747,163)
Net income (unaudited). ............... -- -- -- 174,412 174,412
Capital withdrawal (unaudited). ...... -- -- (12,947) -- (12,947)
------ ------ -------- ----------- ----------
BALANCE, DECEMBER 31, 1997
(UNAUDITED) ........................... 10,000 $-- $111,840 $ (697,538) $ (585,698)
====== ====== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-141
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
1996 1996 1997
-------------- -------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income. ................................. $ (79,284) $ (44,984) $ 174,412
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Loss on sale of fixed assets ..................... 547 547 --
Depreciation and amortization. .................. 67,768 56,835 50,756
Amortization of deferred credit. .................. (6,491) (4,869) (4,869)
Changes in operating assets and liabilities:
Accounts receivable, net ........................ (51,751) (46,618) 21,577
Inventory. ....................................... 39,513 39,061 (2,974)
Accounts payable ................................. (43,895) (41,029) (4,180)
Accrued liabilities. ........................... 34,874 (5,937) (86,797)
Unearned revenue ................................. 123,025 74,364 (51,961)
Advance payments ................................. 8,825 9,159 926
---------- ---------- ----------
Total adjustments. ................................. 172,415 81,513 (77,522)
---------- ---------- ----------
Net cash provided by operating activities. ......... 93,131 36,529 96,890
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. ............... -- -- (8,454)
Proceeds from sale of property and equipment. ...... 6,699 6,699 --
---------- ---------- ----------
Net cash provided by (used in) investing activities 6,699 6,699 (8,454)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable. ............ 35,657 35,657 397,841
Repayments of notes payable. ........................ (157,523) (137,980) (459,648)
Capital withdrawal ................................. -- -- (12,947)
---------- ---------- ----------
Net cash used in financing activities. ............ (121,866) (102,323) (74,754)
---------- ---------- ----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS ....................................... (22,036) (59,095) 13,682
CASH AND CASH EQUIVALENTS,
at beginning of period .............................. 132,765 132,765 110,729
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
at end of period .................................... $ 110,729 $ 73,670 $ 124,411
========== ========== ==========
SUPPLEMENTAL NONCASH FINANCING
ACTIVITY:
NRTC patronage capital declared. .................. $ 48,919 $ 48,919 $ 17,204
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest .............................. $ 106,343 $ 73,126 $ 82,572
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-142
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. Organization and Nature of Business
Ocmulgee Communications, Inc. (the "Company") is an S corporation
organized in Georgia. The Company was formed on February 5, 1993 to acquire and
operate the rights to distribute direct broadcast satellite ("DBS") services
("DIRECTV Services") offered by DirecTv, Inc. ("DirecTv").
The Company obtained the rights to distribute DIRECTV Services in 11 rural
markets in Georgia pursuant to agreements (the "NRTC Member Agreements") with
the National Rural Telecommunications Cooperative ("NRTC") in exchange for
approximately $500,000 (Note 3). The Company also obtained the rights to
distribute DIRECTV Services in 16 additional rural markets in Georgia and
Florida pursuant to the management agreements (the "Management Agreements")
with various investors (the "Sub-Investors") who had purchased the rights from
the NRTC (Note 10).
In October 1997, the Company entered into an asset purchase agreement (the
"Agreement") with Digital Television Services, LLC ("DTS") or its affiliate.
The Agreement provides that DTS will purchase the Company's NRTC Member
Agreements and other assets used in connection with the Company's business, as
defined in the Agreement, and will assume certain liabilities of the Company,
as defined in the Agreement. The purchase price is subject to an adjustment
based on the number of subscribers and working capital at the date of closing
of the Agreement (Note 11).
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under monthly, annual, or seasonal subscriptions; and movies and events
programming, including premium programming, available on a pay-per-view basis.
Programming purchased on a monthly, quarterly, annual, or seasonal basis is
billed in advance and is recorded as unearned revenue. All programming revenue
is recognized when earned.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the Company and is
recognized upon delivery of the equipment to the customer. Installation revenue
is recognized when the equipment is installed and represents the amounts paid
by the customers to the Company for such services.
Cost of Revenue
Cost of revenue includes the cost associated with providing DIRECTV
Services to the Company's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the NRTC [Note
9]); monthly subscriber maintenance fees charged by DirecTv, such as security
fees, ground service fees, system authorization fees, and fees for subscriber
billings; cost of equipment sold; and certain subscriber operating costs. These
costs also include amounts paid to the Sub-Investors in accordance with the
Management Agreements (Note 10). Cost of equipment and installation represents
the actual cost of the equipment to the Company plus the costs to install the
equipment.
F-143
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Inventories
The Company maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment and leased equipment is provided using
the straight-line method over the estimated useful lives of the respective
assets ranging from 7 to 31 years for buildings and improvements, 5 to 7 years
for equipment, and 7 years for furniture and fixtures. Depreciation expense for
the year ended December 31, 1996 and the nine months ended September 30, 1996
and 1997 was $17,189, $18,901, and $12,822, respectively. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the balance sheet and any gain or loss is reflected in earnings.
Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1996 and
September 30, 1997:
1996 1997
---------- ---------
Accrued programming expense ...... $149,258 $ 77,041
Other ........................... 44,612 30,032
-------- --------
$193,870 $107,073
======== ========
Income Taxes
The Company files its tax return as an S corporation for federal and state
income tax purposes. All taxable income or loss of an S corporation is
allocable to the stockholders of the Company in proportion to their respective
ownership interests and is included in their individual income tax returns.
Accordingly, no provision for income taxes is included in the accompanying
financial statements.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1996, management does not believe any significant concentration of credit risk
exists.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the
F-144
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
asset and its eventual disposition. Having found no instances whereby the sum
of expected future cash flows (undiscounted and without interest charges) was
less than the carrying amount of the asset and thus requiring the recognition
of an impairment loss, management believes that the long-lived assets in the
accompanying balance sheet are appropriately valued.
3. Contract Rights and Other Assets, Net
Contract rights and other assets consist of the following at December 31,
1996 and September 30, 1997:
December 31, September 30,
1996 1997
-------------- --------------
Contract rights ............... $ 505,785 $ 505,785
Accumulated amortization ...... (126,446) (164,380)
---------- ----------
379,339 341,405
NRTC patronage capital ......... 94,825 112,029
---------- ----------
$ 474,164 $ 453,434
========== ==========
NRTC Patronage Capital
The Company is an affiliate of the NRTC. While affiliates have no vote,
they do have an interest in the NRTC in proportion to their prior patronage.
NRTC patronage capital represents the noncash portion of NRTC patronage income.
Under its bylaws, the NRTC declares a patronage dividend of its excess of
revenues over expenses each year. Of the total patronage dividend, 20% is paid
in cash, is recognized as income when received, and is netted against
programming expense in the accompanying statements of operations.
The remaining 80% is distributed in the form of noncash patronage capital,
which will be redeemed in cash only at the discretion of the NRTC. The Company
includes noncash patronage capital as other assets, with an offsetting deferred
patronage income amount included in other liabilities in the accompanying
balance sheets. The patronage capital will be recognized as income when cash
distributions are declared by the NRTC.
Contract Rights
Contract rights represent the Company's cost of acquiring the exclusive
rights to distribute DIRECTV Services. Contract rights are being amortized over
ten years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statements of operations, for the year ended December 31, 1996 and the nine
months ended September 30, 1996 and 1997 was $50,579, $37,934, and $37,934,
respectively.
4. Commitments and Contingencies
Minimum Subscribers
As part of the NRTC Member Agreements, the Company is required to pay
certain fees based on a minimum number of subscribers (such minimum number of
subscribers being equal to up to 5% of the households the Company's Rural
DirecTv Market, or up to 2,009 subscribers) beginning in the fourth year of
operation of the NRTC Member Agreement if the Company fails to obtain such
minimum number of subscribers prior to such time. The Company has achieved the
minimum subscriber requirement at December 31, 1996 and is therefore not
required to pay such fee.
Litigation
The Company is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
F-145
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
5. Notes Payable to Related Parties
At December 31, 1996 and September 30, 1997, the Company had outstanding
notes payable to certain shareholders and related parties. The outstanding
notes payable to certain shareholders and related parties are due on demand and
are subordinate to amounts outstanding under the notes payable due to banks
(Note 6). The notes payable to certain shareholders and related parties
outstanding as of December 31, 1996 and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Note payable to a corporation related to certain shareholders,
principal due December 1, 1997, bearing interest at the rate
which a certain bank pays on certain certificates of deposit
plus 1%, secured by the assets of the Company ............... $250,000 $250,000
Unsecured notes payable to the majority shareholder, due on
demand, payable in monthly installments through December 1,
2006, bearing interest at rates ranging from 7% to 7.6% ...... 51,300 50,504
Unsecured note payable to a minority shareholder, due on
demand, interest payable monthly at 8.5% ..................... 16,703 15,703
-------- --------
$318,003 $316,207
======== ========
</TABLE>
During 1996, the Company received advances of $27,000 from a company
related to a stockholder. The advance was repaid during 1996.
F-146
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
6. Debt
The Company's long-term debt consists of the following as of December 31,
1996 and September 30, 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Note payable to a bank, payable in monthly installments of
$4,800, with final principal of $297,000 due February 10,
1998, secured by all shares of the Company's common stock
and certain personal property of the stockholders and related
parties, guaranteed by certain stockholders and a related-party
corporation, bearing interest at 8.51% ........................... $430,621 $ --
Note payable to a bank, payable in monthly installments of
$10,200, with final principal of $776,000 due April 10, 1998,
secured by certain fixed assets of the Company, guaranteed by
certain stockholders, bearing interest at 8.51% .................. -- 777,315
Notes payable to a bank, principal due May 14, 1997, secured by
accounts receivable of the Company and certain personal prop-
erty of the stockholders, bearing interest at prime plus 2%
(10.5% at December 31, 1996) .................................... 400,044 --
Notes payable to a bank, payable in monthly principal and inter-
est installments of $750 through April 11, 1998 and August 11,
1999, secured by certain fixed assets, bearing interest at rates
ranging from 7.75% to 9% ....................................... 14,428 7,767
-------- --------
845,093 785,082
Less current maturities of long-term debt ........................ 536,551 781,745
-------- --------
$308,542 $ 3,337
======== ========
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1996 are as
follows:
1997 ...................................................... $536,551
1998 ...................................................... 307,230
1999 ...................................................... 1,312
--------
$845,093
========
7. Stockholders' Agreement
On November 2, 1993, the stockholders executed a stockholders' agreement
(the "Stockholder Agreement"). Unless terminated pursuant to the terms of the
agreement, the Stockholder Agreement terminates on the death of the last
survivor of the stockholders who are parties to the agreement. The Stockholder
Agreement places certain restrictions on the transfer of the Company's common
stock and provides an option for existing stockholders to acquire the shares
proposed to be transferred by the stockholder.
8. Benefit Plan
The Company's employees participate in a defined contribution retirement
plan with certain employees of the majority stockholder. The Company
contributes a discretionary amount to the plan. The contribution is allocated
in the proportion that each participant's compensation bears to the total
compensation of all participants. Employee contributions to the plan are not
permitted.
F-147
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
9. Reliance on DirecTv and the NRTC and Other Matters
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the Company for these services on a monthly
basis. These fees are recorded as service fees in the accompanying statements
of operations. The NRTC also sells DSS(R) equipment to its members.
Because the Company is, through the NRTC, a distributor of DIRECTV
Services, the Company would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and
Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the Company would
have the right to acquire DIRECTV Services directly from DirecTv. The NRTC has
contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized remittance processing
services. If the NRTC is unable to provide these services for whatever reason,
the Company would be required to acquire the services from other sources. There
can be no assurance that the cost to the Company to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The Company would also be adversely affected by the termination of the
NRTC Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the Company
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the Company would be able to obtain similar DBS services from
other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the Company will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While the Company believes that it will have access to DIRECTV Services
following the expiration of the current Hughes Agreement by virtue of the
NRTC's right of first refusal in the Hughes Agreement and the Company's
existing contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the Company from Hughes or
the NRTC, and, if available, there can be no assurance with regard to the
financial and other terms under which the Company could acquire the services.
The Company's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the Company's DBS business.
DirecTv, and therefore the Company, is dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and different
renewal and cancellation provisions. There can be no assurance that any such
agreements will be renewed or will not be canceled prior to expiration of their
original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
F-148
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
10. Management Agreements
In 1993, the Company entered into the Management Agreements with the
Sub-Investors. The length of the Management Agreements was for a period of one
year, which was extended for additional periods as mutually agreed to by the
parties. The Company manages the operation of the Sub-Investors markets
pursuant to the Management Agreements. The Company is the authorized dealer of
the NRTC with respect to the Sub-Investors' markets. Accordingly, all revenues
generated and expenses incurred in the Company's management and operation of
the Sub-Investors' markets are included in the accompanying statements of
operations. Pursuant to the Management Agreements, the Sub-Investors are
entitled to defined amounts of revenues generated in their respective markets.
Amounts paid to the Sub-Investors are reflected as royalties in the
accompanying statements of operations.
Pursuant to the Management Agreements, the Sub-Investors contributed
amounts equal to 10% of the cost (the "Deferred Credit") of their NRTC license
to the Company. The Deferred Credit was paid by the Sub-Investors in order to
offset the Company's costs in managing and operating the markets owned by the
Sub-Investors. The Deferred Credit is being amortized over ten years, the
estimated remaining useful life of the satellites operated by DirecTv which
provide service under the related contracts. Amortization of the Deferred
Credit, included as an offset to general and administrative expenses in the
accompanying statements of operations, was $6,491, $4,869 and $4,869 for the
year ended December 31, 1996 and for the nine months ended September 30, 1996
and 1997, respectively. The unamortized portion of the Deferred Credit included
in other liabilities in the accompanying balance sheets at December 31, 1996
and September 30, 1997 was $45,623 and $40,754, respectively.
The Sub-Investors retained the rights to the 16 rural markets in Georgia
and Florida. Therefore, the contract rights for the markets have not been
recorded in the accompanying balance sheets. The Company has the right of first
refusal to purchase the license rights in the event the Sub-Investors decide to
sell their rights in the markets. The Sub-Investors also retained the right to
apply as a licensee directly to the NRTC at any time during the term of the
Management Agreement and upon such acceptance and approval by the NRTC as a
direct licensee, the Management Agreement may be cancelled upon 30 days notice.
Any remaining unamortized portion of the Deferred Credit would be recorded as
income as the Company is not required to remit these amounts to the Sub-
Investors.
11. Subsequent Events
Refinancing of Debt
On April 10, 1997, the Company entered into an amended credit agreement
with a bank allowing the Company to consolidate existing debt. Amounts
outstanding under the amended credit agreement bear interest at 8.51% and
mature on April 10, 1998. The note is collateralized by certain property of the
Company and is guaranteed by certain shareholders of the Company.
Letter of Intent
On October 22, 1997, the Company entered into the Agreement with DTS,
which was subsequently amended by an amendment dated November 14, 1997 by and
among the Company and DTS. The Agreement provides that DTS will purchase the
Company's NRTC Member Agreements and certain other assets used in connection
with the Company's business, as defined in the Agreement, and will assume
certain liabilities of the Company, as defined in the Agreement. The purchase
price is subject to an adjustment based on the number of subscribers and
working capital at the date of closing of the Agreement.
The Agreement is contingent upon obtaining consents from Hughes and the
NRTC and is contingent upon the negotiation of a definitive agreement.
In connection with the Company's Agreement with DTS, the Company has
entered into agreements with the Sub-Investors to transfer their rights in the
16 rural markets in Georgia and Florida to DTS in exchange for specified
amounts.
F-149
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Basis of Presentation
Pro forma consolidated statements of operations and other data for the year
ended December 31, 1996 and the nine months ended September 30, 1997 give effect
to (i) the Portland, Maine TV acquisition, which closed on January 29, 1996, and
the Tallahassee, Florida TV acquisition, which closed on March 8, 1996, (ii) the
acquisition of a Puerto Rico cable system, which closed on August 29, 1996,
(iii) the Completed DBS Acquisitions, (iv) the Pending DBS Acquisitions, (v) the
sale of the New England cable systems, (vi) Pegasus' initial public offering of
3,000,000 shares of Class A Common Stock (the "Initial Public Offering"), which
was consummated on October 8, 1996, and Pegasus' public offering of 100,000
shares of 12 3/4% Series A Cumulative Exchangeable Preferred Stock and warrants
to purchase 193,600 shares of Class A Common Stock (the "Unit Offering"), which
was consummated on January 27, 1997, (vii) the offering of $115.0 million
aggregate principle amount of 9 5/8% Series A Senior Notes due 2005 (the "Senior
Notes Offering"), and (viii) the DTS Acquisition, all as if such events had
occurred at the beginning of each period.
The pro forma condensed consolidated balance sheet as of September 30,
1997, gives effect to (i) the Completed DBS Acquisitions, (ii) the Pending DBS
Acquisitions which are anticipated to occur in the first quarter of 1998, (iii)
the New Credit Facility and the closing of an existing credit facility, (iv) the
Senior Notes Offering and the use of proceeds thereof, and (v) the DTS
Acquisition, as if such events had occurred on such date.
The acquisitions are accounted for using the purchase method of accounting.
The total costs of such acquisitions are allocated to the tangible and
intangible assets acquired and liabilities assumed based upon their respective
fair values. The allocation of the purchase price included in the pro forma
financial statements is preliminary. The Company does not expect that the final
allocation of the purchase price will materially differ from the prelimianry
allocation.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable. The pro forma
consolidated financial information should be read in conjunction with the Notes
to Pro Forma Consolidated Statements of Operations, as well as the financial
statements and notes thereto of the acquisitions, included elsewhere in this
report. The pro forma consolidated financial information is not necessarily
indicative of the Company's future results of operations. There can be no
assurance whether or when the Pending DBS Acqusitions or the DTS Acquisition
will be consummated.
F-150
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Balance Sheet
September 30, 1997
<TABLE>
<CAPTION>
Acquisitions
------------------------
Completed Pending Cable New Credit
Actual DBS(a) DBS(b) Sale(c) Facility(d)
---------- ---------- ---------- ---------- ----------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $34,211 ($9,616) ($28,475) $28,000 ($1,800)
Restricted cash 1,181
Accounts receivable, net 10,577
Inventory 760
Prepaid expenses and other
current assets 4,129
Property and equipment, net 27,423 (3,802)
Intangibles, net 237,512 48,371 38,725 (2,047) 1,800
Other assets 1,948
---------- ---------- ---------- ---------- ----------
Total assets $317,741 $38,755 $10,250 $22,151
========== ========== ========== ========== ==========
LIABILITIES AND TOTAL EQUITY
Current liabilities $9,444
Accrued interest 3,457
Current portion of long-term debt 4,895
Current portion of program rights
payable 898
Long-term debt, net 83,224 $ 5,219 $10,250
Pegasus' Senior Notes
DTS' Senior Subordinated Notes
PSH Credit Facility 69,200 25,000
Program rights payable 1,242
Other long term liabilities 1,389
Preferred Stock 108,678
Minority Interest 3,000
Class A Common Stock 53 4
Class B Common Stock 46
Additional paid in capital 57,017 8,532 $22,151
Retained earnings (24,802)
---------- ---------- ---------- ---------- ----------
Total liabilities and equity $317,741 $38,755 $10,250 $22,151
========== ========== ========== ========== ==========
</TABLE>
(a) To record 6 Completed DBS Acquisitions which occurred after September 30,
1997.
(b) To record 7 Pending DBS Acquisitions.
(c) To record the pending sale of the New England cable operations.
(d) To record costs in connection with the New Credit Facility.
(e) To record the proceeds from the Senior Notes Offering and the uses of such
proceeds.
(f) To record the pending DTS Acquisition.
F-151
<PAGE>
<TABLE>
<CAPTION>
Other(e) Sub-total DTS(f) Pro Forma
--------------------- --------- -----------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $14,750 $37,070 $2,804 $39,874
Restricted cash 1,181 36,544 37,725
Accounts receivable, net 10,577 677 11,254
Inventory 760 1,101 1,861
Prepaid expenses and other
current assets 4,129 1,892 6,021
Property and equipment, net 23,621 2,102 25,723
Intangibles, net 6,050 330,411 272,211 602,622
Other assets 1,948 279 2,227
--------- --------- --------- ---------
Total assets $20,800 $409,697 $317,610 $727,307
========= ========= ========= =========
LIABILITIES AND TOTAL EQUITY
Current liabilities $9,444 $10,620 $20,064
Accrued interest 3,457 3,229 6,686
Current portion of long-term debt 4,895 9,324 14,219
Current portion of program rights
payable 898 898
Long-term debt, net 98,693 24,419 123,112
Pegasus' Senior Notes $115,000 115,000 115,000
DTS' Senior Subordinated Notes 152,877 152,877
PSH Credit Facility (94,200)
Program rights payable 1,242 1,242
Other long term liabilities 1,389 1,036 2,425
Preferred Stock 108,678 108,678
Minority Interest 3,000 3,000
Class A Common Stock 57 55 112
Class B Common Stock 46 46
Additional paid in capital 87,700 116,050 203,750
Retained earnings (24,802) (24,802)
--------- --------- --------- ---------
Total liabilities and equity $20,800 $409,697 $317,610 $727,307
========= ========= ========= =========
</TABLE>
F-152
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Acquisitions
-------------------------------------------------------------
DBS DBS New England
Income Statement Data: Actual TV(a) Cable(b) Completed(c) Pending(d) Adjustments Cable Sale(e)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
TV $28,488 $651 $17(h)
DBS 5,829 $30,633 $6,329
Cable 13,496 $4,056 ($7,463)
Other 116
--------------------------------------------------------------------------------------
Total net revenues 47,929 651 4,056 30,633 6,329 17 (7,463)
--------------------------------------------------------------------------------------
Location operating expenses:
TV 18,726 537 (43)(i)
DBS 4,958 30,311 5,217 (7,837)(j)
Cable 7,192 2,448 (249)(k) (3,830)
Other 28
Incentive compensation 985 (136)
Corporate expenses 1,429 33 88 1,458 187 (1,766)(l)
Depreciation and amortization 12,061 17 365 2,245 710 17,414 (m) (2,721)
--------------------------------------------------------------------------------------
Income (loss) from operations 2,550 64 1,155 (3,381) 215 (7,502) (776)
Interest expense (12,455) (585) (482) (1,365) (104) (16,324)(n)
Other income (expense), net 61 3 577 55 (593)(o) 3
-------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary items (9,844) (518) 673 (4,169) 166 (24,419) (773)
Provision (benefit) for income taxes (120) 35 20 (79) 60 (36) (p)
-------------------------------------------------------------------------------------
Income(loss) before extraordinary items (9,724) (553) 653 (4,090) 106 (24,383) (773)
Dividends on Series A Preferred Stock
-------------------------------------------------------------------------------------
Income (loss) applicable to common
shares before extraordinary items ($9,724) ($553) $653 ($4,090) $106 ($24,383) ($773)
======================================================================================
</TABLE>
F-153
<PAGE>
<TABLE>
<CAPTION>
Previous
Income Statement Data: Offerings(f) Sub-total DTS(g) Pro Forma
------------------------------------------------------
<S> <C> <C> <C> <C>
Net Revenues:
TV $29,156 $29,156
DBS 42,791 $34,649 77,440
Cable 10,089 10,089
Other 116 116
------------------------------------------------------
Total net revenues 82,152 34,649 116,801
------------------------------------------------------
Location operating expenses:
TV 19,220 19,220
DBS 32,649 26,845 59,494
Cable 5,561 5,561
Other 28 28
Incentive compensation 849 464 1,313
Corporate expenses 1,429 429 1,858
Depreciation and amortization $ 897 30,988 18,763 49,751
------------------------------------------------------
Income (loss) from operations (897) (8,572) (11,852) (20,424)
Interest expense 8,214 (23,101) (21,817) (44,918)
Other income (expense), net 106 (34) 72
-------------------------------------------------------
Income (loss) before income taxes
and extraordinary items 7,317 (31,567) (33,703) (65,270)
Provision (benefit) for income taxes (120) (120)
-------------------------------------------------------
Income(loss) before extraordinary items 7,317 (31,447) (65,150)
Dividends on Series A Preferred Stock (12,750) (12,750) (12,750)
-------------------------------------------------------
Income (loss) applicable to common
shares before extraordinary items ($5,433) ($44,197) ($33,703) ($77,900)
======================================================
</TABLE>
F-154
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Statement of Operations
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
DBS Acquisitions New England Previous
-----------------------------------
Income Statement Data: Actual Completed(c) Pending(d) Adjustments Cable Sale(e) Offerings(f) Sub-total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
TV $21,664 $21,664
DBS 23,362 $16,758 $6,811 46,931
Cable 12,399 ($4,721) 7,678
Other 112 112
-------------------------------------------------------------------------------------
Total net revenues 57,537 16,758 6,811 (4,721) 76,385
-------------------------------------------------------------------------------------
Location operating expenses:
TV 14,574 14,574
DBS 17,817 17,234 5,228 ($5,020)(j) 35,259
Cable 6,598 (2,449) 4,149
Other 22 22
Incentive compensation 744 (47) 697
Corporate expenses 1,409 696 155 (851)(l) 1,409
Depreciation and amortization 18,160 980 607 7,160 (m) (1,337) $400 25,970
-------------------------------------------------------------------------------------
Income (loss) from operations (1,787) (2,152) 821 (1,289) (888) (400) (5,695)
Interest expense (10,288) (565) (117) (8,350)(n) 1,994 (17,326)
Other income (expense), net 374 121 30 (151)(o) 37 411
-------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary items (11,701) (2,596) 734 (9,790) (851) 1,594 (22,610)
Provision (benefit) for income
taxes 50 (10) 57 (47)(p) 50
-------------------------------------------------------------------------------------
Income(loss) before extraordinary
item (11,751) (2,586) 677 (9,743) (851) 1,594 (22,660)
Dividends on Series A Preferred
Stock (8,678) (1,062) (9,740)
-------------------------------------------------------------------------------------
Income (loss) applicable to common
shares before extraordinary
items ($20,429) ($2,586) $677 ($9,743) ($851) $532 ($32,400)
=====================================================================================
</TABLE>
F-155
<PAGE>
<TABLE>
<CAPTION>
Income Statement Data: DTS(g) Pro Forma
-----------------------
<S> <C> <C>
Net Revenues:
TV $21,664
DBS $37,612 84,543
Cable 7,678
Other 112
-----------------------
Total net revenues 37,612 113,997
-----------------------
Location operating expenses:
TV 14,574
DBS 29,053 64,312
Cable 4,149
Other 22
Incentive compensation 406 1,103
Corporate expenses 423 1,832
Depreciation and amortization 15,010 40,980
-----------------------
Income (loss) from operations (7,280) (12,975)
Interest expense (16,362) (33,688)
Other income (expense), net (203) 208
-----------------------
Income (loss) before income taxes
and extraordinary items (23,845) (46,455)
Provision (benefit) for income
taxes 50
-----------------------
Income(loss) before extraordinary
item (23,845) (46,505)
Dividends on Series A Preferred
Stock (9,740)
-----------------------
Income (loss) applicable to common
shares before extraordinary
items ($23,845) ($56,245)
=======================
</TABLE>
F-156
<PAGE>
Notes to Pro Forma Consolidated Statements of Operations
(a) Financial results of Portland Broadcasting, Inc. and WTLH, Inc. for the
beginning of the period to the date of acquisition by the Company.
(b) Financial results of Dom's Tele Cable, Inc. for the beginning of the period
to the date of acquisition by the Company.
(c) Represents the combined financial results of the Completed DBS Acquisitions
for the beginning of the period to the date of acquisition by the Company
or the end of the period.
(d) Represents the combined financial results of the Pending DBS Acquisitions
for the period presented.
(e) Financial results of the New England operations of Pegasus Cable
Television.
(f) To remove interest expense on the debt retired with the proceeds of the
Initial Public Offering and the Unit Offering, to eliminate amortization of
deferred costs related to an old credit facility, to record amortization of
costs incurred in connection with the Senior Notes Offering and the New
Credit Facility and to record dividends on Pegasus' Series A Preferred
Stock. Interest expense is adjusted for the Senior Notes Offering and the
use of proceeds therefrom and gives effect to the Completed DBS
Acquisitions, the New England Cable Sale, the Unit Offering, the Pending
DBS Acquisitions, the Subsidiaries Combination and the New Credit Facility.
(g) Pro forma financial results of Digital Television Services, Inc. and
Subsidiaries for the period presented.
(h) To reduce the commissions paid by WPXT and WTLH to their national
advertising sales representative to conform to the Company's contract.
(i) To eliminate payroll expenses related to staff reductions and rent expenses
incurred from prior acquisitions.
(j) Represents elimination of costs associated with 35 call centers that were
not acquired and to conform accounting policies with respect to subscriber
acquisition costs, net of the Company adding additional customer service
representatives.
(k) To reflect expense reductions, such as redundant staff, rent, professional
fees and utilities implemented in connection with acquisitions and
interconnection of its Puerto Rico cable systems.
(l) To eliminate corporate expenses charged by prior owners.
(m) To record additional depreciation and amortization resulting from the
purchase accounting treatment of the acquisitions and to conform accounting
policies with respect to subscriber acquisition costs. Such amounts are
based on a preliminary allocation of the total consideration. The actual
depreciation and amortization may change based upon the final allocation of
the total consideration to be paid to the tangible and intangible assets
acquired.
(n) To record the increase in net interest expense associated with the
borrowings incurred in connection with the acquisitions described above.
(o) To eliminate certain nonrecurring income and expenses, primarily comprised
of legal and professional expenses incurred by the prior owners of the
businesses in connection with the acquisitions.
(p) To eliminate the net tax provision in connection with the acquisitions.
F-157
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Merger dated January 8, 1998, by and between
Pegasus and DTS (schedules have been omitted but will be provided
upon request to the SEC).
10.1 Credit Agreement dated as of December 10, 1997, by and among
Pegasus Media & Communications, Inc., the lenders thereto and
Bankers Trust Company, as agent (exhibits and schedules have been
omitted but will be provided upon request to the SEC).
<PAGE>
AGREEMENT AND PLAN OF MERGER
among
PEGASUS COMMUNICATIONS CORPORATION
and certain of its shareholders,
PEGASUS DTS MERGER SUB, INC.,
and
DIGITAL TELEVISION SERVICES, INC.
and certain of its shareholders
--------------------------------
January 8, 1998
--------------------------------
<PAGE>
Table of Contents
ARTICLE I
DEFINITIONS.................................. 1
1.1 Certain Definitions................................................ 1
1.2 Other Definitions.................................................. 10
ARTICLE II
BASIC TRANSACTION............................... 11
2.1 Merger; Surviving Corporation...................................... 11
2.2 Certificate of Incorporation....................................... 11
2.3 By-Laws............................................................ 11
2.4 Directors and Officers............................................. 11
2.5 Effective Time..................................................... 12
2.6 Exchange of Certificates........................................... 12
2.7 Merger Consideration; Conversion and Cancellation of
Securities......................................................... 12
2.8 Stock Transfer Books............................................... 14
2.9 Dissenting Shares.................................................. 14
2.10 Failure to Surrender Share Certificates............................ 14
2.11 Closing............................................................ 14
2.12 Treatment of Certain Outstanding Warrants and Options of
the Company........................................................ 15
2.13 Shareholder Notes.................................................. 16
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY................. 17
3.1 Organization and Qualification..................................... 17
3.2 Capitalization..................................................... 18
3.3 Authority and Validity............................................. 19
3.4 No Breach or Violation............................................. 19
3.5 Consents and Approvals............................................. 20
3.6 Title to Assets.................................................... 20
3.7 Intellectual Property.............................................. 20
3.8 Compliance with Legal Requirements................................. 21
3.9 Financial and Other Information.................................... 21
3.10 Company Credit Facility............................................ 22
3.11 Subsequent Events.................................................. 22
3.12 Undisclosed Liabilities............................................ 22
3.13 Legal Proceedings.................................................. 22
3.14 Taxes.............................................................. 23
3.15 Employee Benefits; Employees....................................... 23
3.16 Contracts.......................................................... 25
3.17 Books and Records.................................................. 27
i
<PAGE>
3.18 Business Information................................................ 27
3.19 Insurance........................................................... 28
3.20 Disclosure.......................................................... 28
3.21 Brokers or Finders.................................................. 29
3.22 Certain Payments.................................................... 29
3.23 Subscribers......................................................... 29
3.24 Favorable Business Relationships.................................... 29
3.25 Securities Matters.................................................. 30
3.26 Billing and Authorization System.................................... 30
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE PRINCIPAL COMPANY SHAREHOLDERS........................ 30
4.1 Authority and Validity.............................................. 30
4.2 Ownership........................................................... 30
4.3 Consents and Approvals.............................................. 31
4.4 Certain Information................................................. 31
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PEGASUS
5.1 Organization and Qualification...................................... 31
5.2 Capitalization...................................................... 32
5.3 Authority and Validity.............................................. 32
5.4 No Breach or Violation.............................................. 32
5.5 Consents and Approvals.............................................. 33
5.6 Title to Assets..................................................... 33
5.7 Intellectual Property............................................... 33
5.8 Compliance with Legal Requirements.................................. 33
5.9 Legal Proceedings................................................... 34
5.10 Subsequent Events................................................... 34
5.11 Financial and Other Information..................................... 34
5.12 Undisclosed Liabilities............................................. 35
5.13 Taxes............................................................... 35
5.14 Employee Benefits; Employees........................................ 36
5.15 Contracts........................................................... 37
5.16 Business Information................................................ 38
5.17 Disclosure.......................................................... 38
5.18 Brokers or Finders.................................................. 39
5.19 Certain Payments.................................................... 39
5.20 Subscribers......................................................... 39
5.21 Favorable Business Relationships.................................... 39
5.22 Securities Matters.................................................. 39
5.23 FCC Matters......................................................... 40
ii
<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MERGER SUB............ 40
6.1 Organization and Qualification............................... 40
6.2 Certificate of Incorporation and Bylaws...................... 41
6.3 Authority.................................................... 41
6.4 No Conflict; Required Filings and Consents................... 41
6.5 Vote Required................................................ 42
ARTICLE VII
PRE-CLOSING COVENANTS OF THE SELLERS................ 42
7.1 Additional Information....................................... 42
7.2 Exclusivity.................................................. 42
7.3 Continuity and Maintenance of Operations..................... 43
7.4 Consents and Approvals....................................... 45
7.5 Adoption by Shareholders..................................... 45
7.6 Securities Filings; Financial Information.................... 46
7.7 Notification of Certain Matters.............................. 46
7.8 Supplements to Company Disclosure Statement and Company
Registration Statement....................................... 46
7.9 Duty of Good Faith and Fair Dealing.......................... 47
7.10 Employee Matters............................................. 47
7.11 1997 Company Financial Statements............................ 47
7.12 1997 Tax Returns............................................. 47
7.13 Indemnity under Prior Company Acquisitions................... 47
ARTICLE VIII
PRE-CLOSING COVENANTS OF THE PEGASUS PARTIES............................... 48
8.1 Additional Information....................................... 48
8.2 Exclusivity.................................................. 48
8.3 Conduct of Business.......................................... 49
8.4 Consents and Approvals....................................... 49
8.5 Adoption by Pegasus Shareholders............................. 50
8.6 Merger Registration Statement................................ 50
8.7 Notification of Certain Matters.............................. 50
8.8 Supplements to Pegasus Disclosure Statement.................. 51
8.9 Duty of Good Faith and Fair Dealing.......................... 51
8.10 Tax Certificate.............................................. 51
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PEGASUS PARTIES................. 51
9.1 Accuracy of Representations.................................. 51
9.2 Covenants.................................................... 52
9.3 Consents and Approvals....................................... 52
iii
<PAGE>
9.4 Dissenters' Rights............................................. 53
9.5 Delivery of Documents.......................................... 53
9.6 No Material Adverse Change..................................... 54
9.7 No Litigation.................................................. 54
9.8 NRTC Compliance Certificate.................................... 54
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS.......................... 55
10.1 Accuracy of Representations.................................... 55
10.2 Covenants...................................................... 55
10.3 Consents and Approvals......................................... 55
10.4 Delivery of Documents.......................................... 56
10.5 No Material Adverse Change..................................... 57
10.6 Litigation..................................................... 57
ARTICLE XI
POST-CLOSING COVENANTS......................... 57
11.1 Transition..................................................... 57
11.2 Indemnification of Directors, Officers and Managers of the
Company and its Predecessors; Directors' and Officers'
Insurance...................................................... 57
11.3 Certain Securities Law Matters................................. 59
11.4 Offer to Purchase.............................................. 59
ARTICLE XII
TERMINATION.............................. 59
12.1 Events of Termination.......................................... 59
12.2 Effect of Termination.......................................... 61
12.3 Procedure Upon Termination..................................... 61
ARTICLE XIII
INDEMNIFICATION............................ 61
13.1 Survival of Representations and Warranties..................... 61
13.2 Indemnification Provisions for Benefit of the Pegasus Parties.. 61
13.3 Indemnification Provisions for Benefit of the Shareholders..... 62
13.4 Matters Involving Third Parties................................ 63
13.5 Determination of Adverse Consequences.......................... 64
13.6 Payment in Shares.............................................. 65
13.7 No Indemnification for Certain Disclosed Matters............... 65
ARTICLE XIV
MISCELLANEOUS............................................................... 66
14.1 Parties Obligated and Benefited............................... 66
14.2 Notices....................................................... 66
iv
<PAGE>
14.3 Attorneys' Fees............................................... 67
14.4 Headings...................................................... 67
14.5 Choice of Law................................................. 67
14.6 Rights Cumulative............................................. 67
14.7 Further Actions............................................... 67
14.8 Time of the Essence........................................... 67
14.9 Late Payments................................................. 68
14.10 Counterparts.................................................. 68
14.11 Entire Agreement.............................................. 68
14.12 Amendments and Waivers........................................ 68
14.13 Construction.................................................. 68
14.14 Expenses...................................................... 68
14.15 Disclosure.................................................... 68
14.16 Company Action................................................ 69
Exhibits
Exhibit 1 Fleet Confidentiality Agreement
Exhibit 2 Indemnification Agreement of Columbia Principals
Exhibit 3 Noncompetition Agreement -- Management
Exhibit 4 Noncompetition Agreement -- Owners
Exhibit 5 Registration Rights Agreement
Exhibit 6 Voting Agreement
Exhibit 7 Certificate of Merger
Exhibit 8 Tax Certificate
Exhibit 9 Certain addresses for notices
v
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated January 8, 1998 (the "Agreement"),
among PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation ("Pegasus"),
PEGASUS DTS MERGER SUB, INC., a Delaware corporation ("Merger Sub"), DIGITAL
TELEVISION SERVICES, INC., a Delaware corporation (the "Company," which term
also includes (unless the context otherwise requires) Digital Television
Services, LLC, a Delaware limited liability company to which the Company
succeeded by merger (the "Corporate Conversion") on October 10, 1997, the
shareholders of Pegasus that have executed this Agreement (the "Principal
Pegasus Shareholders"), and the shareholders of the Company that have executed
this Agreement (the "Principal Company Shareholders"). Pegasus, Merger Sub, the
Company, the Principal Pegasus Shareholders and the Principal Company
Shareholders are collectively referred to herein as the "Parties." The Company
and the Principal Company Shareholders are sometimes referred to herein
collectively as the "Sellers." Pegasus, Merger Sub and the Principal Pegasus
Shareholders are sometimes referred to herein collectively as the "Pegasus
Parties."
RECITALS:
Subsidiaries (this and certain other terms are defined in Article I) of
the Company are party to certain NRTC Distribution Agreements with the National
Rural Telecommunications Cooperative ("NRTC"), pursuant to which Subsidiaries of
the Company hold rights to distribute DIRECTV(R) ("DIRECTV") programming offered
by DirecTV, Inc. in the Service Areas.
The Parties intend for Pegasus to acquire the Company and its
Subsidiaries by means of the merger of Merger Sub with and into the Company,
upon the terms and subject to the conditions set forth herein.
For federal income tax purposes, it is intended that the Merger will
qualify as a reorganization under Section 368(a) of the Code.
NOW, THEREFORE, in consideration of the premises and mutual promises
herein made, and in consideration of the representations, warranties, covenants
and agreements herein contained, and intending to be legally bound hereby, the
Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. The following terms shall, when used
in this Agreement, have the following meanings:
"Accounts Receivable" means the accounts receivable identified
in the Books and Records and reported on NRTC Report 19A.
<PAGE>
"Acquisition" means the acquisition by a Person of any
business (including a DIRECTV Distribution Business), assets or property other
than in the Ordinary Course, whether by way of the purchase of assets or stock,
by merger, consolidation or otherwise.
"Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, assessments, dues, penalties,
fines, interest, costs, amounts paid in settlement, Liabilities, obligations,
Taxes, liens, losses, expenses and fees (including court costs, settlement
costs, legal, accounting, experts' and other fees, costs and expenses).
"Affiliate" means, with respect to any Person: (i) any Person
directly or indirectly owning, controlling, or holding with power to vote 10% or
more of the outstanding voting securities of such other Person; (ii) any Person
10% or more of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with power to vote, by such other Person; (iii) any
Person directly or indirectly controlling, controlled by, or under common
control with such other Person; and (iv) any officer, director or partner of
such other Person. "Control" for the foregoing purposes shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities or voting interests, by contract or otherwise.
"Agreement in Principle" means that certain letter agreement
dated November 5, 1997, among the Parties.
"Applicable Rate" means the prime rate reported in The Wall
Street Journal from time to time, plus 3%.
"Assets" mean all properties, assets, privileges, powers,
rights, interests and claims of every type and description that are owned,
leased, held, used or useful in the Business and in which the Company or any of
its Subsidiaries has any right, title or interest or in which the Company or any
of its Subsidiaries acquires any right, title or interest on or before the
Closing Date, wherever located, whether known or unknown, and whether or not now
or on the Closing Date on the Books and Records of the Company or any of its
Subsidiaries, including Accounts Receivable, Books and Records, Consumer
Contracts, Contracts, Intangibles, Intellectual Property, Inventory, NRTC
Patronage Capital, Personal Property and subscribers.
"Basis" means any past or present fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act or transaction that forms or could form the
basis for any specified consequence.
2
<PAGE>
"Books and Records" mean all of the Company's and its
Subsidiaries' books and records, including purchase and sale order files,
invoices, sales materials and records, customer lists, mailing lists, marketing
information, personnel records and files, technical data and records, all NRTC
Reports and invoices, all correspondence with and documents pertaining to NRTC,
DIRECTV, subscribers, suppliers, Governmental Authorities and other third
parties, all records evidencing the Accounts Receivable and a schedule of
Accounts Receivable aging, all other financial records and all books and records
relating to the Company's and its Subsidiaries' formation and capitalization,
including corporate seals, minute books and stock books.
"Business" means the DIRECTV distribution business conducted
by the Company and its Subsidiaries pursuant to rights granted under the NRTC
Distribution Agreements.
"Business Day" means any day other than Saturday, Sunday or a
day on which banking institutions in New York, New York, are required or
authorized to be closed.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral Documents" mean the Exhibits and any other
documents, instruments and certificates to be executed and delivered by the
Parties hereunder or thereunder.
"Columbia Principals" means James B. Murray, Jr., David P.
Mixer, Mark R. Warner, Robert B. Blow, Mark J. Kington, Harry F. Hopper, III, R.
Philip Herget, III, Neil P. Byrne, Barton Schneider, and James Fleming.
"Commission" means the Securities and Exchange Commission or
any Governmental Authority that succeeds to its functions.
"Committed Member Residence" has the meaning assigned to it in
the NRTC Distribution Agreement.
"Company Credit Agreement" means the Second Amended and
Restated Credit Agreement dated as of July 30, 1997, as amended as of October
30, 1997, among the Company, the lenders identified therein, and Canadian
Imperial Bank of Commerce, New York Agency, as agent.
"Company Disclosure Statement" means the disclosure statement
delivered by the Company and the Principal Company Shareholders to Pegasus
concurrently with the execution of this Agreement, as supplemented pursuant to
Section 7.8.
"Company Financial Model" means the Company's financial
projections attached as Exhibit A to the Company Disclosure Statement, as
updated from time to time pursuant to Section 7.3(c)(i).
"Company Indenture" means the indenture dated as of July 30,
1997, among the Company as successor by merger to Digital Television Services,
LLC, DTS Capital, Inc., the
3
<PAGE>
Guarantors identified therein, and the Bank of New York, as trustee, as
supplemented by a supplemental indenture dated as of October 10, 1997.
"Company Registration Statement" means the Company's
registration statement on Form S-4, No. 333-36217, as filed with the Commission
on September 24, 1997, by Digital Television Services, LLC, DTS Capital, Inc.
and the other registrants identified therein, as amended by Amendment No. 1
thereto, filed with the Commission on November 19, 1997, by Amendment No. 2
thereto, filed with the Commission on December 15, 1997, by Amendment No. 3
thereto, filed with the Commission on December 23, 1997, and by Amendment No. 4
thereto, filed with the Commission on December 24, 1997, and as amended from
time to time thereafter.
"Company Senior Management" means Douglas S. Holladay, Jr.,
Earl A. MacKenzie and Donald A. Doering.
"Confidentiality Agreement" means the Confidentiality
Agreement dated April 10, 1997, between Pegasus and the Company, as successor by
merger to Digital Television Services, LLC.
"Consumer Contract" means any rental agreement, lease
agreement, installment sale agreement or other agreement or arrangement under
which the Company or any of its Subsidiaries (or predecessors in interest) has
rented, leased or sold any DSS System or other Inventory to a subscriber or has
otherwise financed the acquisition or use of any DSS System or other Inventory
by a subscriber.
"DIRECTV Distribution Business" means the distribution of any
service transmitted using the frequencies licensed to Hughes Communications
Galaxy or its successors at the 101(0) West orbital location.
"DSS System" means the satellite receiving system for DIRECTV
consisting of an eighteen inch satellite antenna dish, an integrated receiver
decoder and a remote control.
"Employee Benefit Plan" means any: (a) nonqualified deferred
compensation or retirement plan or arrangement that is an Employee Pension
Benefit Plan; (b) qualified defined contribution retirement plan or arrangement
that is an Employee Pension Benefit Plan; (c) qualified defined benefit
retirement plan or arrangement that is an Employee Pension Benefit Plan
(including any Multiemployer Plan); (d) Employee Welfare Benefit Plan; or (e)
other employee benefit arrangement or payroll practice.
"Employee Pension Benefit Plan" has the meaning set forth in
ERISA Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Section 3(l).
"Encumbrance" means any mortgage, pledge, lien, encumbrance,
charge, security interest, security agreement, conditional sale or other title
retention agreement, limitation, option,
4
<PAGE>
assessment, restrictive agreement, restriction, adverse interest, restriction on
transfer or any exception to or defect in title or other ownership interest
(including restrictive covenants, leases and licenses).
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Escrow Agent" means First Union National Bank.
"Escrow Agreement" means an escrow agreement in form and
substance reasonably satisfactory to the Parties to be entered into on the
Closing Date to provide for the escrow of the Company Escrow Shares pursuant to
Section 2.7(b), which shall in all material respects conform to Revenue
Procedure 84-42.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
"Exchange Offer" means the exchange offer made by means of the
Company Registration Statement.
"Fleet Confidentiality Agreement" means the form of
confidentiality agreement attached hereto as Exhibit 1.
"GAAP" means United States generally accepted accounting
principles as in effect from time to time.
"Governmental Authority" means: (i) the United States of
America; (ii) any state, commonwealth, territory or possession of the United
States of America and any political subdivision thereof (including counties,
municipalities and the like); (iii) any foreign (as to the United States of
America) sovereign entity and any political subdivision thereof; or (iv) any
agency, authority or instrumentality of any of the foregoing, including any
court, tribunal, department, bureau, commission or board.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"Indemnification Agreement" means the form of indemnification
agreement attached hereto as Exhibit 2, as executed by the Columbia Principals
and each of the Successor Principal Company Shareholders.
"Intangibles" mean all accounts, notes and other receivables,
claims, deposits, prepayments, refunds, causes of action, choses in action,
rights of recovery, rights of set-off, rights of recoupment and other intangible
assets owned, used or held for use in the Business.
5
<PAGE>
"Intellectual Property" means (i) trademarks, service marks,
trade dress, logos, trade names and corporate names, together with all
translations, adaptations, derivations and combinations thereof and all
applications, registrations and renewals in connection therewith; (ii) all
copyrightable works, all copyrights and all applications, registrations and
renewals in connection therewith; (iii) trade secrets and confidential business
information (including ideas, research and development, know-how, formulas,
compositions, manufacturing and production processes and techniques, technical
data, designs, drawings, specifications, customer and supplier lists, pricing
and cost information and business and marketing plans and proposals); (iv) all
computer software (including data and related documentation); (v) all other
proprietary rights; and (vi) all copies and tangible embodiments thereof (in
whatever form or medium).
"Inventory" means the DSS Systems and other equipment owned by
the Company or any of its Subsidiaries for sale, lease or rent to subscribers or
that has been rented or leased to subscribers or sold to subscribers on an
installment basis.
"Judgment" means any judgment, writ, order, injunction, award
or decree of any court, judge, justice, magistrate or any other Governmental
Authority.
"Legal Requirement" means any statute, ordinance, law, rule,
regulation, code, plan, injunction, judgment, order, decree, ruling, charge or
other requirement, standard or procedure enacted, adopted or applied by any
Governmental Authority, including judicial decisions applying common law or
interpreting any other Legal Requirement.
"Liability" means any liability or obligation (whether known
or unknown, whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due), including any liability for Taxes.
"Market Price" per share of Pegasus Class A Common Stock on
any day means the average of the Quoted Prices of the Pegasus Class A Common
Stock for 30 consecutive trading days commencing 45 trading days before such
day. The "Quoted Price" of the Pegasus Class A Common Stock on any day means the
last reported sale price on such day of the Pegasus Class A Common Stock as
reported by the Nasdaq National Market or, if the Pegasus Class A Common Stock
is listed on a securities exchange, the last reported sale price of the Pegasus
Class A Common Stock on such exchange, which shall be for consolidated trading
if applicable to such exchange, or, if not so reported or listed, the last
reported bid price of the Pegasus Class A Common Stock.
"Material Adverse Effect on the Company" means a material
adverse effect on (a) the Company, its Subsidiaries, the Assets and the
Business, taken as a whole, (b) the validity, binding effect or enforceability
of this Agreement or the Collateral Documents, or (c) the ability of the Company
or any of the DTS Parties to perform its obligations under this Agreement or any
of the Collateral Documents.
"Material Adverse Effect on Pegasus" means a material adverse
effect on (a) Pegasus, its Subsidiaries and their assets and business, taken as
a whole, (b) the validity, binding
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effect or enforceability of this Agreement or the Collateral Documents, or (c)
the ability of any of the Pegasus Parties to perform its obligations under this
Agreement or any of the Collateral Documents.
"Merger Consideration" means the shares of Pegasus Class A
Common Stock and the cash in lieu of fractional shares of Pegasus Class A Common
Stock deliverable by Pegasus in exchange for Company Capital Stock pursuant to
Section 2.7.
"Multiemployer Plan" has the meaning set forth in ERISA
Section 3(37).
"Noncompetition Agreement -- Management" means the form of
noncompetition agreement attached hereto as Exhibit 3.
"Noncompetition Agreement -- Owners" means the form of
noncompetition agreement attached hereto as Exhibit 4.
"NRTC Distribution Agreement" means any contract, commitment,
agreement, instrument or other document pursuant to which NRTC and/or DirecTV,
Inc. and/or any of their Affiliates has granted the Company or any of its
Subsidiaries rights relating to the marketing and distribution of DIRECTV in the
Service Areas, including those certain NRTC/Member Agreements for Marketing and
Distribution of DBS Services, as amended and supplemented, identified in Section
3.16 of the Company Disclosure Statement.
"NRTC Patronage Capital" means any equity interest in NRTC
allocated to the Company or any of its Subsidiaries or if such equity interest
is not transferrable the right to receive any distributions on account of such
equity interest.
"Offer to Purchase" means the Offer to Purchase (as defined in
the Company Indenture) required by Section 4.14 of the Company Indenture to be
made as a result of the Merger.
"Ordinary Course" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Pegasus Class A Common Stock" means the Class A Common Stock,
par value $0.01 per share, of Pegasus.
"Pegasus Credit Agreement" means the credit agreement dated as
of December 10, 1997, among Pegasus Media & Communications, Inc., the lenders
party thereto, and Bankers Trust Company, as agent for such lenders.
"Pegasus Disclosure Statement" means the disclosure statement
delivered by the Pegasus Parties to the Company concurrently with the execution
of this Agreement, as supplemented pursuant to Section 8.8.
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"Pegasus Exchange Offer Registration Statement" means
Pegasus's registration statement on Form S-4, No. 333-40205, as filed with the
Commission on November 14, 1997, and as amended from time to time thereafter.
"Permit" means any license, permit, consent, approval,
registration, authorization, qualification or similar right granted by a
Governmental Authority.
"Permitted Liens" means (i) liens for Taxes not yet due and
payable or being contested in good faith by appropriate proceedings; (ii) rights
reserved to any Governmental Authority to regulate the affected property; (iii)
statutory liens of banks and rights of set-off; (iv) as to leased Assets,
interests of the lessors thereof and liens affecting the interests of the
lessors thereof; (v) inchoate materialmen's, mechanics', workmen's, repairmen's
or other like liens arising in the ordinary course of business; (vi) liens
incurred or deposits made in the ordinary course of business in connection with
workers' compensation and other types of social security; (vii) earnest money
deposits made to secure the performance of contracts to acquire DIRECTV
Distribution Businesses, so long as no foreclosure, sale or similar proceedings
have been commenced; (viii) licenses of trademarks or other intellectual
property rights granted by the Company in the ordinary course and not
interfering in any material respect with the ordinary conduct of the business of
the Company; and (ix) as to real property, any encumbrance, adverse interest,
constructive or other trust, claim, attachment, exception to or defect in title
or other ownership interest (including, but not limited to, reservations, rights
of entry, rights of first refusal, possibilities of reverter, encroachments,
easement, rights-of-way, restrictive covenants, leases, and licenses) of any
kind, which otherwise constitutes an interest in or claim against property,
whether arising pursuant to any Legal Requirement, under any Contract or
otherwise, that do not, individually or in the aggregate, materially and
adversely affect or impair the value or use thereof as it is currently being
used in the Ordinary Course or render title thereto unmarketable or uninsurable.
"Permitted Redemption" means the redemption of or the
agreement to redeem shares of the Company's common stock (or the agreement
described in Section 2.13(b) to purchase shares of Pegasus Class A Common Stock
into which the Company's common stock is converted pursuant to the Merger) held
by the maker of any Shareholder Note (or such maker's successors and assigns)
solely in exchange for all or a portion of such maker's Shareholder Note.
"Person" means any natural person, corporation, partnership,
trust, unincorporated organization, association, limited liability company,
Governmental Authority or other entity.
"Personal Property" means all tangible personal property of
the Company and its Subsidiaries, whether or not identified in Section 3.6 of
the Company Disclosure Statement.
"Registration Rights Agreement" means the form of registration
rights agreement attached hereto as Exhibit 5.
"Representative" means any director, officer, employee, agent,
consultant, adviser or other representative of a Person, including legal
counsel, accountants and financial advisors.
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"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations thereunder.
"Service Areas" means the areas identified on Exhibits "C" of
each NRTC Distribution Agreement identified in Section 3.16 of the Company
Disclosure Statement.
"Shareholder Notes" means those three noninterest bearing,
nonrecourse promissory notes in the aggregate principal amount of $870,490
received by the Company from Douglas S. Holladay, Jr., Donald A. Doering and
William Dorran in connection with their purchase of 87,049 shares of the
Company's common stock.
"Specified Owners" means Columbia Capital Corporation,
Columbia DBS, Inc., Columbia DBS Investors, L.P., Columbia DBS Class A
Investors, LLC, the Columbia Principals, J.H. Whitney Equity Partners LLC, and
Whitney Equity Partners, L.P.
"Subscriber" means any subscriber who is reported by the NRTC
as an active DIRECTV subscriber account of the Business, excluding the account
of any subscriber who (i) does not pay for a core DIRECTV programming package
(except commercial subscribers); (ii) receives a discount from the Company for
DIRECTV programming other than pursuant to promotions of the NRTC or DIRECTV;
(iii) resides outside the Service Areas or is not otherwise a Committed Member
Residence; (iv) is pending disconnection for any reason; or (v) is 60 days or
more past due in the payment of any amount payable to the Company or any of its
Subsidiaries or is categorized as a "Level 2 Disconnection".
"Subsidiary" of a specified Person means (a) any Person if
securities having ordinary voting power (at the time in question and without
regard to the happening of any contingency) to elect a majority of the
directors, trustees, managers or other governing body of such Person are held or
controlled by the specified Person or a Subsidiary of the specified Person; (b)
any Person in which the specified Person and its Subsidiaries collectively hold
a 50% or greater equity interest; (c) any partnership or similar organization in
which the specified Person or Subsidiary of the specified Person is a general
partner; or (d) any Person the management of which is directly or indirectly
controlled by the specified Person and its Subsidiaries through the exercise of
voting power, by contract or otherwise.
"Successor Principal Company Shareholders" means those Persons
who, at any time after the date hereof and prior to the Effective Time, become
the owners of any of the capital stock of the Company owned by the Principal
Company Shareholders on the date hereof.
"Tax" means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental, customs duties, capital stock,
franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated or other tax
of any kind whatsoever, including any interest, penalties, fees, deficiencies,
assessments, additions or other charges of any nature with respect thereto,
whether disputed or not.
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"Tax Return" means any return, declaration, report, claim for
refund or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Voting Agreement" means the form of voting agreement attached
hereto as Exhibit 5.
1.2 Other Definitions. The following terms shall, when used in
this Agreement, have the meanings assigned to such terms in the Sections
indicated. Term Section
"Additional Shareholder Note Shares".......................................2.13
"Agreement"............................................................Preamble
"Certificate of Merger".....................................................2.5
"Claim"....................................................................11.2
"Closing"..................................................................2.11
"Closing Date".............................................................2.11
"Company Alternative Transaction"...........................................7.2
"Company Capital Stock".....................................................2.7
"Company Financial Statements".............................................3.19
"Company Indemnitees"......................................................13.3
"Contracts"................................................................3.16
"Conversion Ratio".......................................................2.7(b)
"Corporate Conversion".................................................Preamble
"DGCL"......................................................................2.1
"DIRECTV"..............................................................Recitals
"Dissenting Shares".........................................................2.9
"DTS Indemnified Parties"..................................................11.2
"DTS Parties"...............................................................3.3
"Effective Time"............................................................2.5
"Escrowed Shares"........................................................2.7(b)
"FCC"......................................................................5.23
"FCC Licenses".............................................................5.23
"Indemnification Period"...................................................13.2
"Indemnified Party"........................................................13.4
"Indemnifying Party".......................................................13.4
"Merger"....................................................................2.1
"NRTC".................................................................Recitals
"Options"..................................................................2.12
"Parties"..............................................................Preamble
"Pegasus Alternative Transaction"...........................................8.2
"Pegasus Financial Statements".............................................5.11
"Pegasus Indemnitees"......................................................13.2
"Pegasus Merger Registration Statement".....................................8.6
"Pegasus Parties"......................................................Preamble
"Pegasus SEC Reports"......................................................5.22
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"Proxy Statement/Prospectus"...............................................8.6
"Sellers".............................................................Preamble
"Shareholders".............................................................2.6
"Surviving Corporation"....................................................2.1
"Third Party Claim".......................................................13.4
"Unvested Bing Warrants...................................................2.12
"Vested Bing Warrants"....................................................2.12
"Warrants"................................................................2.12
ARTICLE II
BASIC TRANSACTION
2.1 Merger; Surviving Corporation. In accordance with and subject to
the provisions of this Agreement and the General Corporation Law of the State of
Delaware ("DGCL"), at the Effective Time, Merger Sub shall be merged with and
into the Company (the "Merger"), and the Company shall be the surviving
corporation in the Merger (hereinafter sometimes called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Delaware. At the Effective Time, the separate existence of Merger Sub
shall cease. All properties, franchises and rights belonging to the Company and
Merger Sub, by virtue of the Merger and without further act or deed, shall be
vested in the Surviving Corporation, which shall thenceforth be responsible for
all the liabilities and obligations of each of Merger Sub and the Company.
2.2 Certificate of Incorporation. The Company's certificate of
incorporation shall be amended and restated effective at the Effective Time to
be as set forth in the Certificate of Merger, and, as so amended and restated,
shall thereafter continue in full force and effect as the certificate of
incorporation of the Surviving Corporation until altered or amended as provided
therein or by law, to the extent permitted by Section 11.2.
2.3 By-Laws. The Company's by-laws, as in effect at the Effective Time,
shall be the by-laws of the Surviving Corporation until altered, amended or
repealed as provided therein or by law, to the extent permitted by Section 11.2.
2.4 Directors and Officers. The directors of the Surviving Corporation
following the Effective Time shall be the persons serving as directors of Merger
Sub immediately before the Effective Time and shall serve thereafter in
accordance with the certificate of incorporation and by-laws of the Surviving
Corporation and the DGCL. The officers of Merger Sub immediately before the
Effective Time shall serve in the same capacities as officers of the Surviving
Corporation at the pleasure of the board of directors of the Surviving
Corporation following the Effective Time in accordance with the certificate of
incorporation and by-laws of the Surviving Corporation and the DGCL.
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2.5 Effective Time. The Merger shall become effective at the time and
date that the certificate of merger (the "Certificate of Merger"), in the form
attached hereto as Exhibit 7, is accepted for filing by the Secretary of State
of the State of Delaware in accordance with the provisions of Section 251 of the
DGCL. The Certificate of Merger shall be executed by the Surviving Corporation
and delivered to the Secretary of State of the State of Delaware for filing on
the Closing Date. The date and time when the Merger becomes effective are
referred to herein as the "Effective Time."
2.6 Exchange of Certificates. At the Closing, immediately after the
Effective Time, all of the shareholders of the Company (the "Shareholders"), who
are listed in Section 3.2(b) of the Company Disclosure Statement along with
their respective ownership interests (as Section 3.2(b) of the Company
Disclosure Statement may be modified pursuant to Section 2.7(b)), shall
surrender to the Surviving Corporation all of the outstanding certificates
theretofore representing shares of Company Capital Stock in exchange for the
Merger Consideration deliverable to the Shareholders as provided in Section 2.7.
Until such certificates are surrendered, outstanding certificates formerly
representing shares of Company Capital Stock shall be deemed for all purposes as
evidencing the right to receive the Merger Consideration into which such shares
are converted as though said surrender and exchange had taken place. In no event
will a holder of shares of Company Capital Stock be entitled to interest on the
Merger Consideration issuable in respect of such shares.
2.7 Merger Consideration; Conversion and Cancellation of Securities.
(a) Conversion of Company Capital Stock. At the Effective Time
of the Merger all of the issued and outstanding shares of the common stock, par
value $.01 per share and preferred stock, par value $.01 per share, of the
Company (the "Company Capital Stock") outstanding immediately before the
Effective Time, other than shares described in Section 2.7(c) and other than
Dissenting Shares, shall be converted, by virtue of the Merger and without any
further action on the part of the holders thereof, into the number of shares of
Pegasus Class A Common Stock determined as follows:
(i) 5,500,000 shares of Pegasus Class A Common Stock,
plus
(ii) the adjustment specified in Section 2.13(a) or
(c), if any, minus
(iii) the number of shares of Pegasus Class A Common
Stock having an aggregate Market Price on the Closing Date equal to one-half of
the difference between (A) the aggregate Market Price on the Closing Date of the
Pegasus Class A Common Stock underlying the warrants and options that replace
the Vested Bing Warrants and the Warrants and Options described in Section
2.12(a)(i) and (B) the aggregate exercise price of such replacement warrants and
replacement options, minus
(iv) the number of shares of Pegasus Class A Common
Stock having an aggregate Market Price on the Closing Date equal to the
difference between (A) the aggregate Market Price on the Closing Date of the
Pegasus Class A Common Stock underlying the options
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that replace the Options described in Section 2.12(a)(ii) and (B) the aggregate
exercise price of such replacement options, minus
(v) the number of shares of Pegasus Class A Common
Stock having an aggregate Market Price on the Closing Date equal to $75,000.
(b) Conversion Ratio; Escrowed Shares; Delivery of Shares at
Closing. The ratio of the number of shares of Pegasus Class A Common Stock into
which each share of the Company's preferred stock and common stock,
respectively, shall be converted (the "Conversion Ratio") shall be computed
pursuant to the formula specified in Section 3.2(b) of the Company Disclosure
Statement. Not later than 24 hours before the Closing, the Company shall provide
to Pegasus (i) a list of the Shareholders specifying that portion of the total
number of shares computed as provided in Section 2.7(a) to be issued to each
such Shareholder based upon the Conversion Ratio, and (ii) an amendment to
Section 3.2(b) of the Company Disclosure Statement consistent with such list.
Both the list and the amendment shall be signed by each of the Principal Company
Shareholders. At the Closing, Pegasus shall (subject to Section 2.10) deliver
(A) to the Escrow Agent (subject to the provisions of Section 13.6 and the
Escrow Agreement) share certificates registered in the name of the Escrow Agent
evidencing 10% of the number of shares of Pegasus Class A Common Stock (rounded
down to the next whole share) that would be included in the Merger Consideration
if there were no Dissenting Shares (the "Escrowed Shares," which shares shall be
deemed to be owned by the Shareholders (other than holders of Dissenting Shares)
in proportion to their entitlement to the Merger Consideration, subject to the
Escrow Agreement), and (B) to such Shareholders (other than holders of
Dissenting Shares), or a person designated in writing by the Company to serve as
agent for the Shareholders, share certificates registered in the names of the
applicable Shareholders evidencing the balance of the shares of Pegasus Class A
Common Stock to be received by each such Shareholder (other than holders of
Dissenting Shares), rounded down to the nearest whole share and accompanied by
any payment in lieu of fractional shares required by Section 2.7(e).
(c) Treasury Shares, Etc. Each share of Company Capital Stock
held in the treasury of the Company and each share of Company Capital Stock, if
any, held by Pegasus or any Subsidiary of Pegasus or of the Company immediately
before the Effective Time shall be cancelled and extinguished, and nothing shall
be issued or paid in respect thereof.
(d) Conversion of Merger Sub Shares. Each share of common
stock, par value $1.00 per share, of Merger Sub issued and outstanding
immediately before the Effective Time shall be converted into one share of
common stock, par value $1.00 per share, of the Surviving Corporation.
(e) Fractional Shares. No certificates or scrip evidencing
fractional shares of Pegasus Class A Common Stock shall be issued in exchange
for Company Capital Stock. In lieu of any such fractional shares, each holder of
Company Capital Stock shall be paid an amount in cash (without interest),
rounded to the nearest cent, determined by multiplying (i) the Market Price on
the Closing Date of the Pegasus Class A Common Stock by (ii) the fractional
share of
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Pegasus Class A Common Stock to which such holder would otherwise be entitled
(taking into account all shares held of record by such holder at the Effective
Time).
(f) Withholding. Pegasus (or any Affiliate thereof) shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any former holder of Company Capital Stock such
amounts, if any, as Pegasus (or any Affiliate thereof) is required to deduct and
withhold with respect to the making of such payment under the Code, or any other
provision of federal, state, local or foreign tax law. To the extent that
amounts are so withheld by Pegasus, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the former holder of the
Company Capital Stock in respect of which such deduction and withholding was
made by Pegasus (or such Affiliate).
2.8 Stock Transfer Books. At the Effective Time, the stock transfer
books of the Company shall be closed, and there shall be no further registration
of transfers of shares of Company Capital Stock thereafter on the records of the
Company.
2.9 Dissenting Shares. Shares of Company Capital Stock which are issued
and outstanding immediately prior to the Effective Time and which are held by
persons who have properly exercised, and not withdrawn or waived, appraisal
rights with respect thereto in accordance with Section 262 of the DGCL (the
"Dissenting Shares") will not be converted into the right to receive the Merger
Consideration, and holders of such shares of Company Capital Stock will be
entitled, in lieu thereof, to receive payment of the appraised value of such
shares of Company Capital Stock in accordance with the provisions of such
Section 262 unless and until such holders fail to perfect or effectively
withdraw or lose their rights to appraisal and payment under the DGCL. If, after
the Effective Time, any such holder fails to perfect or effectively withdraws or
loses such right, such shares of Company Capital Stock will thereupon be treated
as if they had been converted at the Effective Time into the right to receive
the Merger Consideration, without any interest thereon. The Company will give
Pegasus prompt notice of any demands received by the Company for appraisal of
shares of Company Capital Stock. Prior to the Effective Time, the Company will
not, except with the prior written consent of Pegasus make any payment with
respect to, or settle or offer to settle, any such demands.
2.10 Failure to Surrender Share Certificates. Pegasus shall be
obligated to deliver certificates evidencing the Merger Consideration and cash
in lieu of fractional shares only upon receipt of certificates representing the
Company Capital Stock converted by reason of the Merger into the Merger
Consideration. If the share certificates delivered to Pegasus at the Closing
represent fewer than all the outstanding shares of Company Capital Stock,
Pegasus may withhold from its delivery to the applicable Shareholder and the
Escrow Agent the corresponding portion of the Merger Consideration until such
time as the applicable share certificates (or, in case of lost, stolen or
missing share certificates, an affidavit of loss and unsecured indemnity
agreement reasonably satisfactory to Pegasus) shall be delivered.
2.11 Closing. The closing of the transactions contemplated by this
Agreement and the Collateral Documents ("Closing") shall take place at the
offices of Drinker Biddle & Reath LLP, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107, or
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at such other location as the parties may agree, at 10:00 a.m., Eastern Time, on
a Business Day specified by Pegasus that may be on, but shall not be more than
five Business Days after, all conditions precedent to the Closing set forth in
Articles IX and X have been satisfied or waived, or on such other date and at
such other time as the Parties may agree, provided that all such conditions
precedent have been satisfied or waived. The date on which the Closing actually
occurs is referred to herein as the "Closing Date."
2.12 Treatment of Certain Outstanding Warrants and Options of the
Company.
(a) The Company represents and warrants that only the
following warrants ("Warrants") and options ("Options") to acquire Company
Capital Stock are outstanding on the date hereof:
(i) Warrants to purchase an aggregate of 79,500
shares of the Company's common stock for an exercise price of $22.50 per share
and Options to purchase an aggregate of 30,000 shares of the Company's common
stock for an exercise price of $22.50 per share, held by members of Company
Senior Management and by Craig Benn and Suzanne Beisner;
(ii) Options to purchase an aggregate of 11,133
shares of the Company's common stock for an exercise price of $22.50 per share,
granted to members of Company Senior Management as of October 30, 1997, and
expiring two years after such date, as ratified by action of the Company's board
of directors taken at its meeting on December 16, 1997.
(iii) Warrants to purchase an aggregate of 25,000
shares of the Company's common stock for an exercise price of $22.50 per share,
held by Steven Bing, 3,181 of which have vested or are anticipated to vest prior
to the Closing Date (the "Vested Bing Warrants"), and the balance of which are
unvested (the "Unvested Bing Warrants"); and
(iv) Warrants to purchase an aggregate of 19,500
shares of the Company's common stock for an exercise price of $22.50 per share
and Options to purchase 2,500 shares of the Company's common stock for an
exercise price of $22.50 per share, held by employees of the Company other than
those identified in paragraphs (i) and (ii), none of which vests before May 1,
1998.
(b) The Company shall not issue additional Options or Warrants
between the date of this Agreement and the Closing Date.
(c) At the Effective Time, Pegasus will assume the Company's
obligations under the Vested Bing Warrants and the Warrants and Options
described in Section 2.12(a)(i), (a)(ii) and (a)(iv), and will replace them
(upon surrender thereof by the Persons who hold them) with warrants and options
to purchase the number of shares of Pegasus Class A Common Stock equal to the
Conversion Ratio applicable to the Company's common stock times the number of
shares of Company common stock issuable upon the exercise of such Warrants and
Options, for an
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exercise price equal to the exercise price applicable to such Warrants and
Options divided by the Conversion Ratio applicable to the Company's common
stock.
(d) Neither Pegasus nor the Surviving Corporation shall have
any obligation in respect of the Unvested Bing Warrants, and the indemnification
obligations under Section 13.2 shall apply to the Unvested Bing Warrants.
2.13 Shareholder Notes.
(a) If Pegasus shall be reasonably satisfied (by way of
obtaining the concurrence of the trustee under the Company Indenture, an
amendment to the Company Indenture or otherwise) that the following is permitted
under the Company Indenture, then:
(i) the Merger Consideration shall be adjusted upward
by the number of shares of Pegasus Class A Common Stock (the "Additional
Shareholder Note Shares") equal to the outstanding balance of the Shareholder
Notes as of the Closing Date divided by the Market Price of a share of Pegasus
Class A Common Stock on the Closing Date, provided that
(ii) the Surviving Corporation and each maker of a
Shareholder Note enter into an agreement on or before the Closing Date under
which each such maker agrees to sell to the Surviving Corporation, and the
Surviving Corporation agrees to purchase from such maker, upon the termination
of such maker's employment with the Surviving Corporation, all of such maker's
Additional Shareholder Note Shares for a price per share equal to the Market
Price of a share of Pegasus Class A Common Stock on the Closing Date, payable by
cancellation of such maker's Shareholder Note.
(b) If Pegasus shall not be reasonably satisfied that the
transactions described will be permitted under the Company Indenture, then, on
the Closing Date and simultaneously with the Closing:
(i) the employment of each maker of a Shareholder
Note with the Company will be terminated, and such maker will become an employee
of Pegasus or one of its Subsidiaries;
(ii) Pegasus and such maker will enter into
agreements confirming the existing agreements (as previously approved by
Pegasus) between such maker and the Company relating to base compensation, bonus
and severance (including the vesting of Warrants and Options) and modifying such
agreements to provide that employment by Pegasus or one of its Subsidiaries
after the Closing will be the equivalent of continued employment by the Company;
and
(iii) there will be no adjustment to the Merger
Consideration pursuant to Section 2.7(a)(ii); and
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(iv) just prior to Closing, the Company shall be
permitted to redeem shares of the Company's common stock held by the makers of
the Shareholder Notes solely in exchange for such Shareholder Notes, and if it
does so and the Closing occurs prior to May 20, 1998, the Company shall be
entitled in its discretion to pay such makers a special bonus, not exceeding
$88,000 in the aggregate, reasonably calculated to compensate such makers for
the difference, if any, between the federal tax rate applicable to capital gain
on capital assets held for one year but not more than 18 months, and the federal
tax rate applicable to capital gain on capital assets held for more than 18
months.
(c) In the event that the Company does not enter into an
agreement with the maker of one or more of the Shareholder Notes for a Permitted
Redemption as described in either Section 2.13(a) or 2.13(b) prior to Closing
and as a consequence such maker's Shareholder Note becomes due in full upon the
Closing, then (i) to the extent such Shareholder Notes are paid in full in cash,
Pegasus shall adjust the Merger Consideration upward by the Additional
Shareholder Note Shares computed with respect to the amount of such Shareholder
Notes that are paid, and (ii) to the extent such Shareholders Notes are not
paid, Pegasus shall cause the Company to foreclose on or otherwise exercise the
Company's rights with respect to that portion of the Merger Consideration
otherwise receivable by the maker of such Shareholder Note with respect to such
maker's shares of the Company's common stock that are pledged as security for
the payment of the Shareholder Note and shall adjust the Merger Consideration
upward by the net proceeds to the Company of such foreclosure or exercise of
other rights.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Pegasus Parties that the
statements contained in Article III are correct and complete as of the date of
this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout Article III).
3.1 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and each Subsidiary of the Company is a business organization of the
type described in Section 3.1 of the Company Disclosure Statement and is duly
organized, validly existing and in good standing under the laws of the state
identified in Section 3.1 of the Company Disclosure Statement. All of the
Company's Subsidiaries are identified in Section 3.1 of the Company Disclosure
Statement. Digital Television Services, LLC, a Delaware limited liability
company, merged with and into the Company on October 10, 1997, and the Company
has succeeded to all property and rights formerly held by Digital Television
Services, LLC and has become the successor issuer under the Company Indenture.
The Company has, and each of its Subsidiaries has, all requisite power and
authority to own, lease and use its assets as they are currently owned, leased
and used and to conduct its business as it is currently conducted. The Company
is, and each of its Subsidiaries is, duly qualified or licensed to do business
in and is in good standing in each jurisdiction in which the character of the
properties owned, leased or used by it or the nature of the activities
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conducted by it make such qualification necessary, all of which are identified
in Section 3.1 of the Company Disclosure Statement, except any such jurisdiction
where the failure to be so qualified or licensed would not have a Material
Adverse Effect on the Company.
3.2 Capitalization.
(a) The authorized, issued and outstanding capital stock and
other ownership interests of the Company and each of its Subsidiaries are fully
and accurately described in Section 3.2 (a) of the Company Disclosure Statement.
(b) All of the issued and outstanding shares of Company
Capital Stock, are owned of record, and to the best knowledge of the Company
beneficially, by the Persons set forth in Section 3.2 (b) of the Company
Disclosure Statement, in the numbers and percentages set forth therein, and, to
the best knowledge of the Company, no other Person has any right, title or
interest, whether legal or equitable, in said shares other than equitable
distribution rights and other similar rights.
(c) All of the issued and outstanding ownership interests in
each Subsidiary of the Company are owned, beneficially and of record, by the
Persons set forth in Section 3.2(c) of the Company Disclosure Statement, in the
numbers and percentages set forth therein, and no other Person has any right,
title or interest, whether legal or equitable, in said ownership interests.
(d) Except as described in Section 3.2 (d) of the Company
Disclosure Statement, there are no outstanding or authorized options, warrants,
purchase rights, preemptive rights or other contracts or commitments that could
require the Company or any of its Subsidiaries to issue, sell, or otherwise
cause to become outstanding any of its capital stock or other ownership
interests. There are no authorized or outstanding stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Company or
any of its Subsidiaries.
(e) All of the issued and outstanding shares of Company
Capital Stock, and all outstanding ownership interests of each of its
Subsidiaries, have been duly authorized and are validly issued and outstanding,
fully paid and nonassessable (with respect to Subsidiaries that are
corporations), have been issued in compliance with applicable securities laws
and other Legal Requirements, and are subject to no Encumbrances other than
under the Company Credit Agreement, or as described in Section 3.2(e) of the
Company Disclosure Statement, or where any such Encumbrance would not have a
Material Adverse Effect on the Company.
(f) This Section 3.2 does not prohibit the transfer of Company
Capital Stock, consistent with applicable law, between the date of this
Agreement and the Closing Date, provided that any Principal Company Shareholder
so transferring shares of Company Capital Stock requires its transferee to a
agree in writing to be bound by this Agreement (including the covenant in
Section 7.5 to vote for the Merger). All such transfers will be reflected in the
Company's notification and in the amendment to Section 3.2(b) of the Company
Disclosure Statement delivered pursuant to Section 2.7(b). If any shares of
Company Capital Stock shall be transferred before the Closing Date, shares of
Pegasus Class A Common Stock issued in exchange for the
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transferred shares shall be treated for purposes of Section 4.1 of the Voting
Agreement as Covered Shares received by the transferor at the Closing and
transferred to the transferee thereafter, and the form of Voting Agreement
executed at the Closing shall be appropriately modified. If, however, the
Principal Company Shareholders shall transfer all their shares of Company
Capital Stock before the Closing Date to a partnership or limited liability
company owned by them, the form of Voting Agreement executed at the Closing
shall include such partnership or limited liability company as an additional
party and the shares of Pegasus Class A Common Stock issued in exchange therefor
shall not be treated pursuant to the immediately preceding sentence as having
been transferred after the Closing Date for purposes of Section 4.1 of the
Voting Agreement.
3.3 Authority and Validity. The Company has all requisite corporate
power to execute and deliver, to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement. The execution and
delivery by the Company of, the performance by the Company of its obligations
under, and the consummation by the Company of the transactions contemplated by,
this Agreement have been duly authorized by all requisite action of the Company
(subject to the approval of the Shareholders as contemplated by Section 7.5).
This Agreement has been duly executed and delivered by the Company and is the
legal, valid, and binding obligation of the Company, enforceable against it in
accordance with its terms. Each Person other than Pegasus and its Affiliates
that is required by this Agreement to execute, or that does execute, this
Agreement or any of the Collateral Documents (collectively, the "DTS Parties")
has all requisite power to execute and deliver, to perform its obligations
under, and to consummate the transactions contemplated by the Collateral
Documents to which it is a party. Upon the execution and delivery by the DTS
Parties of the Collateral Documents, the Collateral Documents will be the legal,
valid and binding obligations of each of them, enforceable against each in
accordance with their respective terms.
3.4 No Breach or Violation. Subject to obtaining the consents,
approvals, authorizations, and orders of and making the registrations or filings
with or giving notices to Governmental Authorities and Persons identified in the
exceptions to Section 3.5, the execution, delivery and performance by the
Sellers of this Agreement and by the DTS Parties of the Collateral Documents,
and the consummation of the transactions contemplated hereby and thereby in
accordance with the terms and conditions hereof and thereof, do not and will not
conflict with, constitute a violation or breach of, constitute a default or give
rise to any right of termination or acceleration of any right or obligation of
the Company or any other DTS Party under, or result in the creation or
imposition of any Encumbrance upon the Company, any of its Subsidiaries, the
Assets, the Business or the Company Capital Stock by reason of the terms of (i)
the certificate of incorporation, by-laws or other charter or organizational
document of the Company, any of the other DTS Parties or any Subsidiary of the
Company, (ii) any material contract, agreement, lease, indenture or other
instrument to which the Company, any of the other DTS Parties or any Subsidiary
of the Company is a party or by or to which the Company, any of the other DTS
Parties, any Subsidiary of the Company or the Assets may be bound or subject,
(iii) any order, judgment, injunction, award or decree of any arbitrator or
Governmental Authority or any statute, law, rule or regulation applicable to the
Company, any of the other DTS Parties or any Subsidiary
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of the Company or (iv) any Permit of the Company or any Subsidiary of the
Company, which in the case of (ii), (iii) or (iv) above would have a Material
Adverse Effect on the Company.
3.5 Consents and Approvals. Except for (i) requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act, the HSR Act, and
the Company Credit Agreement, (ii) the requirement to make the Offer to Purchase
following the Closing, and (iii) requirements described in Section 3.5 of the
Company Disclosure Statement, no consent, approval, authorization or order of,
registration or filing with, or notice to, any Governmental Authority or any
other Person is necessary to be obtained, made or given by the Company or any
DTS Party in connection with the execution, delivery and performance by them of
this Agreement or any Collateral Document or for the consummation by them of the
transactions contemplated hereby or thereby, except to the extent the failure to
obtain any such consent, approval, authorization or order or to make any such
registration or filing would not have a Material Adverse Effect on the Company.
3.6 Title to Assets. Section 3.6 of the Company Disclosure Statement
includes an accurate and complete description of (i) all real property owned by
the Company or any of its Subsidiaries (identifying the owner), (ii) all real
property leased by the Company or any of its Subsidiaries (identifying the
lessee and the lessor and describing the term and the payment terms), and (iii)
each place of business of the Company or any of its Subsidiaries. The Company
and its Subsidiaries have exclusive, good and marketable title to the material
Assets, free and clear of any and all Encumbrances, except (A) Encumbrances
arising under the Company Credit Agreement, (B) the security interest in the
interest escrow established by the Company Indenture and the related escrow
agreement, (C) the matters described in Section 3.6 of the Company Disclosure
Statement, (D) Permitted Liens and (E) Encumbrances (other than in the nature of
liens and security interests) that would not have a Material Adverse Effect on
the Company. Except as provided by this Agreement, and except as described in
Section 3.2 or 3.6 of the Company Disclosure Statement, no Person has any right
to acquire, directly or indirectly, any interest in any of the Company's
Subsidiaries or any material Assets, and there is no agreement to which any
Seller, any Subsidiary of the Company or any of their Affiliates is a party or
is otherwise bound relating to the direct or indirect sale of any of the NRTC
Distribution Agreements or the capital stock, other ownership interests or any
material Assets of the Company or any of its Subsidiaries.
3.7 Intellectual Property.
(a) Neither the Company nor any of its Subsidiaries uses or
holds any copyrights, trade names, trademarks, service marks, service names,
logos, licenses, permits or other similar intellectual property rights and
interests in the operations of the Business that do not incorporate the name
"Digital Television Services," abbreviations or variations thereof or names
permitted for use by the Company and its Subsidiaries under the NRTC
Distribution Agreements.
(b) To the best knowledge of the Company, neither the Company
nor any of its Subsidiaries has in its operation of the Business interfered
with, infringed upon, misappropriated or otherwise come into conflict with, and
the operation of the Business as currently conducted does not violate or
infringe upon, any Intellectual Property rights of third
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parties, and neither the Company nor any of its Subsidiaries has received any
charge, complaint, claim, demand or notice alleging any such interference,
infringement, misappropriation or violation (including any claim that the
Company or any of its Subsidiaries or any of their predecessors in interest must
license or refrain from using any Intellectual Property rights of any third
party). To the best knowledge of the Sellers, no third party has interfered
with, infringed upon, appropriated or otherwise come into conflict with any
Intellectual Property rights of the Company or any of its Subsidiaries.
3.8 Compliance with Legal Requirements. The Company and its
Subsidiaries have operated the Business in material compliance with all material
Legal Requirements and requirements of the NRTC (including NRTC's by-laws,
policies, procedures and guidelines) applicable to the Company and its
Subsidiaries. No action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand or notice has been filed, commenced or, to the best of
the Sellers' knowledge, threatened against the Company, any of its Subsidiaries
or any of the Principal Company Shareholders alleging any failure to so comply,
and, to the best knowledge of the Sellers, there is no Basis for any claim that
such a failure to comply exists.
3.9 Financial and Other Information.
(a) The historical financial statements ("Company Financial
Statements") contained in the Company Registration Statement (including the
notes thereto) have been prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby and present fairly the
financial condition of the Persons reported on and their results of operations
as of the dates and for the periods indicated, subject in the case of the
unaudited financial statements only to normal year-end adjustments (none of
which will be material in amount) and the omission of footnotes.
(b) The Company Registration Statement became effective on
December 24, 1997. The Company Registration Statement did not, as of its
effective date, and will not, as of the date the Exchange Offer is consummated,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(c) No written information concerning the Company or its
Shareholders furnished to Pegasus by the Company specifically for inclusion in
the Pegasus Merger Registration Statement will at the time provided and,
assuming that the Company is given reasonable opportunity to review and comment
on the filings with the Commission, as of the filing date thereof, the filing
date of any amendment thereof, or the effective date thereof, or as of the
Closing Date, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading.
(d) The Company Financial Model has been prepared in good
faith and on the basis of assumptions believed to be reasonable by the Company's
management and the Principal Company Shareholders.
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3.10 Company Credit Facility. Except as described in Section 3.10 of
the Company Disclosure Statement, the credit facility established under the
Company Credit Agreement is adequate, to satisfy all future cash requirements of
the Company and its Subsidiaries to the extent shown in the Company Financial
Model, including but not limited to capital expenditures, working capital and
debt service (excluding the Offer to Purchase).
3.11 Subsequent Events. Except as set forth in Section 3.11 of the
Company Disclosure Statement, in connection with the Corporate Conversion, or to
the extent consented to in writing by Pegasus, since September 30, 1997: (i)
neither the Company nor any of its Subsidiaries has sold, leased, transferred or
assigned any of the Assets except in the Ordinary Course; (ii) no third party
has accelerated, terminated, modified or canceled any material agreement,
contract, lease or license (or series of related agreements, contracts, leases
and licenses) relating to the Company, any of its Subsidiaries or the Business;
(iii) neither the Company nor any of its Subsidiaries has imposed or permitted
the imposition of any Encumbrance upon any of the material Assets; (iv) neither
the Company nor any of its Subsidiaries has made any capital investment in, any
loan to, or any Acquisition of the securities or assets of, any other Person (or
series of related capital investments, loans or Acquisitions) other than
Subsidiaries of the Company; (v) neither the Company nor any of its Subsidiaries
has issued any note, bond or other debt security or created, incurred, assumed
or guaranteed any indebtedness for borrowed money or capitalized lease
obligations except under the Company Credit Agreement or as contemplated by the
Exchange Offer; (vi) neither the Company nor any of its Subsidiaries has delayed
or postponed the payment of accounts payable and other Liabilities outside the
Ordinary Course; (vii) neither the Company nor any of its Subsidiaries has
canceled, compromised, waived or released any right or claim (or series of
related rights and claims) involving more than $150,000 or outside the Ordinary
Course; (viii) neither the Company nor any of its Subsidiaries has granted any
license or sublicense of any rights under or with respect to any Intellectual
Property used or useful in the Business, other than in connection with the
Acquisition of certain portions of the DIRECTV Distribution Business of the
Company; (ix) there has not been any other material occurrence, event, incident,
action, failure to act or transaction outside the Ordinary Course involving the
Company or any of its Subsidiaries except matters generally known to, and that
generally affect, other NRTC members and affiliates; and (x) neither the Company
nor any of its Subsidiaries has committed to any of the foregoing. Since
September 30, 1997, no event has occurred which is likely, individually or in
the aggregate, to have a Material Adverse Effect on the Company.
3.12 Undisclosed Liabilities. Neither the Company nor any of its
Subsidiaries has any Liability and there is no Basis for any Liability, except
for (i) Liabilities reflected in the Company Financial Statements, (ii) current
Liabilities incurred after September 30, 1997, in the Ordinary Course, (iii)
Liabilities incurred after September 30, 1997, under the Company Credit
Agreement to finance expenditures not prohibited by this Agreement, (iv)
Liabilities incurred after September 30, 1997, in connection with Acquisitions
permitted by Section 7.3(c)(i), (v) Liabilities disclosed in Section 3.12 of the
Company Disclosure Statement, and (vi) Liabilities in an aggregate amount not
exceeding $500,000.
3.13 Legal Proceedings. Other than proceedings affecting the direct
broadcast satellite industry generally, and except as set forth in Section 3.13
of the Company Disclosure Statement,
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(i) there are no outstanding judgments or orders against or otherwise affecting
or related to the Company, any of its Subsidiaries, the Business or the Assets;
(ii) there is no action, suit, complaint, proceeding or investigation, judicial,
administrative or otherwise, that is pending or, to the best of any Seller's
knowledge, threatened that, if adversely determined, might result in Adverse
Consequences in an amount exceeding $500,000, or that challenges the validity or
propriety of any of the transactions contemplated by this Agreement or the
Collateral Documents; and (iii) there is no Basis upon which any such action,
suit, proceeding or investigation could be brought or initiated.
3.14 Taxes. The Company has, and each of its Subsidiaries has, duly and
timely filed in proper form all Tax Returns for all Taxes required to be filed
with the appropriate Governmental Authority, except where the Adverse
Consequences of all such failures to file do not exceed $500,000 in the
aggregate. All Taxes due and payable by the Company and its Subsidiaries (or
claimed to be due and payable) have been paid (regardless whether Tax Returns
relating to such Taxes have been duly and timely filed or, if filed, regardless
whether such Tax Returns are deficient), except such amounts as (i) are not in
the aggregate material or (ii) are being contested diligently and in good faith
and for which the Company has adequately reserved in the Company Financial
Statements. The Company has furnished to Pegasus true and correct copies of all
federal and state income Tax Returns ever filed by it or any of its
Subsidiaries, all of which are accurate and complete in all material respects.
Except as set forth in Section 3.14 of the Company Disclosure Statement, there
are no pending tax audits, claims or proceedings relating to the Company any of
its Subsidiaries, the Assets or the Business and income therefrom. Neither the
Company nor any of its Subsidiaries has agreed to any waiver or extension of any
statute of limitations relating to any Tax.
3.15 Employee Benefits; Employees. All Employee Benefit Plans
maintained or contributed to by the Company are set forth in Section 3.15 of the
Company Disclosure Statement. Except for matters that individually and in the
aggregate would not have Adverse Consequences in excess of $500,000:
(a) Except as set forth in Section 3.15 of the Company
Disclosure Statement, all such Employee Pension Benefit Plans are, and have been
at all times since their establishment, qualified for federal income tax
purposes under Code Section 401(a) and the related trusts are, and have been at
all times since their establishment, exempt from federal income tax under Code
Section 501(a). All such Employee Benefit Plans are in compliance with all
applicable provisions of ERISA, including, but not limited to, the applicable
reporting and disclosure requirements, as they relate to such plans, and the
Company is not subject to any liabilities based on past non-compliance, if any.
Pegasus and Merger Sub are not required under ERISA, the Code, any collective
bargaining agreement or any other agreement to maintain or to continue to
contribute to any Employee Benefit Plan maintained or contributed to by the
Company.
(b) The Company has made all required contributions under each
Employee Benefit Plan listed in Section 3.15 of the Company Disclosure Statement
for all periods through and including the fiscal year ended December 31, 1996,
and has made all required contributions
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for subsequent periods or has provided adequate accruals therefor in the Company
Financial Statements.
(c) There is not now, and has not been, any violation of the
Code or ERISA with respect to the filing of applicable reports, documents, and
notices regarding the Employee Benefit Plans maintained or contributed to by the
Company with the Secretary of Labor and the Secretary of the Treasury or the
furnishing of such documents to the participants or beneficiaries of the
Employee Benefit Plans.
(d) No fiduciary or other party in interest with respect to
any of the Employee Benefit Plans maintained or contributed to by the Company
has caused any of such plans to engage in a "prohibited transaction," as defined
in ERISA Section 406.
(e) The Company has never been obligated to contribute to any
Multiemployer Plan.
(f) There has been no violation of the "continuation coverage
requirements" of "group health plans" as set forth in Code Section 4980B and
Part 6 of Subtitle B of Title I of ERISA with respect to any Employee Benefit
Plan maintained by the Company to which such continuation coverage requirements
apply.
(g) The Company does not maintain retiree life and retiree
health insurance plans which are Employee Welfare Benefit Plans providing for
continuing benefits or coverage for any employee or any beneficiary of any
employee after such employee's termination of employment (except to the extent
such continued coverage is required by Code Section 4980B and Part 6 of Subtitle
B of Title I of ERISA).
(h) Prior to the Closing, the Company will not establish or
create any new Employee Benefit Plan, except with the consent of Pegasus, nor
will the Company amend or modify as to any benefit or in any other way any
existing Employee Benefit Plan, except with the consent of Pegasus.
(i) The Company does not maintain and is not obligated to
contribute to any Employee Pension Benefit Plan that is a defined benefit plan,
and has not maintained and has not been obligated to contribute to such a plan
within the last six years.
(j) "Company," as used in subsections (a) through (i) of this
Section 3.15 shall include any other entity required to be aggregated with the
Company under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and the
regulations thereunder.
(k) There are no collective bargaining agreements applicable
to any Persons employed by the Company or any of its Subsidiaries, and the
Company and its Subsidiaries have no duty to bargain with any labor organization
with respect to any such Person. There are not pending any unfair labor practice
charges against the Company or any of its Subsidiaries, nor is there any demand
for recognition, or any other request or demand from a labor organization for
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representative status with respect to any Person employed by the Company or any
of its Subsidiaries.
(l) The Company and its Subsidiaries are in substantial
compliance with all applicable Legal Requirements respecting employment
conditions and practices, have withheld all amounts required by any applicable
Legal Requirements or Contracts to be withheld from the wages or salaries of
their employees, and are not liable for any arrears of wages or any Taxes or
penalties for failure to comply with any of the foregoing.
(m) The Company and its Subsidiaries have not engaged in any
unfair labor practice within the meaning of the National Labor Relations Act and
have not violated any Legal Requirement prohibiting discrimination on the basis
of race, color, national origin, sex, religion, age, marital status, or handicap
in their employment conditions or practices, except where such violations would
not have a Material Adverse Effect on the Company. There is not pending or, to
the best of the Company's knowledge, threatened any unfair labor practice charge
or discrimination complaint relating to race, color, national origin, sex,
religion, age, marital status, or handicap against the Company or any of its
Subsidiaries before any Governmental Authority nor, to the best of the Company's
knowledge, does any Basis therefor exist.
(n) There is no existing or, to the best of the Company's
knowledge, threatened, labor strike, dispute, grievance or other labor
controversy affecting the Company or any of its Subsidiaries. There is no
pending or, to the best of the Company's knowledge, threatened representation
question respecting the employees of the Company or any of its Subsidiaries.
There is no pending or, to the best of the Company's knowledge, threatened
arbitration proceeding under any Contract. To the best of the Company's
knowledge, there exists no Basis for any of the above.
(o) Except as disclosed in Section 3.15 of the Company
Disclosure Statement, neither the Company nor any of its Subsidiaries is a party
to any employment agreement or arrangement, written or oral, relating to any
employee, consultant or independent contractor that cannot be terminated at will
by the Company or such Subsidiary without further liability.
(p) Section 3.15 of the Company Disclosure Statement sets
forth a true and complete list of the names, titles and rates of compensation of
all of the Company's employees.
3.16 Contracts.
(a) Section 3.16 of the Company Disclosure Statement contains
a true, correct and complete list of (or a specific cross-reference to one or
more other sections of the Company Disclosure Statement where there is
described) the following contracts, agreements and commitments, whether written
or oral, to which the Company or any its Subsidiaries is a party ("Contracts"):
(i) each NRTC Distribution Agreement (together with
the Service Area covered by each) and any other agreement with NRTC or DirecTV,
Inc. or any of their Affiliates;
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(ii) each agreement to which the Company or any of
its Subsidiaries is a party relating to the Acquisition of a DIRECTV
Distribution Business;
(iii) any agreement (or group of related agreements)
relating to the financing, lease or rental of Personal Property to the Company
or any of its Subsidiaries by any Person requiring payments in excess of $75,000
per year;
(iv) each lease of real property to which the Company
or any of its Subsidiaries is a party;
(v) each form of agreement used by the Company or any
of its Subsidiaries to provide for the maintenance or installation of DSS
Systems since the date of the Company's Acquisition of the DIRECTV Distribution
Business in which such agreement or contract is used;
(vi) any agreement (or group of related agreements)
for the purchase or sale of supplies, products or other personal property, or
for the furnishing or receipt of services (including any forms of agreement or
purchase order relating to the sale of DSS Systems or the sale of DIRECTV
services) requiring payments in excess of $75,000 per year;
(vii) any agreement concerning a partnership or joint
venture;
(viii) any agreement with the Shareholders (or any of
them), including agreements related to registration rights;
(ix) any agreement (or group of related agreements)
under which the Company or any of its Subsidiaries has created, incurred,
assumed or guaranteed any indebtedness for borrowed money, or any capitalized
lease obligation, or under which the Company or any of its Subsidiaries has
imposed an Encumbrance, the liability on which, determined in accordance with
GAAP, exceeds $75,000;
(x) any agreement concerning confidentiality or
noncompetition;
(xi) any agreement involving any officer, director,
shareholder or member of the Company or any of its Affiliates;
(xii) any agreement for the employment or hire of any
individual on a full-time, part-time, consulting or other basis requiring
payments in excess of $50,000 per year;
(xiii) each form of agreement used by the Company or
any of its Subsidiaries relating to the services of sales representatives,
agents and other independent contractors (including agreements relating to the
maintenance or installation of DSS Systems) since the date of the Company's
Acquisition of the DIRECTV Distribution Business with respect to which such
agreement or contract is used;
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(xiv) any agreement under which the Company or any of
its Subsidiaries has advanced or lent any amount to any employee or any of the
current or former directors, officers or shareholders of the Company or any of
its Affiliates (other than advances against properly documented and properly
reimbursable business expenses in the Ordinary Course);
(xv) any agreement under which the consequences of a
default or termination could have a Material Adverse Effect on the Company; and
(xvi) any other agreement (or group of related
agreements) entered into other than in the Ordinary Course the performance of
which involves consideration in excess of $150,000.
The Company has delivered to Pegasus a correct and complete copy of
each written agreement listed in Section 3.16 of the Company Disclosure
Statement and a written summary setting forth the terms and conditions of each
oral agreement listed therein. With respect to each such agreement, except as
described in Section 3.16 of the Company Disclosure Statement: (A) the agreement
is legal, valid, binding, enforceable and in full force and effect; (B) subject
to obtaining any consent referred to in Section 3.5 or disclosed in Section 3.5
of the Company Disclosure Statement, the agreement will continue to be legal,
valid, binding, enforceable and in full force and effect on identical terms
following the consummation of the transactions contemplated hereby; (C) neither
the Company nor any of its Subsidiaries, nor, to the best knowledge of the
Company, any other party thereto, is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification or acceleration, under the
agreement; (D) neither the Company nor any of its Subsidiaries, nor, to the best
knowledge of the Company, any other party thereto, has repudiated any provision
of the agreement; and (E) to the best knowledge of the Company, there is no
Basis for any Person to claim that any of clauses (A) through (D) is untrue.
(b) Each Consumer Contract conforms, and the Company's and its
Subsidiaries' conduct in the origination, administration and enforcement of each
Consumer Contract has conformed, to all applicable Legal Requirements, including
those relating to usury, consumer credit, consumer credit disclosure and terms,
consumer leasing and rental, debt collection and enforcement practices, equal
credit opportunity and credit reporting practices, except where failures to so
conform would not, in the aggregate have a Material Adverse Effect on the
Company.
3.17 Books and Records. Section 3.17 of the Company Disclosure
Statement identifies and describes all of the Books and Records. The Books and
Records accurately and fairly represent the Business and its results of
operations in all material respects. All Accounts Receivable and Inventory of
the Business are reflected properly on such Books and Records in all material
respects.
3.18 Business Information. Section 3.18 of the Company Disclosure
Statement sets forth a materially true and accurate description of the following
information as of the date set forth therein: (i) the approximate number of
Committed Member Residences in each Service Area; (ii)
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the approximate number of Committed Member Residences in each Service Area that
is cabled; (iii) the approximate number of Committed Member Residences in each
Service Area that is uncabled; and (iv) the rates charged to subscribers in each
Service Area.
3.19 Insurance. Section 3.19 of the Company Disclosure Statement sets
forth the following information with respect to each insurance policy relating
to the Business (including policies providing property, casualty, liability,
directors' and officers' liability and workers' compensation coverage and bond
and surety arrangements) to which the Company or any of its Subsidiaries has
been a party, a named insured, or otherwise the beneficiary of coverage at any
time:
(i) the name, address, and telephone number of the
agent;
(ii) the name of the insurer, the name of the
policyholder and the name of each covered insured;
(iii) the policy number and the period of coverage;
(iv) the scope (including an indication of whether
the coverage was on a claims made, occurrence or other basis) and amount
(including a description of how deductibles and ceilings are calculated and
operate) of coverage; and
(v) a description of any retroactive premium
adjustments or other loss-sharing arrangements.
With respect to each such insurance policy: (A) the policy is
legal, valid, binding, enforceable, and in full force and effect; (B) neither
the Company, nor any predecessor in interest nor any other party to the policy
is in breach or default (including with respect to the payment of premiums or
the giving of notices), and no event has occurred which, with notice or the
lapse of time, would constitute such a breach or default, or permit termination,
modification or acceleration, under the policy; and (C) no party to the policy
has repudiated any provision thereof. The Business and the Assets have been
covered since the beginning of Business operations in scope and amount customary
and reasonable for such a business and in the case of workers' compensation
coverage, in scope and amount required by applicable Legal Requirements. Section
3.19 of the Company Disclosure Statement describes any self-insurance
arrangements affecting the Assets or the Business. Section 3.19 of the Company
Disclosure Statement also sets forth each insurance claim (other than medical
claims) in excess of $100,000 made or loss incurred relating to the Business
pursuant to property, casualty, liability, workers' compensation and bond and
surety policies and, except as indicated therein, no such claim is outstanding.
3.20 Disclosure. No representation or warranty of any Seller in this
Agreement or of any DTS Party in the Collateral Documents and no statement in
any certificate, report, instrument, list or other document furnished or to be
furnished by the Company pursuant to this Agreement or by any DTS Party in the
Collateral Documents contained, contains or will contain on the date such
agreement, certificate, report, instrument, list or other document was or is
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delivered, any untrue statement of a material fact, or omitted, omits or will
omit on such date to state any material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading; nor will any such representation or warranty or statement contain on
the Closing Date any untrue statement of a material fact or omit on the Closing
Date to state any material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not misleading. There
is no fact known to any Seller and not disclosed in this Agreement (other than
facts generally known to, and that generally affect, NRTC members and affiliates
providing DIRECTV services) that could be reasonably likely to have a Material
Adverse Effect on the Company.
3.21 Brokers or Finders. No broker or finder has acted directly or
indirectly for the Company, any Seller or any of their Affiliates in connection
with the transactions contemplated by this Agreement. Neither the Company, any
Seller nor any of their Affiliates has incurred any obligation to pay any
brokerage or finder's fee or other commission in connection with the transaction
contemplated by this Agreement.
3.22 Certain Payments. Neither the Company, any of the Sellers, any of
their Affiliates nor the Representatives of any of them has directly or
indirectly, on behalf of or for the purpose of assisting the Business, made any
contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other
similar payments to any Person, private or public, regardless of form, whether
in money, property or services, to obtain favorable treatment in securing
business, to pay for favorable treatment for business secured, to obtain special
concessions or for special concessions already obtained, in violation of any
Legal Requirement, nor has any such Person established or maintained any fund or
asset that has not been recorded in the Books and Records.
3.23 Subscribers.
(a) As of December 7, 1997, the Company had the number of
Subscribers shown in Section 3.23 of the Company Disclosure Statement, inclusive
of persons included in the most recent Subscribers Without Core Packages Report.
(b) Neither the Company, any of its Affiliates, nor any of
their Representatives has solicited, nor has the Company, any of its Affiliates,
or any of their Representatives employed any scheme or device for the purpose of
encouraging, Persons residing outside the Service Areas or Persons who would not
be deemed Committed Member Residences to become subscribers of the DIRECTV
service offered by the Business. Except as disclosed in the most recent
Subscribers Without Core Packages Reports for all the Service Areas, which have
been provided by the Company to Pegasus, the Business does not provide DIRECTV
service to any Person who does not pay for a core DIRECTV programming package,
who to the best knowledge of the Company resides outside the Service Areas or
who is not a Committed Member Residence for a reason other than residing outside
the Service Areas.
3.24 Favorable Business Relationships. To the best knowledge of the
Sellers, except as described in Section 3.24 of the Company Disclosure
Statement, there are no favorable business
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relationships relating to the Business with lessors, licensors, subscribers,
suppliers or other business associates of the Company or any of its Subsidiaries
which will terminate after Closing.
3.25 Securities Matters. Each Principal Company Shareholder is an
"accredited investor," as that term is defined in Rule 501 under the Securities
Act, and not more than 35 Persons to whom Pegasus Class A Common Stock will be
issued at the Closing are not "accredited investors."
3.26 Billing and Authorization System. The Company has not altered,
modified or manipulated the NRTC Reporting System and/or the Billing and
Authorization System (together, the "Information Systems") in any way out of the
Ordinary Course for NRTC members and affiliates generally, including, without
limitation, alteration, modification or manipulation of the collection or
processing of data by the Information Systems, the standard parameters set by
the Information Systems with respect to subscriber authorization, billing and
cut-off and the standard reports generated by the Information Systems.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE PRINCIPAL COMPANY SHAREHOLDERS
Each of the Principal Company Shareholders, severally and not jointly,
represents and warrants to the Pegasus Parties that with respect to itself the
statements contained in Article IV are correct and complete as of the date of
this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout Article IV).
4.1 Authority and Validity. Each Principal Company Shareholder has all
requisite power to execute and deliver, to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement and the Collateral
Documents to which it is or is to be a party. The execution and delivery by each
Principal Company Shareholder of, the performance by each Principal Company
Shareholder of its obligations under, and the consummation by each Principal
Company Shareholder of the transactions contemplated by, this Agreement and the
Collateral Documents to which it is or is to be a party have been duly
authorized by all requisite action of such Principal Company Shareholder. This
Agreement has been duly executed and delivered by each Principal Company
Shareholder and is the legal, valid, and binding obligation of such Principal
Company Shareholder, enforceable against it in accordance with its terms. Upon
the execution and delivery by such Principal Company Shareholder of the
Collateral Documents to which it is or is to be a party, such Collateral
Documents will be the legal, valid and binding obligations of such Principal
Company Shareholder, enforceable against it in accordance with its terms.
4.2 Ownership. Each Principal Company Shareholder owns, beneficially
and of record, the number of shares of Company Capital Stock shown as owned by
it on Schedule 3.2(b) of the Company Disclosure Statement. Except as described
in Section 3.2(d) or 4.2 of the Company
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Disclosure Statement, no Person has any right to acquire, and there are no
Encumbrances on, the shares of Company Capital Stock owned by such Principal
Company Shareholder, other than transfer restrictions under applicable
securities laws.
4.3 Consents and Approvals. Except for (i) requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act, the HSR Act, and
the Company Credit Agreement, (ii) the requirement to make the Offer to Purchase
following the Closing, and (iii) requirements described in Section 3.5 of the
Company Disclosure Statement, no consent, approval, authorization or order of,
registration or filing with, or notice to, any Governmental Authority or any
other Person is necessary to be obtained, made or given by any Principal Company
Shareholder in connection with the execution, delivery and performance by them
of this Agreement or any Collateral Document or for the consummation by them of
the transactions contemplated hereby or thereby.
4.4 Certain Information. No written information concerning any
Principal Company Shareholder or its interest in the Company furnished to
Pegasus by any Principal Company Shareholder specifically for inclusion in the
Pegasus Merger Registration Statement will at the time provided and, assuming
that such Principal Company Shareholder is given reasonable opportunity to
review and comment on the filings with the Commission, as of the filing date
thereof, the filing date of any amendment thereof, or the effective date
thereof, or as of the Closing Date, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PEGASUS
Pegasus represents and warrants to the Company and the Principal
Company Shareholders that the statements contained in this Article V are correct
and complete as of the date of this Agreement and, except as provided in Section
10.1, will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout this Article V, except in the case of representations and warranties
stated to be made as of the date of this Agreement or as of another date).
5.1 Organization and Qualification. Each of Pegasus and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and each Subsidiary of Pegasus is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or formation. Pegasus has, and each Subsidiary of Pegasus
(including Merger Sub) has all requisite power and authority to own, lease and
use its assets as they are currently owned, leased and used and to conduct its
business as it is currently conducted. Pegasus is, and each of its Subsidiaries
(including Merger Sub) is, duly qualified or licensed to do business in and is
in good standing in each jurisdiction in which the character of the properties
owned, leased or used by it or the nature of the activities conducted by it
makes such qualification necessary, except any such jurisdiction where the
failure to be so qualified or licensed and in good standing would not have a
Material Adverse Effect on Pegasus.
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5.2 Capitalization. Pegasus's authorized capital stock consists of (i)
30,000,000 shares of Class A Common Stock, par value $.01 per share, of which
5,739,842 shares are outstanding, (ii) 15,000,000 shares of Class B Common
Stock, par value $.01 per share, of which 4,581,900 shares are outstanding, and
(iii) 5,000,000 shares of preferred stock, par value $.01 per share,
112,214.9875 of which have been designated as 12.75% Series A Cumulative
Exchangeable Preferred Stock, all of which is outstanding. Except as described
in Section 5.2 of the Pegasus Disclosure Statement, there are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, preemptive rights or other contracts or commitments
that could require Pegasus to issue, sell, or otherwise cause to become
outstanding any of its capital stock. There are no outstanding or authorized
stock appreciation, phantom stock, profit participation, or similar rights with
respect to Pegasus. The issuance by Pegasus of additional capital stock or other
securities between the date of this Agreement and the Closing Date shall not be
deemed to cause the representations and warranties in this Section to be untrue
or breached as of the Closing Date. The shares of Pegasus Class A Common Stock
included in the Merger Consideration, when issued in accordance with this
Agreement, will have been duly authorized, validly issued and outstanding and
will be fully paid and nonassessable.
5.3 Authority and Validity. Each Pegasus Party has all requisite power
to execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement and the Collateral Documents. The
execution and delivery by each Pegasus Party of, the performance by each Pegasus
Party of its respective obligations under, and the consummation by the Pegasus
Parties of the transactions contemplated by, this Agreement and the Collateral
Documents have been duly authorized by all requisite action of each Pegasus
Party (subject to the approval of Pegasus's shareholders as contemplated by
Section 8.5). This Agreement has been duly executed and delivered by each of the
Pegasus Parties and is the legal, valid and binding obligation of each Pegasus
Party, enforceable against each of them in accordance with its terms. Upon the
execution and delivery by each of the Pegasus Parties and Marshall W. Pagon of
the Collateral Documents to which each of them is a party, the Collateral
Documents will be the legal, valid and binding obligations of each such Person,
as the case may be, enforceable against each of them in accordance with their
respective terms.
5.4 No Breach or Violation. Subject to obtaining the consents,
approvals, authorizations, and orders of and making the registrations or filings
with or giving notices to Governmental Authorities and Persons identified in the
exceptions to Section 5.5, the execution, delivery and performance by the
Pegasus Parties of this Agreement and the Collateral Documents to which each is
a party and the consummation of the transactions contemplated hereby and thereby
in accordance with the terms and conditions hereof and thereof, do not and will
not conflict with, constitute a violation or breach of, constitute a default or
give rise to any right of termination or acceleration of any right or obligation
of any Pegasus Party under, or result in the creation or imposition of any
Encumbrance upon the property of Pegasus or Merger Sub by reason of the terms of
(i) the certificate of incorporation, by-laws or other charter or organizational
document of any Pegasus Party, (ii) any material contract, agreement, lease,
indenture or other instrument to which any Pegasus Party is a party or by or to
which any Pegasus Party or its property may be bound or subject, (iii) any
order, judgment, injunction, award or decree of any arbitrator or Governmental
Authority or any statute, law, rule or regulation
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applicable to any Pegasus Party or (iv) any Permit of Pegasus or Merger Sub,
which in the case of (ii), (iii) or (iv) above would have a Material Adverse
Effect on Pegasus.
5.5 Consents and Approvals. Except for requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act and the HSR Act,
no consent, approval, authorization or order of, registration or filing with, or
notice to, any Governmental Authority or any other Person is necessary to be
obtained, made or given by any Pegasus Party in connection with the execution,
delivery and performance by them of this Agreement or any Collateral Documents
or for the consummation by them of the transactions contemplated hereby or
thereby, except to the extent the failure to obtain such consent, approval,
authorization or order or to make such registration or filings or to give such
notice would not have a Material Adverse Effect on Pegasus.
5.6 Title to Assets. Pegasus and its Subsidiaries have exclusive, good
and marketable title to their material property and assets, free and clear of
any and all Encumbrances, except (i) Encumbrances arising under the Pegasus
Credit Agreement, (ii) Permitted Liens, (iii) the matters described in Section
5.6 of the Pegasus Disclosure Statement and (iv) Encumbrances (other than in the
nature of liens and security interests) that would not have a Material Adverse
Effect on Pegasus. Except as provided by this Agreement, and except as described
in Section 5.2 or 5.6 of the Pegasus Disclosure Statement, no Person has any
right to acquire, directly or indirectly, any interest in any of Pegasus's
Subsidiaries or any substantial portion of their respective properties or
assets, and there is no agreement to which Pegasus or any of its Subsidiaries is
a party relating to the direct or indirect sale of any substantial portion of
such properties or assets or the capital stock or other ownership interests of
Pegasus or any of its Subsidiaries.
5.7 Intellectual Property. To the best knowledge of Pegasus, neither
Pegasus nor any of its Subsidiaries has in the operation of their respective
businesses interfered with, infringed upon, misappropriated or otherwise come
into conflict with, and the operation of such businesses as currently conducted
does not violate or infringe upon, any Intellectual Property rights of third
parties, and neither Pegasus nor any of its Subsidiaries has received any
charge, complaint, claim, demand or notice alleging any such interference,
infringement, misappropriation or violation (including any claim that Pegasus or
any of its Subsidiaries or any of their predecessors in interest must license or
refrain from using any Intellectual Property rights of any third party). To the
best knowledge of the Pegasus Parties, no third party has interfered with,
infringed upon, appropriated or otherwise come into conflict with any
Intellectual Property rights of Pegasus or any of its Subsidiaries.
5.8 Compliance with Legal Requirements. Pegasus and its Subsidiaries
have operated their respective businesses in material compliance with all
material Legal Requirements and requirements of the NRTC (including NRTC's
by-laws, policies, procedures and guidelines) applicable to Pegasus and its
Subsidiaries. No action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand or notice has been filed, commenced or, to the best
knowledge of the Pegasus Parties, threatened against Pegasus, any of its
Subsidiaries or any of the Principal Pegasus Shareholders alleging any failure
to so comply and, to the best knowledge of the Pegasus Parties, there is no
Basis for any claim that such a failure to comply exists.
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5.9 Legal Proceedings. Other than proceedings affecting the broadcast
television, cable television or direct broadcast satellite industry generally,
and except as set forth in Section 5.9 of the Pegasus Disclosure Statement, (i)
there are no outstanding judgments or orders against or otherwise affecting or
related to Pegasus, any of its Subsidiaries, or their business or assets; (ii)
there is no action, suit, complaint, proceeding or investigation, judicial,
administrative or otherwise, that is pending or, to the best knowledge of any
Pegasus Party, threatened that, if adversely determined, could have a Material
Adverse Effect on Pegasus; and (iii) there is no Basis upon which any such
action, suit, proceeding or investigation could be brought or initiated.
5.10 Subsequent Events. Except as set forth in Section 5.10 of the
Pegasus Disclosure Statement or to the extent consented to in writing by the
Company, between September 30, 1997, and the date of this Agreement: (i) neither
Pegasus nor any of its Subsidiaries has sold, leased, transferred or assigned
any substantial portion of its properties or assets except in the Ordinary
Course; (ii) no third party has accelerated, terminated, modified or canceled
any material agreement, contract, lease or license (or series of related
agreements, contracts, leases and licenses) relating to Pegasus any of its
Subsidiaries; (iii) neither Pegasus nor any of its Subsidiaries has imposed or
permitted the imposition of any Encumbrance upon any substantial portion of its
properties or assets except under the Pegasus Credit Agreement; (iv) neither
Pegasus nor any of its Subsidiaries has made any capital investment in, any loan
to, or any Acquisition of the securities or assets of, any other Person (or
series of related capital investments, loans or Acquisitions) in excess of
$500,000, other than in Subsidiaries of the Company and other than Acquisitions
of DIRECTV Distribution Businesses; (v) neither Pegasus nor any of its
Subsidiaries has issued any note, bond or other debt security or created,
incurred, assumed or guaranteed any indebtedness for borrowed money or
capitalized lease obligations except under the Pegasus Credit Agreement; (vi)
neither Pegasus nor any of its Subsidiaries has delayed or postponed the payment
of accounts payable and other Liabilities outside the Ordinary Course; (vii)
neither Pegasus nor any of its Subsidiaries has canceled, compromised, waived or
released any right or claim (or series of related rights and claims) involving
more than $500,000 or outside the Ordinary Course; (viii) neither Pegasus nor
any of its Subsidiaries has granted any license or sublicense of any rights
under or with respect to any Intellectual Property used or useful in the DIRECTV
Distribution Business of Pegasus, other than in the Ordinary Course or in
connection with the Acquisition of certain parts of such business; (ix) there
has not been any other material occurrence, event, incident, action, failure to
act or transaction outside the Ordinary Course involving Pegasus or any of its
Subsidiaries except matters generally known to, and that generally affect, other
NRTC members and affiliates or that generally affect the broadcast television or
cable television industries; and (x) neither Pegasus nor any of its Subsidiaries
has committed to any of the foregoing. Since September 30, 1997, no event has
occurred which is likely, individually or in the aggregate, to have a Material
Adverse Effect on Pegasus.
5.11 Financial and Other Information.
(a) The historical financial statements ("Pegasus Financial
Statements") contained (or incorporated by reference) in the Pegasus Exchange
Offer Registration Statement (including the notes thereto) have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby, and present fairly the financial condition of the
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Persons reported on and their results of operations as of the dates and for the
periods indicated, subject in the case of the unaudited financial statements
only to normal year-end adjustments (none of which will be material in amount)
and the omission of footnotes.
(b) Except as provided in subsection (d), the Pegasus Exchange
Offer Registration Statement did not, as of its filing date, and does not as of
the date of this Agreement, contain (directly or by incorporation by reference)
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein (or incorporated therein reference) not
misleading.
(c) Except as provided in subsection (d), the Pegasus Merger
Registration Statement will not, as of its effective date, at the date it is
first mailed to the shareholders of Pegasus, at the time of the meeting of
shareholders of Pegasus contemplated by Section 8.5, or as of the Closing Date,
contain (directly or by incorporation by reference) any untrue statement of a
material fact or omit to state (directly or by incorporation by reference) a
material fact required to or stated therein (or incorporated therein by
reference) or necessary to make the statements therein (or incorporated therein
by reference) not misleading.
(d) The representation and warranties in subsections (b) and
(c) do not extend to any information concerning the Company, any of its
Subsidiaries or any of the Principal Company Shareholders furnished by the
Company or any of the Principal Company Shareholders and contained or
incorporated by reference in the Pegasus Exchange Offer Registration Statement
or the Pegasus Merger Registration Statement.
5.12 Undisclosed Liabilities. Neither Pegasus nor any of its
Subsidiaries has any Liability and there is no Basis for any Liability, except
for (i) Liabilities reflected in the Pegasus Financial Statements, (ii) current
Liabilities incurred after September 30, 1997, in the Ordinary Course, (iii)
Liabilities incurred after September 30, 1997, under the Pegasus Credit
Agreement, (iv) Liabilities incurred after September 30, 1997, in connection
with Acquisitions that do not give rise to a right of termination under Section
12.1(d) (or Acquisitions that are approved in writing by the Company), (v)
Liabilities disclosed in Section 5.12 of the Pegasus Disclosure Statement, and
(vi) Liabilities in an aggregate amount of up to $1,000,000.
5.13 Taxes. Pegasus has, and each of its Subsidiaries has, duly and
timely filed in proper form all Tax Returns for all Taxes required to be filed
with the appropriate Governmental Authority, except where the Adverse
Consequences of all such failures to file do not exceed $500,000 in the
aggregate. All Taxes due and payable by Pegasus and its Subsidiaries (or claimed
to be due and payable) have been paid (regardless whether Tax Returns relating
to such Taxes have been duly and timely filed or, if filed, regardless whether
such Tax Returns are deficient), except such amounts as (i) are not in the
aggregate material or (ii) are being contested diligently and in good faith and
for which Pegasus has adequately reserved in the Pegasus Financial Statements.
All copies of federal and state income Tax Returns furnished or to be furnished
by Pegasus to the Company are accurate and complete in all material respects.
There are no pending tax audits, claims or proceedings relating to Pegasus, any
of its Subsidiaries, their assets or their
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business and income therefrom. Neither the Pegasus nor any of its Subsidiaries
has agreed to any waiver or extension of any statute of limitations relating to
any Tax.
5.14 Employee Benefits; Employees. All Employee Benefit Plans
maintained or contributed to by Pegasus as of the date of this Agreement are set
forth in Section 5.14 of the Pegasus Disclosure Statement. Except for matters
that individually or in the aggregate would not have Adverse Consequences in
excess of $250,000:
(a) Except as set forth in Section 5.14 of the Pegasus
Disclosure Statement, all such Employee Pension Benefit Plans are, and have been
at all times since their establishment, qualified for federal income tax
purposes under Code Section 401(a) and the related trusts are, and have been at
all times since their establishment, exempt from federal income tax under Code
Section 501(a). All such Employee Benefit Plans are in compliance with all
applicable provisions of ERISA, including, but not limited to, the applicable
reporting and disclosure requirements, as they relate to such plans, and Pegasus
is not subject to any liabilities based on past non-compliance, if any.
(b) Pegasus has made all required contributions under each
Employee Benefit Plan listed in Section 5.14 of the Company Disclosure Statement
for all periods through and including the fiscal year ended December 31, 1996,
and has made all required contributions for subsequent periods or has provided
adequate accruals therefor in the Company Financial Statements.
(c) There is not now, and has not been, any violation of the
Code or ERISA with respect to the filing of applicable reports, documents, and
notices regarding the Employee Benefit Plans maintained or contributed to by
Pegasus with the Secretary of Labor and the Secretary of the Treasury or the
furnishing of such documents to the participants or beneficiaries of the
Employee Benefit Plans.
(d) No fiduciary or other party in interest with respect to
any of the Employee Benefit Plans maintained or contributed to by Pegasus has
caused any of such plans to engage in a "prohibited transaction," as defined in
ERISA Section 406.
(e) Pegasus has never been obligated to contribute to any
Multiemployer Plan.
(f) There has been no violation of the "continuation coverage
requirements" of "group health plans" as set forth in Code Section 4980B and
Part 6 of Subtitle B of Title I of ERISA with respect to any Employee Benefit
Plan maintained by Pegasus to which such continuation coverage requirements
apply.
(g) Pegasus does not maintain retiree life and retiree health
insurance plans which are Employee Welfare Benefit Plans providing for
continuing benefits or coverage for any employee or any beneficiary of any
employee after such employee's termination of employment (except to the extent
such continued coverage is required by Code Section 4980B and Part 6 of Subtitle
B of Title I of ERISA).
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(h) Pegasus does not maintain and is not obligated to
contribute to any Employee Pension Benefit Plan that is a defined benefit plan,
and has not maintained and has not been obligated to contribute to such a plan
within the last six years.
(i) "Pegasus," as used in subsections (a) through (h) of this
Section 5.14 shall include any other entity required to be aggregated with
Pegasus under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and the
regulations thereunder.
(j) There are no collective bargaining agreements applicable
to any Persons employed by Pegasus or any of its Subsidiaries, and Pegasus and
its Subsidiaries have no duty to bargain with any labor organization with
respect to any such Person. There are not pending any unfair labor practice
charges against Pegasus or any of its Subsidiaries, nor is there any demand for
recognition, or any other request or demand from a labor organization for
representative status with respect to any Person employed by Pegasus or any of
its Subsidiaries.
(k) Pegasus and its Subsidiaries are in substantial compliance
with all applicable Legal Requirements respecting employment conditions and
practices, have withheld all amounts required by any applicable Legal
Requirements or Contracts to be withheld from the wages or salaries of their
employees, and are not liable for any arrears of wages or any Taxes or penalties
for failure to comply with any of the foregoing.
(l) Pegasus and its Subsidiaries have not engaged in any
unfair labor practice within the meaning of the National Labor Relations Act and
have not violated any Legal Requirement prohibiting discrimination on the basis
of race, color, national origin, sex, religion, age, marital status, or handicap
in their employment conditions or practices, except where such violations would
not have a Material Adverse Effect on Pegasus. There is not pending or, to the
best knowledge of Pegasus, threatened any unfair labor practice charge or
discrimination complaint relating to race, color, national origin, sex,
religion, age, marital status, or handicap against Pegasus or any of its
Subsidiaries before any Governmental Authority nor, to the best knowledge of
Pegasus, does any Basis therefor exist.
(m) There is no existing or, to the best knowledge of Pegasus,
threatened, labor strike, dispute, grievance or other labor controversy
affecting Pegasus or any of its Subsidiaries. There is no pending or, to the
best knowledge of Pegasus, threatened representation question respecting the
employees of Pegasus or any of its Subsidiaries. There is no pending or, to the
best knowledge of Pegasus, threatened arbitration proceeding under any Contract.
To the best knowledge of Pegasus, there exists no Basis for any of the above.
(n) Neither Pegasus nor any of its Subsidiaries is a party to
any employment agreement or arrangement, written or oral, relating to any
employee, consultant or independent contractor that cannot be terminated at will
by Pegasus or such Subsidiary without further liability.
5.15 Contracts. Section 5.15 of the Pegasus Disclosure Statement
contains a true, correct and complete list as of the date hereof of (or a
specific cross-reference to one or more other sections of the Pegasus Disclosure
Statement where there is described) (i) each NRTC
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Distribution Agreement (together with the Service Area covered by each) and any
other agreement with NRTC or DirecTV, Inc. or any of their Affiliates to which
Pegasus or any of its Subsidiaries is a party, (ii) a description of any
agreement pursuant to which Pegasus or any of its Subsidiaries acquired any
portion of their DIRECTV Distribution Business (other than rights acquired
directly from the NRTC), and (iii) any other agreement entered into other than
in the Ordinary Course the performance of which involves consideration in excess
of $150,000.
Pegasus has made available to the Company the opportunity to inspect
and copy a correct and complete copy of each agreement referred to in this
Section 5.15. With respect to each such agreement: except as included in Section
5.15 of the Pegasus Disclosure Statement (A) the agreement is legal, valid,
binding, enforceable and in full force and effect; (B) subject to obtaining any
consent referred to in Section 5.5 or disclosed in Section 5.5 of the Pegasus
Disclosure Statement, the agreement will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms following the
consummation of the transactions contemplated hereby; (C) neither Pegasus nor
any of its Subsidiaries, nor to the best knowledge of Pegasus, any other party
thereto, is in breach or default, and no event has occurred which with notice or
lapse of time would constitute a breach or default, or permit termination,
modification or acceleration, under the agreement; (D) neither Pegasus nor any
of its Subsidiaries, nor to the best knowledge of Pegasus, any other party
thereto, has repudiated any provision of the agreement; and (E) to the best
knowledge of the Pegasus, there is no Basis for any Person to claim that any of
clauses (A) through (D) is untrue.
5.16 Business Information. Section 5.16 of the Pegasus Disclosure
Statement sets forth a materially true and accurate description of the following
information as of the date of this Agreement: (i) the approximate number of
Committed Member Residences in each Service Area; (ii) the approximate number of
Committed Member Residences in each Service Area that is cabled; and (iii) the
approximate number of Committed Member Residences in each Service Area that is
uncabled.
5.17 Disclosure. No representation or warranty of any Pegasus Party in
this Agreement or in the Collateral Documents and no statement in any
certificate, report, instrument, list or other document furnished or to be
furnished by any Pegasus Party pursuant to this Agreement or the Collateral
Documents, contained, contains or will contain on the date such agreement,
certificate, report, instrument, list or other document was or is delivered, any
untrue statement of a material fact, or omitted, omits or will omit on such date
to state any material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading; nor will
any such representation or warranty or statement (to the extent it is required
by Section 10.1 to be accurate at the Closing Date) contain on the Closing Date
any untrue statement of a material fact or omit on the Closing Date to state any
material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading. There is no fact known
to any Pegasus Party and not disclosed in this Agreement (other than facts
generally known to, and that generally affect, NRTC members and affiliates
providing DIRECTV services or Persons in the broadcast television or cable
television industry) that could reasonably be expected to have a Material
Adverse Effect on Pegasus.
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5.18 Brokers or Finders. No broker or finder (with the possible
exception of the services rendered by Merrill Lynch & Co., as financial adviser
to Pegasus and in connection with rendering its fairness opinion relating to the
Merger) has acted directly or indirectly for any of the Pegasus Parties in
connection with the transactions contemplated by this Agreement, and none of the
Pegasus Parties has incurred any obligation to pay any brokerage or finder's fee
or other commission in connection therewith.
5.19 Certain Payments. Neither Pegasus, any of its Subsidiaries, any of
their Affiliates nor the Representatives of any of them has directly or
indirectly, on behalf of or for the purpose of assisting their business, made
any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or
other similar payments to any Person, private or public, regardless of form,
whether in money, property or services, to obtain favorable treatment in
securing business, to pay for favorable treatment for business secured, to
obtain special concessions or for special concessions already obtained, in
violation of any Legal Requirement, nor has any such Person established or
maintained any fund or asset that has not been recorded in its books and
records.
5.20 Subscribers.
(a) As of December 7, 1997, Pegasus had the number of
subscribers shown in Section 5.20 of the Pegasus Disclosure Statement, inclusive
of persons included in the most recent Subscribers Without Core Packages Report.
(b) Neither Pegasus, any of its Affiliates, nor any of their
Representatives has solicited, nor has Pegasus, any of its Affiliates, or any of
their Representatives employed any scheme or device for the purpose of
encouraging, Persons residing outside the Service Areas or Persons who would not
be deemed Committed Member Residences to become subscribers of the DIRECTV
service offered by Pegasus and its Subsidiaries. Except as disclosed in the most
recent Subscribers Without Core Packages Reports for all the Service Areas,
which have been provided by Pegasus to the Company, Pegasus and its Subsidiaries
do not provide DIRECTV service to any Person who does not pay for a core DIRECTV
programming package, who to the best knowledge of Pegasus resides outside the
Service Areas or who is not a Committed Member Residence for a reason other than
residing outside the Service Areas.
5.21 Favorable Business Relationships. To the best knowledge of
Pegasus, there are no favorable business relationships relating to the business
of Pegasus and its Subsidiaries with lessors, licensors, subscribers, suppliers
or other business associates of Pegasus or any of its Subsidiaries which will
terminate after Closing.
5.22 Securities Matters. Pegasus has filed all forms, reports,
statements and other documents required to be filed with the Commission, and has
heretofore made available to the Company, in the form filed with the Commission,
together with any amendments thereto, its (i) Annual Reports on Form 10-K, (ii)
all Quarterly Reports on Form 10-Q, (iii) all proxy statements relating to
meetings of stockholders (whether annual or special), (iv) all reports on Form
8-K, and (v) all other reports or registration statements filed by Pegasus
(collectively, the "Pegasus SEC Reports"). As of their respective filing dates
the Pegasus SEC Reports (i) complied as to form
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in all material respects with the requirements of the Exchange Act and the
Securities Act and (ii) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
5.23 FCC Matters. Pegasus and its Subsidiaries hold all licenses,
authorizations and permits (the "FCC Licenses") from the Federal Communications
Commission (the "FCC") necessary for the operation of the broadcast television
stations (the "Stations") operated by Pegasus and its Subsidiaries, except to
the extent the absence thereof would not have a Material Adverse Effect on
Pegasus, and except as disclosed in Section 5.23 of the Pegasus Disclosure
Statement. Each of the FCC Licenses is in full force and effect, and no material
default by Pegasus or any of its Subsidiaries has occurred and is continuing
thereunder. As of the date hereof, except as limited by the provisions of the
Communications Act of 1934, as amended, and the FCC's rules and regulations and
as otherwise specified on the face of any FCC License, none of the FCC Licenses
is subject to any restriction or condition that would limit in any material
respect the operation of the business of Pegasus and its Subsidiaries as it is
now conducted. There is not, as of the date hereof, pending or to, the knowledge
of Pegasus, threatened any action by or before the FCC to revoke, cancel,
rescind or modify (including a reduction in coverage area) any of the FCC
Licenses (other than proceedings to amend FCC rules of general applicability) or
refuse to renew the FCC Licenses, and there is not now issued or outstanding,
pending or, to the knowledge of Pegasus threatened by or before the FCC, any
order to show cause, notice of violation, notice of apparent liability, or
notice of forfeiture or complaint against Pegasus or any of its Subsidiaries
with respect to any of the FCC Licenses. Pegasus has no reason to believe that
any of the FCC licenses will be revoked or will not be renewed in the ordinary
course.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MERGER SUB
Each of Pegasus and Merger Sub, severally and jointly, represents and
warrants to the Company that the statements contained in Article VI are correct
and complete as of the date of this Agreement and, except as provided in Section
10.1, will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout Article VI), except in the case of representations and warranties
stated to be made as of the date of this Agreement or as of another date.
6.1 Organization and Qualification. Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of it incorporation. Merger Sub was formed solely for the purpose
of engaging in the transactions contemplated by this Agreement. As of the date
of this Agreement, except for obligations or liabilities incurred in connection
with its incorporation or organization and the transactions contemplated by this
Agreement, Merger Sub has no assets (other than not more than $1,000 in cash)
and has not incurred, directly or indirectly, any obligations or liabilities or
engaged in any business activities of any type or kind whatsoever or entered
into any agreements or arrangements with any person.
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6.2 Certificate of Incorporation and Bylaws. Merger Sub has heretofore
made available to the Company a complete and correct copy of the certificate of
incorporation and the bylaws of Merger Sub, each as amended to date. Such
certificate of incorporation and bylaws are in full force and effect. Merger Sub
is not in violation of any of the provisions of its certificate of incorporation
or bylaws.
6.3 Authority. Merger Sub has the necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement by Merger Sub and the consummation by Merger Sub of the
transactions contemplated hereby have been duly and validly authorize by all
necessary corporate action and no other corporate proceedings on the part of
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Merger Sub and, assuming the due authorization, execution and
delivery by the Company and the Principal Company Shareholders, constitutes a
legal, valid and binding obligation of Merger Sub, enforceable in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
applicability relating to or affecting creditors' rights generally and by the
application of general principles of equity.
6.4 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Merger Sub
do not, and the performance by Merger Sub of its obligations under this
Agreement will not (i) conflict with or violate the certificate of incorporation
or bylaws of Merger Sub, (ii) conflict with or violate any law, statute
ordinance, rule regulation, order, judgment or decree applicable to Merger Sub
or by which any of its properties is bound or affected, or (iii) result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of any Encumbrance on any of the properties or assets of Merger Sub
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Merger sub
is a party or by which Merger Sub or any of its properties or assets is bound or
affected, except, in the case of clauses (ii) and (iii) above for any such
conflicts, violations, breaches, defaults or other alterations or occurrences
that would not prevent or delay consummation of the Merger in any material
respect, or otherwise prevent Merger Sub from performing its obligations under
this Agreement in any material respect.
(b) The execution and delivery of this Agreement by Merger Sub
does not, and the performance of this Agreement by Merger Sub will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity, except (i) for (A) applicable
requirements, if any, of the Securities Act, the Exchange Act, state takeover
laws, exchanges on which Pegasus's securities are traded, the HSR Act and the
Communications Act, (B) filings and recordation of appropriate merger documents
as required by Delaware Law and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make
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such filings or notifications, would not prevent or delay consummation of the
Merger in any material respect.
6.5 Vote Required. The affirmative vote of Pegasus, the sole
stockholder of Merger Sub, is the only vote of the holder of any class or series
of Merger Sub capital stock necessary to approve any of the transactions
contemplated hereby.
ARTICLE VII
PRE-CLOSING COVENANTS OF THE SELLERS
The Sellers jointly and severally covenant and agree as follows:
7.1 Additional Information. The Sellers shall provide to Pegasus and
its Representatives such financial, operating and other documents, data and
information relating to the Company and its Subsidiaries, the Business and the
Assets and Liabilities of the Company and its Subsidiaries, including pending
and completed Acquisitions of DIRECTV Distribution Businesses, as Pegasus or its
Representatives may reasonably request. Such access shall include the right of
Pegasus and its Representatives to inspect the records, reports and material
correspondence of NRTC and DIRECTV and discuss such records, reports and
correspondence with NRTC and DIRECTV, and the Company shall take all action
necessary to facilitate the foregoing. In addition, the Sellers shall take all
action necessary to enable Pegasus and its Representatives (including Coopers &
Lybrand L.L.P.) to review, inspect and audit the Assets, Business and
Liabilities of the Company and its Subsidiaries and discuss them with the
Company's officers, employees, independent accountants, and counsel.
Notwithstanding any investigation that Pegasus may conduct of the Company and
its Subsidiaries, the Business, the Assets and Liabilities, the Pegasus Parties
may fully rely on the Sellers' warranties, covenants and indemnities set forth
in this Agreement, the Collateral Documents and any documents, instruments or
certificates delivered hereunder and thereunder, which will not be waived or
affected by or as a result of such investigation.
7.2 Exclusivity. Neither any Seller, nor any Affiliate or
Representative of any Seller shall directly or indirectly, solicit or initiate
any discussions, submissions of proposals or offers or negotiations with, or,
subject to any fiduciary obligations under applicable law after taking into
account the advice of counsel with respect thereto, participate in any
negotiations or discussions with, or provide any information or data of any
nature whatsoever, to, or otherwise cooperate in any other way with, or assist
or participate in, facilitate or encourage any effort or attempt by, any Person,
other than Pegasus and its shareholders, employees, Representatives, agents and
Affiliates, concerning any merger, consolidation, sale of substantial assets,
sale of shares of capital stock or other equity securities or similar
transaction involving the Company or any of its Subsidiaries (all such
transactions being referred to herein as "Company Alternative Transactions");
provided, however, that the term "Company Alternative Transactions" shall not be
deemed to include, and the foregoing shall not prohibit (i) acquisitions
permitted under Section 7.3(c)(i), excluding any business affiliated with Golden
Sky Systems, Inc., (ii) the consummation of Exchange Offer, and (iii) other
transactions expressly permitted under this
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Agreement. The Sellers shall immediately notify Pegasus if any proposal, offer,
inquiry or other contact is received by, any information is requested from, or
any discussions or negotiations are sought to be initiated or continued with,
any Seller in respect of a Company Alternative Transaction, and shall, in any
such notice to Pegasus, indicate the identity of the offeror.
7.3 Continuity and Maintenance of Operations.
(a) The Company shall, and shall cause its Subsidiaries to,
and the Principal Company Shareholders shall cause the Company and its
Subsidiaries to: (i) comply with all Legal Requirements and requirements of the
NRTC applicable to the Company and its Subsidiaries (including NRTC's by-laws,
policies, procedures and guidelines) relating to the Business; (ii) fulfill all
of its obligations under and maintain in full force and effect all Contracts,
including the NRTC Distribution Agreements, and shall not, without the prior
written consent of Pegasus, alter, modify or amend any of the foregoing in a
manner adverse to the Company or its Subsidiaries; (iii) use its commercially
reasonable efforts in consultation with Pegasus and its Affiliates, to promote
the financial success of the Business and promptly notify Pegasus of any adverse
change in the prospects or condition (financial or otherwise) of the Business;
and (iv) use its commercially reasonable efforts to promote, develop and
preserve its relationships with the NRTC, DSS retailers, participating
cooperatives and its present employees as well as the goodwill of its suppliers,
customers and others having business relations with it, and promptly notify
Pegasus of any adverse change in its relationship with any such Person. Without
limiting the generality of the foregoing, the Company shall, and shall cause its
Subsidiaries to, and the Principal Company Shareholders shall cause the Company
and its Subsidiaries to, maintain the Assets in good order, condition and
repair, maintain insurance relating to the Business as in effect on the date of
this Agreement, continue promotion and other activities with respect to the
Business (including, without limitation, billing, collection and subscriber
matters) substantially in accordance with past practice and in compliance with
NRTC bylaws, policies, procedures and guidelines, maintain inventories of DSS
Systems and supplies at reasonable levels, and keep and maintain all of the
Books and Records in the Ordinary Course. Other than in the Ordinary Course, the
Company and its Subsidiaries shall not pay or credit in any way any Accounts
Receivable prior to the Closing Date, and shall not permit any of its
Representatives to do so either. The Company shall, and the Principal Company
Shareholders shall cause the Company and its Subsidiaries to, enforce procedures
for disconnection and/or discontinuance of service to subscribers (i) whose
accounts are delinquent, (ii) who do not pay for core DIRECTV programming
packages, or (iii) who are not Committed Member Residences, all in accordance
with NRTC by-laws, policies, procedures and guidelines.
(b) The Company shall not, and shall cause its Subsidiaries
not to, and the Principal Company Shareholders shall cause the Company and its
Subsidiaries not to, without the prior written consent of Pegasus: (i) deviate
from DIRECTV national programming packages or rates; (ii) engage in marketing
promotions other than in the Ordinary Course; (iii) sell, lease, transfer,
convey or assign any of the Assets other than in the Ordinary Course (or enter
into any contract to do any of the foregoing) or permit the creation of any
Encumbrance on any of the Assets except under the Company Credit Agreement, the
interest escrow established under the Company Indenture and the related escrow
agreement, as disclosed in Section 3.6 of the Company
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Disclosure Statement, or as otherwise contemplated by this Agreement; or (iv)
permit the amendment or cancellation of any NRTC Distribution Agreement or any
other Contract.
(c) Unless the Company shall have obtained the prior written
consent of Pegasus, the Company shall not, and shall cause its Subsidiaries not
to, and the Principal Company Shareholders shall cause the Company and its
Subsidiaries not to:
(i) engage in any Acquisition unless (A) the
Acquisition is of a DIRECTV Distribution Business; (B) the Acquisition is funded
solely out of the Company's cash on hand as of the date hereof, borrowings under
the Company Credit Agreement, debt incurred to the Sellers, and equity
contributions from the Company's shareholders; (C) on a pro forma basis, after
giving effect to the Acquisition and any debt incurred in connection therewith,
the Company would be in compliance with the Company Credit Agreement (including
any amendments thereto permitted hereby) and the Company Indenture, and the
Company shall have furnished Pegasus with satisfactory evidence to that effect;
(D) on a projected basis, after giving effect to the Acquisition and any debt
incurred in connection therewith, the Company's cash resources (including
available credit under the Company Credit Agreement) will be sufficient to
satisfy its future cash requirements as reflected in the Company Financial
Model, as updated to reflect such proposed Acquisition (other than the two
pending acquisitions reflected in the Company Financial Model), including,
without limitation, to fund Acquisitions of DIRECTV Distribution Businesses that
have been completed or are pending at the time of the Acquisition and to fund
operating expenses, working capital, debt service and capital expenditures
(other than the Offer to Purchase) (it being acknowledged that the Company
Financial Model reflects certain covenant noncompliance), and such updated
projection shall show no worsening in any of the foregoing matters, including
the extent of covenant noncompliance;
(ii) amend the Company Indenture, amend the Company
Credit Agreement to increase the amount of credit available thereunder or,
except as permitted by Section 9.3(b), otherwise amend the Company Credit
Agreement;
(iii) declare or pay any dividends or make any other
distributions to the Shareholders;
(iv) redeem or repurchase any stock (other than stock
of employees in connection with termination of their employment and other than
with Permitted Redemptions;
(v) issue additional stock or options or warrants to
acquire stock (except in connection with the exercise of outstanding options and
warrants or Acquisitions permitted by paragraph (i));
(vi) incur any material debt (except in connection
with Acquisitions permitted by paragraph (i), borrowings under the Company
Credit Agreement to finance expenditures not prohibited by this Agreement, and
other obligations incurred in the Ordinary Course); or
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(vii) make any loans other than in the Ordinary
Course.
Notwithstanding paragraph (v), the Company may sell additional shares of Company
Capital Stock for cash to some or all of its Shareholders if the proceeds are
used solely to pay cash dividends to the holders of its preferred stock, and
notwithstanding paragraph (iii), the Company may pay cash dividends to such
holders solely out of such proceeds.
(d) No Seller shall take or omit to take any action that would
cause any of them to be in breach of any representations, warranties or
covenants in this Agreement or the Collateral Documents or that would, if such
action had been taken or omitted on or before the date of this Agreement, have
been required to be disclosed in Section 3.11 of the Company Disclosure
Statement.
(e) Prior to the Closing Date, the Company shall, and the
Principal Company Shareholder shall cause the Company to, terminate any
consulting arrangements specified by Pegasus providing for aggregate annual
payments in excess of $50,000.
7.4 Consents and Approvals.
(a) As soon as practicable after execution of this Agreement,
the Sellers shall use commercially reasonable efforts to obtain any necessary
consent, approval, authorization or order of, make any registration or filing
with or give any notice to, any Governmental Authority or Person as is required
to be obtained, made or given by any of the Sellers to consummate the
transactions contemplated by this Agreement and the Collateral Documents,
including, without limitation: (i) consents required under the NRTC Distribution
Agreements; and (ii) any authorizations, consents, approvals, actions, filings
or notices set forth in Section 3.5 of the Company Disclosure Statement (other
than consents required pursuant to indebtedness of the Company incurred in the
Acquisition of a DIRECTV Distribution Business where such indebtedness is
secured in full by a letter of credit issued pursuant to the Company Credit
Agreement, provided that the completion of the Merger in the absence of such
consents will not result in a Default or Event of Default under and as defined
in the Company Credit Agreement).
(b) The Sellers shall cooperate with Pegasus in providing such
information and reasonable assistance as may be required in connection with the
obligations of the Pegasus Parties under Section 8.4(a).
7.5 Adoption by Shareholders. The Sellers shall use their respective
best efforts to secure the vote or consent of the Shareholders required by the
DGCL and the Company's certificate of incorporation and bylaws to approve and
adopt this Agreement and the Merger, and the board of directors of the Company
shall recommend to the Shareholders such approval and adoption. Unless the
Company elects to obtain shareholder approval by written consent, the Company
shall take all steps necessary to duly call, give notice of, convene and hold a
meeting of the Shareholders to be held as soon as is reasonably practicable
after the availability of the Pegasus Merger Registration Statement for the
purpose of voting upon the approval of this Agreement and the Merger. The
Company will furnish to each Shareholder a notice of its rights
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to dissent from the Merger under Section 262 of the DGCL and to demand an
appraisal of its shares of Company and Common Stock and shall provide Pegasus
with a copy of such notice prior to the Closing Date. Each of the Principal
Company Shareholders (i) hereby waives its dissenters' appraised rights under
Section 262 of the DGCL and (ii) shall vote all of its shares of Company Capital
Stock, or otherwise give its consent, to approve this Agreement and the Merger.
7.6 Securities Filings; Financial Information. The Sellers shall,
promptly after execution of this Agreement and from time to time thereafter,
provide such information and documents to Pegasus and its Affiliates concerning
the Company, its Subsidiaries and the Principal Company Shareholders as may be
required or appropriate for inclusion in the Pegasus Merger Registration
Statement and any other filing, notification or report made by Pegasus or any
Affiliate of Pegasus under the Securities Act, the Exchange Act or any state
securities law; shall cause their respective counsel and independent accountants
to cooperate with Pegasus, its Affiliates and their investment bankers, counsel
and independent accountants in the preparation of such filings, notifications
and reports; and shall use their best efforts to obtain consents and "comfort
letters" from such accountants as required in connection with such filings,
notifications and reports. The Sellers represent and warrant to Pegasus that no
information or document provided by any Seller for inclusion in any filing,
notification or report made by Pegasus or any Affiliate under the Securities Act
or the Exchange Act will contain any untrue statement of material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they are made, not
misleading.
7.7 Notification of Certain Matters. The Sellers shall promptly provide
to Pegasus copies of any material notices from or correspondence from and to the
NRTC or DIRECTV or any Affiliates of DIRECTV. The Sellers shall promptly notify
Pegasus of any fact, event, circumstance or action that is reasonably likely to
cause any Seller to be unable to perform any of its covenants contained herein
or any condition precedent in Article VII not to be satisfied, or that, if known
on the date of this Agreement, would have been required to be disclosed to
Pegasus pursuant to this Agreement or the existence or occurrence of which would
cause any of the Sellers' representations or warranties under this Agreement not
to be correct and/or complete. The Sellers shall give prompt written notice to
Pegasus of any adverse development causing a breach of any of the
representations and warranties in Article III or IV. However, no disclosure by
the Sellers pursuant to this Section, and no supplement to the Company
Registration Statement referred to in Section 13.2(a), shall be deemed to amend
or supplement this Agreement or to prevent or cure any misrepresentation, breach
of warranty, or breach of covenant by the Sellers.
7.8 Supplements to Company Disclosure Statement and Company
Registration Statement. The Sellers shall, from time to time prior to Closing,
supplement the Company Disclosure Statement and the Company Registration
Statement with additional information that, if existing or known to it on the
date of this Agreement, would have been required to be included therein. For
purposes of determining the satisfaction of any of the conditions to the
obligations of the Pegasus Parties in Article IX, the Company Disclosure
Statement and the Company Registration Statement shall be deemed to include only
(a) the information contained therein on the date of this Agreement and (b)
information added to the Company Disclosure Statement or the Company
Registration Statement by written supplements delivered prior to Closing by the
Sellers
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that (i) are accepted in writing by Pegasus, (ii) are described in Section
2.7(b) or (iii) reflect actions expressly permitted by this Agreement to be
taken prior to Closing. Any supplement to the Company Registration Statement
shall be in writing and delivered to Pegasus, but not be filed with the
Commission unless the Company is otherwise required to do so.
7.9 Duty of Good Faith and Fair Dealing. The Sellers shall act in good
faith with regard to all matters that are the subject of this Agreement, and
shall neither intentionally nor knowingly take any action or omit to take any
action at any time for the primary purpose of depriving the Pegasus Parties
unfairly of any right or benefit that any of them has at such time under this
Agreement.
7.10 Employee Matters. Not later than ten Business Days prior to the
Closing Date, the Company shall, or shall cause the sponsor of the Digital
Television Services 401(k) Plan (the "401(k) Plan") to, take the following
actions: (i) adopt resolutions, or take such other action as required by the
401(k) Plan, to (A) terminate the 401(k) Plan effective as of the Closing Date,
subject to receipt of a ruling from the District Director of Internal Revenue
that the termination of the 401(k) Plan does not adversely affect the tax
qualified status of the 401(k) Plan, and (B) cease contributions under the
401(k) Plan effective as of the Closing Date; and (ii) file Internal Revenue
Service Form 5310 (Application for Determination for Terminating Plan) with
respect to the 401(k) Plan termination with the District Director of Internal
Revenue, such Form fully disclosing the corporate transaction contemplated by
this Agreement and the status of 401(k) Plan participants after the transaction.
Such resolutions (or other action required by the 401(k) Plan) and Form 5310
shall be in a form satisfactory to Pegasus.
7.11 1997 Company Financial Statements. The Company will deliver to
Pegasus at least ten days before the Closing Date its audited financial
statements as of and for the year ended December 31, 1997, accompanied by (i)
the report thereon of Arthur Andersen, L.L.P. and (ii) a schedule prepared by
Arthur Andersen, L.L.P. showing adjustments to the Company Financial Statements
as of and for the period ended September 30, 1997 determined to be appropriate
as a result of their audits. The delivery of such audited financial statements
shall constitute a representation and warranty that such financial statements
(including the notes thereto) have been prepared in accordance with GAAP on a
consistent basis with the Company Financial Statements and that such financial
statements present fairly the financial condition of the Company and its
Subsidiaries and the results of their operations as of December 31, 1997, and
for the year then ended.
7.12 1997 Tax Returns. The Company will deliver to Pegasus a draft copy
of the partnership Tax Returns to be filed by Digital Television Services, LLC
for the period ended October 10, 1997, and will provide Pegasus and its auditors
a reasonable amount of time in which to review it before it is filed. The
Company will deliver to Pegasus at or before the Closing Date drafts of Tax
Returns for the Company and its Subsidiaries for the period ended December 31,
1997.
7.13 Indemnity under Prior Company Acquisitions. If reasonably
requested by Pegasus, the Company will assert claims for indemnification under,
and in accordance with, agreements
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under which it has made Acquisitions of DIRECTV Distribution Businesses,
provided that in the Company's judgment a reasonable basis for such claim
exists.
ARTICLE VIII
PRE-CLOSING COVENANTS OF THE PEGASUS PARTIES
The Pegasus Parties jointly and severally covenant and agree as
follows.
8.1 Additional Information. The Pegasus Parties shall provide to the
Sellers and their Representatives such financial, operating and other documents,
data and information relating to Pegasus and its Subsidiaries, including pending
and completed Acquisitions of DIRECTV Distribution Businesses, as the Sellers or
their Representatives may reasonably request. Such access shall include the
right of the Sellers and their Representatives to inspect the records, reports
and material correspondence of NRTC and DIRECTV and discuss such records,
reports and correspondence with NRTC and DIRECTV, and the Pegasus Parties shall
take all action necessary to facilitate the foregoing. In addition, the Pegasus
Parties shall take all action necessary to enable the Sellers and their
Representatives (including Arthur Andersen, L.L.P.) to review and inspect books
and records of Pegasus and its Subsidiaries and discuss them with the officers,
employees, independent accountants, and counsel of the Pegasus Parties.
Notwithstanding any investigation that the Sellers may conduct of Pegasus and
its Subsidiaries, the Sellers may fully rely on the Pegasus Parties' warranties,
covenants and indemnities set forth in this Agreement, the Collateral Documents
and any documents, instruments or certificates delivered hereunder and
thereunder, which will not be waived or affected by or as a result of such
investigation.
8.2 Exclusivity. Neither any Pegasus Party, nor any of their
Affiliates, nor any of their respective Representatives shall directly or
indirectly, solicit or initiate any discussions, submissions of proposals or
offers or negotiations with, or, subject to any fiduciary obligations under
applicable law after taking into account the advice of counsel with respect
thereto, participate in any negotiations or discussions with, or provide any
information or data of any nature whatsoever to, or otherwise cooperate in any
other way with, or assist or participate in, facilitate or encourage any effort
or attempt by, any Person, other than the Company and its shareholders,
employees, Representatives, agents and Affiliates, concerning any merger,
consolidation, sale of substantial assets, sale of shares of capital stock or
other equity securities or similar transaction involving Pegasus or any of its
Subsidiaries (all such transactions being referred to as "Pegasus Alternative
Transactions"); provided, however, that the term "Pegasus Alternative
Transactions" shall not be deemed to include, and the foregoing shall not
prohibit (i) acquisitions of media and communications businesses (including
issuances of securities in connection therewith); (ii) sales or other
extraordinary transactions relating to Pegasus's cable systems; (iii) a public
offering of equity or debt securities; or (iv) any transaction described in
Section 10.1(d). Pegasus shall immediately notify the Company if any proposal,
offer, inquiry or other contact is received by, any information is requested
from, or any discussions or negotiations are sought to be initiated or continued
with, Pegasus in respect of a Pegasus Alternative Transaction, and shall, in any
such notice to the Company, indicate the identity of the offeror.
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8.3 Conduct of Business. Unless Pegasus shall have obtained the prior
written consent of the Company, Pegasus shall, and shall cause each of its
Subsidiaries to, and the Principal Pegasus Shareholders shall cause Pegasus and
each of its Subsidiaries to:
(a) conduct its business in the Ordinary Course (for purposes
hereof, Acquisitions of media and communications businesses, including issuances
of securities in connection therewith, sales or extraordinary transactions
involving cable systems, public offerings of equity and debt securities and
transactions described in Section 12.1(d) will be deemed conduct of business in
the Ordinary Course);
(b) use its commercially reasonable efforts to maintain its
business, assets and operations, and its relationships with employees,
subscribers, and others with whom it has significant business relationships, as
an ongoing business in accordance with past practice and custom;
(c) except for continuation or replacement arrangements
relating to the Pegasus employee loan program (as described in Section 5.15 of
the Pegasus Disclosure Statement), not enter into any material transaction with
an affiliated person except on terms not less favorable to Pegasus than could
have been obtained with unaffiliated parties; and
(d) not take or omit to take any action that would cause any
of the Pegasus Parties to be in breach of any representation or warranty in this
Agreement or the Collateral Documents the accuracy of which on the Closing Date
is a condition precedent to the Sellers' obligations under Section 10.1, or in
breach of any covenant in this Agreement or the Collateral Documents.
8.4 Consents and Approvals.
(a) As soon as practicable after execution of this Agreement,
the Pegasus Parties shall use their best efforts to obtain any necessary
consent, approval, authorization or order of, make any registration or filing
with or give notice to, any Governmental Authority or Person as is required to
be obtained, made or given by any of the Pegasus Parties to consummate the
transactions contemplated by this Agreement and the Collateral Documents,
including without limitation: (i) consents required under the NRTC Distribution
Agreements; and (ii) any authorizations, consents, approvals, actions, filings
or notices set forth in Section 4.5 of the Pegasus Disclosure Statement.
Notwithstanding anything in this Section to the contrary, the Pegasus Parties
shall not be required to agree to any amendment, modification or change in, the
waiver of any term or condition of, or the imposition of any condition to the
transfer to Pegasus of, any NRTC Distribution Agreement in order to obtain the
consents required under the NRTC Distribution Agreements.
(b) The Pegasus Parties shall cooperate with the Sellers in
providing such information and reasonable assistance as may be required in
connection with the Sellers' obligations under Section 5.4(a).
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8.5 Adoption by Pegasus Shareholders. Pegasus shall, promptly after the
effective date of the Pegasus Merger Registration Statement, take all actions
necessary in accordance with the DGCL and its certificate of incorporation and
by-laws to convene a special meeting of Pegasus's shareholders to act on this
Agreement, to be held as soon as practicable following the effectiveness of the
Pegasus Merger Registration Statement. Pegasus shall use all reasonable efforts
to secure the vote of its shareholders required by the DGCL and its certificate
of incorporation and by-laws to approve and adopt this Agreement, and the board
of directors of Pegasus shall recommend to the shareholders of Pegasus such
approval and adoption. Each of the Principal Pegasus Shareholders shall vote all
of its shares of Pegasus's common stock to approve this Agreement and the
Merger.
8.6 Merger Registration Statement. As soon as practicable, and in any
event within ten Business Days after the date of this Agreement, Pegasus shall
prepare and file with the Commission a registration statement on Form S-4 (such
registration statement, together with any amendments thereof or supplements
thereto, being the "Pegasus Merger Registration Statement") registering under
the Securities Act of the Pegasus Class A Common Stock to be issued in the
Merger. The Pegasus Merger Registration Statement will contain a combined proxy
statement and prospectus (the "Proxy Statement/Prospectus") that will constitute
(i) a prospectus to be delivered to the Shareholders in connection with the
meeting or solicitation of consents referred to in Section 7.5 and (ii) a proxy
statement to be delivered to Pegasus's shareholders in connection with the
meeting of Pegasus's shareholders referred to in Section 8.5. Pegasus shall
provide the Sellers and their counsel reasonable opportunity to review and
comment upon the contents of the Registration Statement. Pegasus will use
commercially reasonable efforts to cause the Pegasus Merger Registration
Statement to become effective as promptly as practicable. As promptly as
practicable after the Pegasus Merger Registration Statement shall have become
effective, Pegasus shall mail or deliver the Proxy Statement/Prospectus to the
Shareholders and to the shareholders of Pegasus entitled to notice of and to
vote at the Pegasus shareholders' meeting referred to in Section 8.5. All
documents that Pegasus is responsible for filing with the Commission in
connection with the transactions contemplated herein will comply as to form in
all material respects with the applicable requirements of the Securities Act,
the Exchange Act and the rules and regulations thereunder. Pegasus will use
commercially reasonable efforts to cause the Pegasus Class A Common Stock to be
issued in the Merger to be approved for listing on the Nasdaq National Market,
subject to notice of issuance prior to the Effective Time.
8.7 Notification of Certain Matters. The Pegasus Parties shall promptly
provide to the Sellers copies of any material notices from or correspondence
from and to the NRTC or DIRECTV or any Affiliates of DIRECTV. The Pegasus
Parties shall promptly notify the Sellers of any fact, event, circumstance or
action that is reasonably like to cause any Pegasus Party to be unable to
perform any of its covenants contained herein or any condition precedent in
Article X not to be satisfied, or that, if known on the date of this Agreement,
would have been required to be disclosed to the Sellers pursuant to this
Agreement or the existence or occurrence of which would cause any of the Pegasus
Parties' representations or warranties under this Agreement not to be correct
and/or complete. The Pegasus Parties shall give prompt written notice to the
Sellers of any adverse development causing a breach of any of the
representations and warranties in Article V or VI as of the date made. No
disclosure by the Pegasus Parties pursuant to this
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Section, however, shall be deemed to amend or supplement this Agreement or to
prevent or cure any misrepresentation, breach of warranty, or breach of covenant
by the Pegasus Parties.
8.8 Supplements to Pegasus Disclosure Statement. The Pegasus Parties
shall, from time to time prior to Closing, supplement the Pegasus Disclosure
Statement with additional information that, if existing or known to it on the
date of this Agreement, would have been required to be included therein. For
purposes of determining the satisfaction of any of the conditions to the
obligations of the Sellers in Article X, the Pegasus Disclosure Statement shall
be deemed to include only (a) the information contained therein on the date of
this Agreement and (b) information added to the Pegasus Disclosure Statement by
written supplements delivered prior to Closing by the Pegasus Parties that (i)
are accepted in writing by the Company or (ii) reflect actions taken or events
occurring after the date hereof and prior to Closing that (A) do not breach any
covenant in this Agreement so as to cause the condition precedent stated in
Section 10.2 not to be fulfilled at or prior to the Closing, (B) do not give
rise to a right on the part of the Sellers to terminate this Agreement pursuant
to Section 12.1(d), and (C) do not in the aggregate have a Material Adverse
Effect on Pegasus.
8.9 Duty of Good Faith and Fair Dealing. The Pegasus Parties shall act
in good faith with regard to all matters that are the subject of this Agreement
and shall neither intentionally nor knowingly take any action or omit to take
any action at any time for the primary purpose of depriving the Sellers unfairly
of any right or benefit that any of them has at such time under this Agreement.
8.10 Tax Certificate. The Pegasus Parties shall take no action that
would preclude them from delivering at Closing a tax certificate in the form of
Exhibit 8 attached hereto.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PEGASUS PARTIES
All obligations of the Pegasus Parties under this Agreement shall be
subject to the fulfillment at or prior to Closing of each of the following
conditions, it being understood that the Pegasus Parties may, in their sole
discretion, to the extent permitted by applicable Legal Requirements, waive any
or all of such conditions in whole or in part.
9.1 Accuracy of Representations. All representations and warranties of
the Company, the Principal DTS Shareholders and the DTS Parties contained in
this Agreement, the Collateral Documents and any other document, instrument or
certificate delivered by any of the Sellers or any of the DTS Parties at or
prior to Closing shall be, if specifically qualified by materiality, true in all
respects and, if not so qualified, shall be true in all material respects, in
each case on and as of the Closing Date with the same effect as if made on and
as of the Closing Date, other than representations and warranties expressly
stated to be made as of the date of this Agreement or as of another date other
than the Closing Date. The Company shall have delivered to Pegasus and Merger
Sub a certificate dated the Closing Date to the foregoing effect.
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9.2 Covenants. The Sellers shall, in all material respects, have
performed and complied with each of the covenants, obligations, conditions and
agreements contained in this Agreement that are to be performed or complied with
by them at or prior to Closing. The Company shall have delivered to Pegasus and
Merger Sub a certificate dated the Closing Date to the foregoing effect.
9.3 Consents and Approvals.
(a) All consents, approvals, authorizations and orders
required to be obtained from, and all registrations, filings and notices
required to be made with or given to, any Governmental Authority or Person as
provided in Sections 7.4(a) and 8.4(a) shall have been duly obtained, made or
given, as the case may be, and shall be in full force and effect, and any
waiting period required by applicable law, including the HSR Act, or any
Governmental Authority in connection with such transactions shall have expired
or have been earlier terminated, unless the failure to obtain, make or give any
such consent, approval, authorization, order, registration, filing or notice, or
to allow any such waiting period to expire or terminate would not have a
Material Adverse Effect on the Company.
(b) Notwithstanding the foregoing, the condition precedent
stated in subsection (a) shall not have been satisfied if any consent, approval,
authorization or order obtained in connection with the transactions contemplated
by this Agreement and the Collateral Documents is conditioned upon or related to
the amendment, modification, cancellation or termination of, or waiver of any
term or condition of, any contract, commitment or agreement, or imposes upon
Pegasus or the Surviving Corporation any condition or requirement or change in
policy not now imposed upon Pegasus, the Company, the Business or the DIRECTV
Distribution Business of Pegasus (regardless of whether such imposition is
specifically related to or predicated upon or precedes or follows such consent,
approval, authorization or order) except that the consent of the lenders under
the Company Credit Agreement may be conditioned on a reduction of the amount of
credit available thereunder to an amount not less than that necessary to satisfy
the standard described in Section 3.10 and on other modifications that are not,
in Pegasus's judgment, materially burdensome.
(c) This Agreement and the Merger shall have been approved by
the requisite vote of Pegasus's shareholders in accordance with the DGCL and the
rules of the Nasdaq Stock Market.
(d) This Agreement and the Merger shall have been approved by
the requisite vote of the Company's Shareholders in accordance with the DGCL.
(e) Pegasus and Merger Sub shall have been furnished with
appropriate evidence, reasonably satisfactory to it and its counsel, of the
granting of such consents, approvals, authorizations and orders, the making of
such registrations and filings and the giving of such notices referred to in
subsections (a), (c) and (d).
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9.4 Dissenters' Rights. The period for assertion of dissenters' rights
pursuant to Section 262 of the DGCL shall have expired, and the holders of
Company Capital Stock entitled to receive not more than five percent of the
Pegasus Class A Common Stock included in the Merger Consideration shall have
perfected their dissenters' appraisal rights under Section 262 of the DGCL in
connection with the Merger.
9.5 Delivery of Documents. The Sellers shall have delivered, or caused
to be delivered, to Pegasus and Merger Sub the following documents:
(i) Fleet Confidentiality Agreement, executed by
Fleet Venture Resources, Inc., Fleet Equity Partners IV, L.P., and Chisholm
Partners III, L.P.
(ii) Noncompetition Agreements -- Owners, executed by
each of the Specified Owners.
(iii) Noncompetition Agreements -- Management,
executed by each member of Company Senior Management.
(iv) Registration Rights Agreement, executed by the
each Principal Company Shareholder, each Columbia Principal, and each member of
Company Senior Management who elects to do so.
(v) Escrow Agreement, executed by the Escrow Agent
and the Company, and delivery to the Escrow Agent of the shares of Pegasus Class
A Common Stock required by Section 2.7 to be delivered to the Escrow Agent.
(vi) Voting Agreement, executed by the Principal
Company Shareholders.
(vii) Indemnification Agreement, executed by each of
the Successor Principal Company Shareholders and each of the Columbia
Principals.
(viii) Schedule satisfactory to Pegasus and certified
as being complete and correct by the Company reflecting the number of
Subscribers in each of the Service Areas as of the Closing Date, based upon
reports of the NRTC, including the most recent ad hoc Active Subscribers Report,
ad hoc Active Subscribers Without Core Packages Report and the ad hoc Cut Off
Report by Level.
(ix) Evidence reasonably satisfactory to Pegasus that
each Seller has taken all action necessary to authorize the execution of this
Agreement and the Collateral Documents to which it is a party and the
consummation of the transactions contemplated hereby and thereby.
(x) Opinion of Nelson Mullins Riley & Scarborough,
L.L.P., counsel to the Sellers, dated the Closing Date, in form and substance
reasonably satisfactory to Pegasus.
(xi) The Books and Records.
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(xii) All originally executed NRTC Agreements, and
all originally executed amendments thereto, that are in the Company's
possession.
(xiii) To the extent in the Company's possession, all
original Consumer Contracts and all original files relating thereto, including
disclosure statements required by applicable Legal Requirements.
(xiv) Resignations of all members of the board of
directors or similar body of the Company and each of its Subsidiaries effective
as of the Effective Time.
(xv) Such other documents and instruments as Pegasus
may reasonably request: (A) to evidence the accuracy of the Company's and the
DTS Parties' representations and warranties under this Agreement, the Collateral
Documents and any documents, instruments or certificates required to be
delivered thereunder; (B) to evidence the performance by the Company and the DTS
Parties of, or the compliance by the Company and the DTS Parties with, any
covenant, obligation, condition and agreement to be performed or complied with
by the Company or any of the DTS Parties under this Agreement and the Collateral
Documents; or (C) to otherwise facilitate the consummation or performance of any
of the transactions contemplated by this Agreement and the Collateral Documents.
9.6 No Material Adverse Change. There shall have been no material
adverse change in the Assets or in the business, financial condition, prospects
or operations of the Company and its Subsidiaries, taken as a whole, other than
those affecting the DIRECTV Distribution Business in general.
9.7 No Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority, and no Legal Requirement or
policy (other than Legal Requirements affecting the direct broadcast satellite
industry generally) of the NRTC, DirecTV, Inc. or any of their Affiliates, or
any applicable regulatory authority, shall have been enacted, promulgated or
issued that would: (i) prohibit or adversely affect Pegasus's or the Surviving
Corporation's and its Subsidiaries' ownership or operation of all or a material
portion of the Business or the Assets or otherwise impair the ability of Pegasus
or the Surviving Corporation and its Subsidiaries to realize the benefits of the
transactions contemplated by this Agreement and the Collateral Documents or
adversely affect the value of the Assets; (ii) restrict or limit or otherwise
condition Pegasus's or the Surviving Corporation's and its Subsidiaries' right
to transfer and/or assign the Business or the Assets in the future; (iii) compel
Pegasus or the Surviving Corporation or any of its Subsidiaries to dispose of or
hold separate all or a material portion of the Business or the Assets as a
result of any of the transactions contemplated by this Agreement and the
Collateral Documents; (iv) prevent or make illegal the consummation of any
transactions contemplated by this Agreement and the Collateral Documents; or (v)
cause any of the transactions contemplated by this Agreement and the Collateral
Documents to be rescinded following consummation.
9.8 NRTC Compliance Certificate. The Company shall have delivered to
Pegasus a certificate or letter from NRTC dated as of the Closing Date to the
effect that the Company and
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its Subsidiaries are in compliance with the NRTC Distribution Agreements and
there are no payments due by the Company under the NRTC Distribution Agreements
other than payments for fees due in the Ordinary Course and not yet payable.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS
All obligations of the Sellers under this Agreement shall be subject to
the fulfillment at or prior to Closing of the following conditions, it being
understood that the Sellers may, in their sole discretion, to the extent
permitted by applicable Legal Requirements, waive any or all of such conditions
in whole or in part.
10.1 Accuracy of Representations. All representations and warranties of
the Pegasus Parties contained in this Agreement (giving effect to Section 8.8)
and the Collateral Documents and any other document, instrument or certificate
delivered by any of the Pegasus Parties at or prior to the Closing shall be, if
specifically qualified by materiality, true and correct in all respects and, if
not so qualified, shall be true and correct in all material respects, in each
case on and as of the Closing Date with the same effect as if made on and as of
the Closing Date, other than representations and warranties expressly stated to
be made as of the date of this Agreement or as of another date other than the
Closing Date. The Pegasus Parties shall have delivered to the Sellers a
certificate dated the Closing Date to the foregoing effect.
10.2 Covenants. The Pegasus Parties shall, in all material respects,
have performed and complied with each obligation, agreement, covenant and
condition contained in this Agreement and the Collateral Documents and required
by this Agreement and the Collateral Documents to be performed or complied with
by the Pegasus Parties at or prior to Closing. The Pegasus Parties shall have
delivered to the Company a certificate dated the Closing Date to the foregoing
effect.
10.3 Consents and Approvals.
(a) All consents, approvals, authorizations and orders
required to be obtained from, and all registrations, filings and notices
required to be made with or given to, any Governmental Authority or Person as
provided in Section 8.4(a) shall have been duly obtained, made or given, as the
case may be, and shall be in full force and effect, and any waiting period
required by applicable, including the HSR Act, or any Governmental Authority in
connection with such transactions shall have expired or have been earlier
terminated, unless the failure to obtain, make or give any such consent,
approval, authorization, order, registration, filing or notice, or to allow any
such waiting period to expire or terminate would not have a Material Adverse
Effect on Pegasus.
(b) This Agreement and the Merger shall have been approved by
the requisite vote of Pegasus's shareholders in accordance with the DGCL and the
rules of the Nasdaq Stock Market.
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(c) This Agreement and the Merger shall have been approved by
the requisite vote of the Company's Shareholders in accordance with the DGCL.
(d) The Sellers shall have been furnished with the appropriate
evidence, reasonably satisfactory to them and their counsel, of the granting of
such consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
subsections (a), (b) and (c).
10.4 Delivery of Documents. The Pegasus Parties, as applicable, shall
have executed and delivered, or caused to be executed and delivered, to the
Company and the Principal Company Shareholders the following documents:
(i) Noncompetition Agreements -- Owners, executed by
Pegasus.
(ii) Noncompetition Agreements -- Management,
executed by Pegasus.
(iii) Registration Rights Agreement, executed by
Pegasus.
(iv) Escrow Agreement, executed by Pegasus and the
Escrow Agent.
(v) Voting Agreement, executed by the Principal
Pegasus Shareholders and by Marshall W. Pagon.
(vi) Schedule satisfactory to the Company and
certified as being complete and correct by Pegasus reflecting the number of
subscribers in each of the service areas served by Pegasus as of the Closing
Date, based on reports of the NRTC, including the most recent ad hoc Active
Subscribers Report, ad hoc Active Subscribers Without Core Packages Report and
ad hoc Cut Off Report by Level.
(vii) Evidence reasonably satisfactory to the Sellers
that the Pegasus Parties have each taken all action necessary to authorize the
execution of this Agreement and the Collateral Documents and the consummation of
the transactions contemplated hereby.
(viii) Such other documents and instruments as the
Sellers may reasonably request: (A) to evidence the accuracy of the
representations and warranties of the Pegasus Parties under this Agreement and
the Collateral Documents and any documents, instruments or certificates required
to be delivered thereunder; (B) to evidence the performance by the Pegasus
Parties of, or the compliance by the Pegasus Parties with, any covenant,
obligation, condition and agreement to be performed or complied with by the
Pegasus Parties under this Agreement and the Collateral Documents; or (C) to
otherwise facilitate the consummation or performance of any of the transactions
contemplated by this Agreement and the Collateral Documents.
(ix) Opinion of Drinker Biddle & Reath LLP, counsel
to the Pegasus Parties, dated the Closing Date, in form and substance reasonably
satisfactory to the Company.
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(x) Opinion of counsel to the Principal Company
Shareholders, in form reasonably satisfactory to them, to the effect that their
receipt of the Pegasus Class A Common Stock in the Merger is tax-deferred under
the Code.
10.5 No Material Adverse Change. There shall have been no material
adverse change in the business, financial condition, prospects or operations of
Pegasus and its Subsidiaries taken as a whole, other than those affecting the
DIRECTV Distribution Business or the broadcast or cable television industry in
general.
10.6 Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority and no Legal Requirement
shall have been enacted, promulgated or issued or deemed applicable to any of
the transactions contemplated by this Agreement and the Collateral Documents
that would: (i) prevent consummation of any of the transactions contemplated by
this Agreement and the Collateral Documents; or (ii) cause any of the
transactions contemplated by this Agreement and the Collateral Documents to be
rescinded following consummation.
ARTICLE XI
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following
Closing:
11.1 Transition. None of the Principal Company Shareholders shall take
any action that is designed or intended to have the effect of discouraging any
lessor, licensor, subscriber, supplier or other business associate of the
Company, its Subsidiaries or the Business from maintaining the same business
relationships with Pegasus, the Surviving Corporation and its Subsidiaries after
Closing as it maintained with the Company and its Subsidiaries prior to Closing.
11.2 Indemnification of Directors, Officers and Managers of the Company
and its Predecessors; Directors' and Officers' Insurance.
(a) The certificate of incorporation and bylaws of the
Surviving Corporation (and of any corporation that shall succeed to it by
merger, consolidation or otherwise) shall contain the provisions with respect to
indemnification set forth in the certificate of incorporation and bylaws of the
Company on the date of this Agreement, which provisions shall not be amended,
repealed or otherwise modified for a period of six (6) years after the Effective
Time in any manner that would adversely affect the rights thereunder of persons
who at any time prior to the Effective Time were identified as prospective
indemnitees under the certificate of incorporation or bylaws of the Company in
respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this
Agreement), unless such modification is required by applicable law.
(b) From and after the Effective Time, the Surviving
Corporation shall indemnify, defend and hold harmless the present and former
officers, directors and employees of
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the Company (and its predecessors) and its Subsidiaries (collectively, the "DTS
Indemnified Parties") against all losses, expenses, claims, damages, liabilities
or amounts that are paid in settlement of, with the approval of Pegasus and the
Surviving Corporation (which approval shall not be unreasonably withheld), or
otherwise in connection with, any claim, action, suit, proceeding or
investigation (a "Claim"), based in whole or in part on the fact that such
person is or was such a director, manager, officer or employee and arising out
of actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement), in each
case to the fullest extent permitted under the DGCL (and shall pay expenses in
advance of the final disposition of any such action or proceeding to each DTS
Indemnified Party to the fullest extent permitted under the DGCL, upon receipt
from the Indemnified Party to whom expenses are advanced of the undertaking to
repay such advances contemplated by Section 145(e) of DGCL).
(c) Without limiting the foregoing, in the event any Claim is
brought against any DTS Indemnified Party (whether arising before or after the
Effective Time) after the Effective Time, (i) subject to the last sentence of
this subsection (c), the Surviving Corporation may retain counsel reasonably
acceptable to the DTS Indemnified Parties to represent them in connection with
the claim, and if it shall fail to do so the DTS Indemnified Parties may retain
their regularly engaged independent legal counsel as of the date of this
Agreement, or other independent legal counsel satisfactory to them provided that
such other counsel shall be reasonably acceptable to Pegasus and the Surviving
Corporation, (ii) the Surviving Corporation shall pay all reasonable fees and
expenses of such counsel for the DTS Indemnified Parties promptly as statements
therefor are received, and (iii) the Surviving Corporation will use its
reasonable efforts to assist in the vigorous defense of any such matter,
provided that the Surviving Corporation shall not be liable for any settlement
of any Claim effected without its written consent, which consent shall not be
unreasonably withheld. Any DTS Indemnified Party wishing to claim
indemnification under this Section 11.2, promptly upon learning of any such
Claim, shall notify the Surviving Corporation (although the failure so to notify
the Surviving Corporation shall not relieve the Surviving Corporation from any
liability which the Surviving Corporation may have under this Section 11.2,
except to the extent such failure prejudices the Surviving Corporation), and
shall deliver to the Surviving Corporation the undertaking contemplated by
Section 145(e) of DGCL. The DTS Indemnified Parties and the Surviving
Corporation and its Affiliates as a group shall be represented by one law firm
(in addition to local counsel) with respect to each such matter unless there is,
under applicable standards of professional conduct (as reasonably determined by
counsel to such DTS Indemnified Parties) a conflict on any significant issue
between the position of the Surviving Corporation and its Affiliates, on the one
hand, and one or more DTS Indemnified Parties, on the other hand, or between the
position of any two or more of such DTS Indemnified Parties, as the case may be,
in which event additional counsel as may be required may be retained by such DTS
Indemnified Parties.
(d) Pegasus shall cause to be maintained in effect for not
less than six (6) years after the Effective Time the current policies of
directors' and officers' liability insurance and fiduciary liability insurance
maintained by the Company with respect to matters occurring prior to the
Effective Time; provided, however, that Pegasus may substitute therefor policies
of
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substantially the same coverage containing terms and conditions that are
substantially the same for the DTS Indemnified Parties to the extent reasonably
available.
(e) This Section 11.2 is intended to be for the benefit of,
and shall be enforceable by, the DTS Indemnified Parties referred to herein,
their heirs and personal representatives and shall be binding on Pegasus and
Merger Sub and the Surviving Corporation and their respective successors and
assigns.
11.3 Certain Securities Law Matters. For a period of six (6) months
following the Closing, Pegasus shall take no action which would cause those
Shareholders who are beneficial owners of 10 percent (10%) or more of the
Pegasus Class A Common Stock (as determined under Section 16(b) of the Exchange
Act) at the Closing by virtue of their receipt or entitlement to the Merger
Consideration to have liability under Section 16(b) of the Exchange Act.
11.4 Offer to Purchase. Promptly following the Closing, Pegasus shall
cause the Surviving Corporation to commence the Offer to Purchase.
ARTICLE XII
TERMINATION
12.1 Events of Termination. This Agreement may be terminated and the
transactions contemplated by this Agreement may be abandoned at any time prior
to Closing as provided below:
(a) This Agreement may be terminated by the mutual written
consent of both Pegasus and the Company at any time prior to Closing.
(b) The Pegasus Parties may terminate this Agreement by giving
written notice to the Sellers at any time prior to Closing (i) on or before
January 15, 1998, if the Pegasus Parties' continuing due diligence investigation
of the Company, the Business or the Assets is not satisfactory to the Pegasus
Parties; or (ii) if the Company or any of the Sellers breaches any
representation, warranty or covenant contained in this Agreement, which breach
if unremedied would cause any condition precedent stated in Article IX not to be
satisfied, Pegasus notifies the Sellers of the breach, and the breach continues
without cure for a period of 30 days after the notice of breach.
(c) The Company may terminate this Agreement by giving written
notice to Pegasus at any time prior to Closing if any Pegasus Party breaches any
representation, warranty or covenant contained in this Agreement, which breach
if unremedied would cause any condition precedent stated in Article X not to be
satisfied, the Sellers notify Pegasus of the breach, and the breach continues
without cure for a period of 30 days after the notice of breach.
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(d) The Company may terminate this Agreement if any of the
following occurs after the date hereof and before the Closing (it being
understood that the occurrence of any of the following will not constitute a
breach of this Agreement by any of the Pegasus Parties):
(i) Pegasus or any of its Subsidiaries makes any
Acquisition or an investment in any business in any single transaction or series
of related transactions for total consideration in excess of $25,000,000, other
than of a DIRECTV Distribution Business;
(ii) Pegasus or any of its Subsidiaries disposes of
any of its assets out of the Ordinary Course, or any of its businesses, in
either case, in any single transaction or series of related transactions for
consideration in excess of $25,000,000, other than in connection with the
disposition of its New England cable operations;
(iii) Pegasus or any of its Subsidiaries issues
equity securities or securities convertible into or exchangeable for equity
securities in any single transaction or series of related transactions at an
offering price that is both greater than $25,000,000 in the aggregate and less
than $25 per share on a common stock equivalent basis, other than (A) in
connection with acquisitions, (B) under existing employee benefit plans, or (C)
in payment in kind of regularly scheduled dividends on Pegasus's Series A
Preferred Stock;
(iv) Pegasus or any of its Subsidiaries incurs
indebtedness in excess of $15,000,000 in the aggregate other than in connection
with acquisitions (including increases in the letter of credit posted in favor
of NRTC) and other than under the Pegasus Credit Agreement; or
(v) Pegasus declares or pays any dividend or other
distribution on its capital stock or redeems or repurchases any of its capital
stock, other than regularly scheduled dividend payments on Pegasus's Series A
Preferred Stock and other than redemptions or repurchase of shares of employees
in connection with the termination of their employment.
(vi) Pegasus or any of its Subsidiaries enters into
any transaction (or series of related transactions), other than transactions in
the Ordinary Course and other than transactions of the nature described in any
of paragraphs (i) through (v), resulting in an expenditure or commitment in
excess of $15,000,000.
(e) The Pegasus Parties may terminate this Agreement if the
Company or any of its Subsidiaries enters into any agreement to make an
Acquisition of or investment in any business permitted by Section 5.3(c)(i) for
consideration in excess of $15,000,000 in any single transaction or series of
related transactions (it being understood that any such action will not
constitute a breach of this Agreement by any of the Sellers).
(f) Either Pegasus or the Company may terminate this Agreement
if the Closing shall not have occurred on or before June 1, 1998, otherwise than
because of a breach by the terminating Party of any of its representations,
warranties or covenants in this Agreement.
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12.2 Effect of Termination. Upon any termination of this Agreement, all
obligations under this Agreement shall cease, except for any obligation or
liability of any Party based on or arising from a breach or default by such
Party with respect to any of its covenants or agreements contained in this
Agreement, other than covenants or agreements contained in Sections 7.1, 7.3
through 7.8, 7.10 through 7.13, 8.1, 8.3 through 8.8, and 8.10 and Article XI.
No termination of this Agreement shall affect any Party's obligation under the
Confidentiality Agreement.
12.3 Procedure Upon Termination. If this Agreement is terminated by any
Party pursuant to this Article, notice of such termination shall promptly be
given by the terminating Party to the other Party.
ARTICLE XIII
INDEMNIFICATION
13.1 Survival of Representations and Warranties.
(a) Except to the extent waived pursuant to Section 13.7, the
representations and warranties contained in Sections 2.12, 3.12, 5.11(a), 5.12
and 7.11 and the last sentence of Section 5.2 shall survive Closing and shall
expire on November 5, 1998; provided, however, that such survival shall be for
the sole purpose of supporting indemnification claims under Section 13.2 and
13.3; and provided further that such expiration will not include, extend or
apply to any claim for indemnification made pursuant to Section 13.2 or 13.3
prior to such date.
(b) Except as provided in Section 13.1(a), all of the
representations and warranties contained in this Agreement shall be deemed
conditions to the Merger, to the extent stated in Sections 9.1 and 10.1, and
shall not survive the Closing or the termination of this Agreement.
(c) If the Closing occurs (i) the covenants and agreements
contained in Sections 7.1 through 7.8, 7.10 through 7.13, 8.1 through 8.8 and
8.10 shall expire at the Closing (including any claim based on a breach of any
such covenant or agreement occurring before the Closing), and (ii) the other
covenants and agreements of the Pegasus Parties and the Sellers in this
Agreement shall survive indefinitely.
13.2 Indemnification Provisions for Benefit of the Pegasus Parties.
(a) If the Company breaches (or if any third party alleges
facts that, if true, would mean the Company has breached) any representation or
warranty of the Company that survives the Closing pursuant to Section 13.1, or
if the Company Registration Statement (or if any third party alleges facts that,
if true, would mean the Company Registration Statement), together with written
supplements thereto provided to Pegasus prior to the Closing Date (whether or
not filed with the Commission) contained, as of the Closing Date, an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading, and if
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in any such case Pegasus makes a written claim for indemnification no later than
November 5, 1998 (the "Indemnification Period"), then, subject to the
limitations contained elsewhere in this Article XIII, the Shareholders shall,
severally and in proportion to the amount of the Merger Consideration received
by each, indemnify Pegasus, the Surviving Corporation and their Affiliates and
the shareholders, directors, officers, employees, agents, successors and assigns
of any of such Persons (the "Pegasus Indemnitees") from and against any Adverse
Consequences that any such Person may suffer through and after the date of the
claim for indemnification (including any Adverse Consequences that any such
Person may suffer after the end of the Survival Period) resulting from, arising
out of, relating to or caused by the breach, untrue statement or omission.
(b) In addition to the their obligations under Section
13.2(a), the Principal Company Shareholders and (as provided in the
Indemnification Agreement) each of the Successor Principal Company Shareholders
and the Columbia Principals shall, severally and in proportion to the amount of
the Merger Consideration received by each, indemnify the Pegasus Indemnitees
from and against any Adverse Consequences described in Section 13.2(a), subject
to the limitations described elsewhere in this Article XIII.
(c) Notwithstanding the foregoing, the Shareholders, the
Principal Company Shareholders, any Successor Principal Company Shareholders,
and the Columbia Principals collectively shall not have any obligation to
indemnify any Pegasus Indemnitee under Section 13.2(a) or (b) unless the Adverse
Consequences with respect thereto shall exceed $2,000,000 in the aggregate, in
which case they shall be required to indemnify the Pegasus Indemnitees only for
the excess of such Adverse Consequences over $1,150,000. This limitation shall
not apply to obligations arising out of the breach of any representation or
warranty contained in Section 2.12.
(d) Notwithstanding the foregoing, (i) the liability of any
Shareholder under Section 13.2(a) shall be satisfied only by the delivery
pursuant to Section 13.6 of Escrowed Shares held for such Shareholder's account
by the Escrow Agent, valued in accordance with Section 13.6; and (ii) the
liability of any Principal Company Shareholder, Successor Principal Shareholder
or Columbia Principal under Section 13.2(b) or under the Indemnification
Agreement (A) shall be satisfied only by the delivery pursuant to Section 13.6
of shares of Pegasus Class A Common Stock, valued in accordance with Section
13.6, or, at the election of each Principal Company Shareholder, each Columbia
Principal or each Successor Principal Company Shareholder, cash of equal value,
(B) shall be limited in the aggregate to five percent of the total number of
shares of Pegasus Class A Common Stock included in the Merger Consideration and
received by such Principal Company Shareholder, Successor Principal Shareholder
or Columbia Principal, and (C) shall not apply until all of the Escrowed Shares
shall have been delivered to Pegasus in satisfaction of indemnification
obligations under Section 13.2(a). This limitation shall not apply to
obligations arising out of the breach of any representation or warranty
contained in Section 2.12.
13.3 Indemnification Provisions for Benefit of the Shareholders.
(a) If Pegasus breaches (or if any third party alleges facts
that, if true, would mean that Pegasus has breached) any representation or
warranty of Pegasus that survives the
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Closing pursuant to Section 13.1 or if the Pegasus Merger Registration Statement
(or if any third party alleges facts that, if true, would mean that the Pegasus
Merger Registration Statement), as of the Closing Date, contained an untrue
statement of material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading (except for statements
made or facts omitted in reliance on and in conformity with information
furnished in writing by the Company or any Principal Company Shareholder
specifically for inclusion therein), and if, in any such case, any Shareholder
makes a written claim for indemnification against Pegasus and the Surviving
Corporation within the Indemnification Period, then subject to the limitations
contained elsewhere in this Article XIII, Pegasus and the Surviving Corporation
shall jointly and severally indemnify, defend and hold harmless the
Shareholders, the former directors, officers, employees and agents of the
Company and its Affiliates and the successors and assigns of any of such Persons
(the "Company Indemnitees"), from and against any Adverse Consequences that any
such Person may suffer through and after the date of the claim for
indemnification (including any Adverse Consequences that any such Person may
suffer after the end of the Indemnification Period) resulting from, arising out
of, relating to or caused by the breach, untrue statement or omission.
(b) Notwithstanding the foregoing, Pegasus and the Surviving
Corporation shall not have any obligation to indemnify any Company Indemnitee
under Section 13.3(a) unless the Adverse Consequences described therein shall
exceed $2,000,000 in the aggregate, in which case they shall be required to
indemnify the Company Indemnitees only for the excess of such Adverse
Consequences over $1,150,000. This limitation shall not apply to obligations
arising out of the breach of any representation or warranty contained in the
last sentence of Section 5.2.
(c) Notwithstanding the foregoing, the liability of Pegasus
and the Surviving Corporation under Section 13.3(a) shall be satisfied only by
the delivery pursuant to Section 13.6 of additional shares of Pegasus Class A
Common Stock, valued in accordance with Section 13.6, and shall be limited in
the aggregate to 15 percent of the total number of shares of Pegasus Class A
Common Stock included in the Merger Consideration, valued in accordance with
Section 13.6. This limitation shall not apply to obligations arising out of the
breach of any representation or warranty contained in the last sentence of
Section 5.2.
13.4 Matters Involving Third Parties.
(a) If any third party shall notify either Pegasus, the
Surviving Corporation or any Principal Company Shareholder (the "Indemnified
Party") prior to the expiration of the Indemnification Period with respect to
any matter (a "Third Party Claim") that may give rise to a claim for
indemnification against the other (the "Indemnifying Party") under this Article,
then the Indemnified Party shall promptly notify the Indemnifying Party thereof
in writing; provided, however, that no delay on the part of the Indemnified
Party in notifying any Indemnifying Party (but not beyond the expiration of the
Indemnification Period, or, in the case of notice of a Third Party Claim
received by the Indemnified Party on the last day of the Indemnification Period,
the next Business Day) shall relieve the Indemnifying Party from any obligation
hereunder unless (and then solely to the extent) the Indemnifying Party thereby
is prejudiced.
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(b) Any Indemnifying Party shall have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Party so long as: (i) the
Indemnifying Party notifies the Indemnified Party in writing within 15 days
after the Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from and against the
entirety of any Adverse Consequences the Indemnified Party may suffer (limited
as provided in this Article XIII) resulting from, arising out of, relating to,
in the nature of or caused by the Third Party Claim; (ii) the Indemnifying Party
provides the Indemnified Party with evidence acceptable to the Indemnified Party
that the Indemnifying Party will have the financial resources to defend against
the Third Party Claim and fulfill its indemnification obligations hereunder
(subject to the aggregate limitations contained herein); (iii) the Third Party
Claim involves only money damages and does not seek an injunction or other
equitable relief; (iv) settlement of, or an adverse judgment with respect to,
the Third Party Claim is not, in the good faith judgment of the Indemnified
Party, likely to (A) exceed the limit of the Indemnifying Party hereunder or (B)
establish a precedent, custom or practice materially adverse to the continuing
business interests of the Indemnified Party; and (v) the Indemnifying Party
conducts the defense of the Third Party Claim actively and diligently.
(c) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with subsection (b): (i) the
Indemnified Party may retain separate co-counsel at its sole cost and expense
and participate in the defense of the Third Party Claim; (ii) the Indemnified
Party shall not consent to the entry of any judgment or enter into any
settlement with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (not to be withheld unreasonably); and (iii)
the Indemnifying Party shall not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnified Party (not to be withheld unreasonably).
(d) If any of the conditions in Section 13.4(b) is not or no
longer satisfied, however: (i) the Indemnified Party may defend against, and
consent to the entry of any judgment or enter into any settlement with respect
to, the Third Party Claim in any manner it reasonably may deem appropriate (and
the Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith); (ii) the Indemnifying Party shall
reimburse the Indemnified Party promptly and periodically for the costs of
defending against the Third Party Claim (including attorneys' fees and expenses)
by delivery of shares of Pegasus Class A Common Stock, from the Escrowed Shares
or otherwise, valued as set forth in Section 13.6; and (iii) the Indemnifying
Party shall remain responsible for any Adverse Consequences the Indemnified
Party may suffer resulting from, arising out of, relating to, in the nature of
or caused by the Third Party Claim to the fullest extent, but subject to the
limitations, provided in this Article XIII.
13.5 Determination of Adverse Consequences. Pegasus, the Surviving
Corporation and the Shareholders shall take into account the time cost of money
(using the Applicable Rate as the discount rate) in determining Adverse
Consequences for purposes of this Article XIII. Adverse Consequences arising
from a breach or alleged breach of any representation or warranty referred to in
Section 13.2 or 13.3 shall be calculated, and whether there is a breach of any
such
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representation or warranty for purposes of Section 13.2 or 13.3 shall be
determined, without reference to any dollar threshold or materiality threshold
contained in any such representation or warranty (it being understood that any
such threshold shall be given effect for determining whether any condition
precedent stated in Section 9.1 or 10.1 shall have been satisfied as of the
Closing Date). All indemnification obligations under this Article shall be net
of any insurance proceeds received by the Indemnified Party in respect of the
event or circumstance giving rise to the claim for indemnification and shall be
deemed adjustments to the Merger Consideration.
13.6 Payment in Shares. All shares of Pegasus Class A Common Stock
delivered in satisfaction of any indemnity claim under this Article XIII shall
be delivered free and clear of all Encumbrances other than transfer restrictions
under applicable securities laws. Each share of Pegasus Class A Common Stock
(whether included in the Escrowed Shares or otherwise) delivered in satisfaction
of any such indemnity claim shall be valued at the Market Price on the Closing
Date (adjusted for stock splits and reclassifications). Any dividends previously
paid and any other distributions made after the Closing Date in respect of
shares of Pegasus Class A Common Stock delivered to Pegasus in settlement of any
indemnity claim (whether paid in cash, securities or other property) shall also
be transferred, free and clear of all Encumbrances other than transfer
restrictions under applicable Securities laws, to Pegasus; and in the case of
Pegasus Class A Common Stock delivered to any Company Indemnitee in settlement
or any indemnity claim, Pegasus shall be required to deliver to such Company
Indemnitee the amount of any cash, securities or other property, valued at the
date of such settlement, that such Company Indemnitee would have received had
such Company Indemnitee owned such shares on the date of such dividend or
distribution.
13.7 No Indemnification for Certain Disclosed Matters.
(a) If any of the Sellers shall disclose in writing to Pegasus
on or before the Closing Date pursuant to Section 7.7 or 7.8 (but not otherwise)
any fact that would cause any condition precedent stated in Article IX not to be
satisfied or would give rise to a right on the part of the Pegasus Parties to
terminate this Agreement pursuant to Section 12.1, if the Pegasus Parties do not
terminate this Agreement pursuant to Section 12.1, then the Pegasus Indemnitees
shall be deemed to have waived any claim to indemnification based on such fact
upon completion of the Closing.
(b) If Pegasus shall disclose in writing to the Company on or
before the Closing Date pursuant to Section 8.7 or 8.8 (but not otherwise) any
fact that would cause any condition precedent stated in Article X not to be
satisfied or would give rise to a right on the part of the Company to terminate
this Agreement pursuant to Section 12.1, if the Company does not terminate this
Agreement pursuant to Section 12.1, then the Company Indemnitees shall be deemed
to have waived any claim to indemnification based on such fact upon completion
of the Closing.
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ARTICLE XIV
MISCELLANEOUS
14.1 Parties Obligated and Benefited. This Agreement shall be binding
upon the Parties and their respective successors by operation of law and shall
inure solely to the benefit of the Parties and their respective successors by
operation of law, and no other Person shall be entitled to any of the benefits
conferred by this Agreement, except that the Shareholders shall be third party
beneficiaries of this Agreement. Without the prior written consent of the other
Party, no Party may assign this Agreement or the Collateral Documents or any of
its rights or interests or delegate any of its duties under this Agreement or
the Collateral Documents; provided, however, that Pegasus may collaterally
assign its rights under this Agreement and the Collateral Documents to any
Persons providing debt financing to Pegasus or its Affiliates.
14.2 Notices. Any notices and other communications required or
permitted hereunder shall be in writing and shall be effective upon delivery by
hand or upon receipt if sent by certified or registered mail (postage prepaid
and return receipt requested) or by a nationally recognized overnight courier
service (appropriately marked for overnight delivery) or upon transmission if
sent by telex or facsimile (with request for immediate confirmation of receipt
in a manner customary for communications of such respective type and with
physical delivery of the communication being made by one or the other means
specified in this Section as promptly as practicable thereafter). Notices shall
be addressed as follows:
(a) If to Pegasus, Merger Sub or the Surviving Corporation,
to:
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
5 Radnor Corporate Center
100 Matsonford Road, Suite 454
Radnor, Pennsylvania 19087
Attn: Mr. Marshall W. Pagon
Telecopier: 610-341-1835
(with a copy to Ted S. Lodge, Esquire at the same address)
(b) If to the Company before the Closing Date or to the
Principal Company Shareholders before or after the Closing Date, to:
Digital Television Services, Inc.
880 Holcomb Bridge Road
Building C-200
Roswell, Georgia 30076
Attn: Douglas S. Holladay, Jr.
Telecopier: 770-645-9429
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with a copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
NationsBank Corporate Center
100 North Tryon Street, Suite 2600
Charlotte, North Carolina 28202-4000
Attn: H. Bryan Ives, III, Esq.
Telecopier: 704-377-4814
(c) If to any Shareholder after the Closing Date, as set forth
on Exhibit 9.
Any Party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section.
14.3 Attorneys' Fees. In the event of any action or suit based upon or
arising out of any alleged breach by any Party of any representation, warranty,
covenant or agreement contained in this Agreement or the Collateral Documents,
the prevailing Party shall be entitled to recover reasonable attorneys' fees and
other costs of such action or suit from the other Party.
14.4 Headings. The Article and Section headings of this Agreement are
for convenience only and shall not constitute a part of this Agreement or in any
way affect the meaning or interpretation thereof.
14.5 Choice of Law. This Agreement and the rights of the Parties under
it shall be governed by and construed in all respects in accordance with the
laws of the Commonwealth of Pennsylvania, without giving effect to any choice of
law provision or rule (whether of the Commonwealth of Pennsylvania or any other
jurisdiction that would cause the application of the laws of any jurisdiction
other than the Commonwealth of Pennsylvania).
14.6 Rights Cumulative. All rights and remedies of each of the Parties
under this Agreement shall be cumulative, and the exercise of one or more rights
or remedies shall not preclude the exercise of any other right or remedy
available under this Agreement or applicable law.
14.7 Further Actions. The Parties shall execute and deliver to each
other, from time to time at or after Closing, for no additional consideration
and at no additional cost to the requesting party, such further assignments,
certificates, instruments, records, or other documents, assurances or things as
may be reasonably necessary to give full effect to this Agreement and to allow
each party fully to enjoy and exercise the rights accorded and acquired by it
under this Agreement.
14.8 Time of the Essence. Time is of the essence under this Agreement.
If the last day permitted for the giving of any notice or the performance of any
act required or permitted under this Agreement falls on a day which is not a
Business Day, the time for the giving of such notice or the performance of such
act shall be extended to the next succeeding Business Day.
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14.9 Late Payments. If either Party fails to pay the other any amounts
when due under this Agreement, the amounts due will bear interest from the due
date to the date of payment at the Applicable Rate.
14.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.11 Entire Agreement. This Agreement (including the Exhibits, the
Company Disclosure Statement, the Pegasus Disclosure Statement and any other
documents, instruments and certificates referred to herein, which are
incorporated in and constitute a part of this Agreement) contains the entire
agreement of the Parties and supersedes all prior oral or written agreements,
understandings and representations to the extent that they relate in any way to
the subject matter hereof, including the Agreement in Principle, but excluding
the Confidentiality Agreement, which shall survive the execution and delivery
of, and any termination of, this Agreement.
14.12 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties. No waiver by any party of any default, misrepresentation or breach of
warranty or covenant hereunder shall be valid unless the same shall be in
writing and signed by the Person against whom its enforcement is sought, and no
such waiver whether intentional or not, shall be deemed to extend to any prior
or subsequent default, misrepresentation or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.13 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean "including without limitation." If any Party has
breached any representation, warranty or covenant contained herein in any
respect, the fact that there exists another representation, warranty or covenant
relating to the same subject matter (regardless of the relative levels of
specificity) which the Party has not breached shall not detract from or mitigate
the fact that the party is in breach of the first representation, warranty or
covenant.
14.14 Expenses. Except as otherwise provided in this Agreement, each
Party shall bear its own costs and expenses (including legal fees and expenses
and accountants' fees and expenses) incurred in connection with the negotiation
of this Agreement, the performance of its obligations and the consummation of
the transactions contemplated hereby.
14.15 Disclosure. The terms of this Agreement are confidential and no
Party shall disclose to any individual or entity such terms, except that (i) any
Party may make such disclosure about this Agreement and information related
thereto as is required (in the opinion of its counsel)
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by law (including filings and other disclosure required under the Securities Act
or the Exchange Act); (ii) any Party may make such disclosure to its
Representatives and lenders who agree to keep the terms of this Agreement
confidential; (iii) the Parties may disclose the terms of this Agreement to the
NRTC and DirecTV, Inc.; (iv) the Sellers may disclose the terms of this
Agreement to the Shareholders; (v) Pegasus may disclose the terms of this
Agreement to its shareholders; and (vi) no Party shall have any obligation to
refrain from disclosing any matter that shall have become a matter of public
knowledge other than by a breach of such Party's obligations hereunder. Each of
the Parties will be responsible for any damages resulting from the unauthorized
disclosure of the terms of this Agreement by it or its Representatives.
14.16 Company Action. Any action, consent or approval required or
permitted to be taken, given, granted or withheld by the Company hereunder shall
be taken, given, granted or withheld by action of the Company's Board of
Directors and, unless such board action receives the unanimous vote of all the
directors then in office, shall be subject to approval by the holders of 70% or
more of the issued and outstanding shares of the Company's PIK Preferred Stock.
This Section is for the exclusive purpose of regulating the relationship among
the DTS Parties. Pegasus may conclusively rely on any writing signed on behalf
of the Company as having received any approval required by this Section and
shall not be under any duty to inquire as to the extent of any such
authorization.
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IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Marshall W. Pagon
-----------------------------
Marshall W. Pagon,
Chairman and President
PEGASUS DTS MERGER SUB, INC.
By: /s/ Marshall W. Pagon
-----------------------------
Marshall W. Pagon,
Chairman and President
DIGITAL TELEVISION SERVICES, INC.
By: /s/ Douglas S. Holladay, Jr.
-----------------------------
Douglas S. Holladay, Jr.,
President
Principal Pegasus Shareholders:
PEGASUS CAPITAL, L.P.
By: Pegasus Capital, Ltd., General Partner
By: /s/ Marshall W. Pagon
-----------------------------
Marshall W. Pagon,
Chairman and President
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By: /s/ Marshall W. Pagon
-----------------------------
Marshall W. Pagon,
Chairman and President
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Principal Company Shareholders:
WHITNEY EQUITY PARTNERS, L.P.
By: J.H. Whitney Equity Partners LLC
Its General Partner
By: /s/ Michael C. Brooks
---------------------------------
Michael C. Brooks,
Managing Member
FLEET VENTURE RESOURCES, INC.
By: /s/ Riordon B. Smith
---------------------------------
Riordon B. Smith,
Senior Vice President
FLEET EQUITY PARTNERS VI, L.P.
By: Fleet Growth Resources II, Inc.
Its General Partner
By: /s/ Riordon B. Smith
---------------------------------
Riordon B. Smith,
Senior Vice President
CHISHOLM PARTNERS III, L.P.
By: Silverado III L.P., its general partner
By: Silverado III Corp., its general partner
By: /s/ Riordon B. Smith
---------------------------------
Riordon B. Smith,
Senior Vice President
71
<PAGE>
KENNEDY PLAZA PARTNERS
By: /s/ Riordon B. Smith
---------------------------------
Riordon B. Smith,
General Partner
COLUMBIA DBS CLASS A INVESTORS, LLC.
By: /s/ Mark R. Warner
---------------------------------
Mark R. Warner,
Member
COLUMBIA DBS INVESTORS, L.P.
By: Columbia Capital Corporation
Its General Partner
By: /s/ Harry F. Hopper, III
---------------------------------
Harry F. Hopper, III,
Managing Director
COLUMBIA DBS, INC.
By: /s/ Harry F. Hopper, III
---------------------------------
Harry F. Hopper,
President
72
<PAGE>
Exhibit 1
Form of Fleet Confidentiality Agreement
CONFIDENTIALITY AGREEMENT, dated ______________, 1998, among PEGASUS
COMMUNICATIONS CORPORATION, a Delaware corporation ("Pegasus"), and [Fleet
Parties] (collectively, "Fleet").
RECITALS:
Pegasus and Digital Television Services, Inc. ("DTS") have entered into
that certain Agreement and Plan of Merger dated January 8, 1998 ("Merger
Agreement"). Fleet is a direct or indirect equity owner of DTS. The Merger
Agreement requires that Fleet execute and deliver this Agreement as a condition
precedent to the obligations of Pegasus under the Merger Agreement.
NOW, THEREFORE, in consideration of the premises, mutual promises,
covenants, agreements, representations and warranties contained herein and
intending to be legally bound hereby, Fleet agrees as follows:
1. Definitions. Capitalized terms used and not otherwise defined herein
shall have the respective meanings assigned to them in the Merger Agreement.
2. Acknowledgments by Fleet. Fleet acknowledges that:
(a) Pegasus has required that Fleet make the covenants set
forth in this Agreement as a condition to Pegasus's consummating the
transactions contemplated by the Merger Agreement.
(b) The portion of the Merger Consideration deliverable to
Fleet is part of the consideration for his undertakings herein, and
such undertakings are a material inducement to Pegasus to enter into
the Merger Agreement and complete the Merger.
(c) The provisions of this Agreement are reasonable and
necessary because of the unique nature of the Business.
3. Confidentiality. Except for disclosure compelled by subpoena or
other legal process, Fleet shall not retain in writing, use, divulge, furnish,
or make accessable to anyone (except Fleet's employees or agents who have a need
to know and who shall be bound by this confidentiality provision), without the
express written consent of Pegasus, any trade secret, private or confidential
information or knowledge of or about Pegasus, DTS or any subsidiary or Affiliate
of either. All computer software, address books, telephone lists,
<PAGE>
customer lists, price lists and other pricing data, contract forms, books,
records, files and know-how of which Fleet acquired knowledge while an indirect
owner of DTS are acknowledged to be the property of DTS and Pegasus and shall
not be duplicated or removed from the possession of Pegasus or DTS.
4. Remedies. If Fleet breaches the covenants set forth in Section 3 of
this Agreement, Pegasus shall be entitled to damages and the right to injunctive
or other equitable relief to restrain any breach or threatened breach or
otherwise to specifically enforce the provisions of Section 3 of this Agreement.
5. General.
(a) This Agreement shall be binding upon the parties hereto
and shall inure to the benefit of their affiliates and successors and assigns.
(b) The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(i) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other parties; (ii) no waiver that may be given
by a party will be applicable except in the specific instance for which it is
given; and (iii) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement.
(c) This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania without regard to conflicts of laws principles.
(d) Whenever possible, each provision and term of this
Agreement shall be interpreted in a manner to be effective and valid, but if any
provision or term of this Agreement is held to be prohibited by law or invalid,
then such provision or term shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or affecting in any manner
whatsoever the remainder of such provision or term or the remaining provisions
or terms of this Agreement.
(e) This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original copy of this
Agreement and all of which, when taken together, shall be deemed to constitute
one and the same agreement.
-2-
<PAGE>
(f) The headings of Sections in this Agreement are provided
for convenience only and shall not affect its construction or interpretation.
All references to "Section" or "Sections" refer to the corresponding Section or
Sections of this Agreement unless otherwise specified.
(g) This Agreement and the Merger Agreement constitute the
entire agreement between the parties with respect to the subject matter of this
Agreement and supersede all prior written and oral agreements and understandings
with respect to the subject matter of this Agreement. This Agreement may not be
amended except by a written agreement executed by the parties.
IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
PEGASUS COMMUNICATIONS CORPORATION
By:_______________________________
Name:
Title:
__________________________________
[Fleet]
-3-
<PAGE>
Exhibit 2
INDEMNIFICATION AGREEMENT, dated _____________, 1998, among the Persons
executing this Agreement as Indemnitors (the "Indemnitors"), and PEGASUS
COMMUNICATIONS CORPORATION, a Delaware corporation ("Pegasus").
Pegasus, Pegasus DTS Merger Sub, Inc., a Delaware corporation ("Merger
Sub"), Digital Television Services, Inc., a Delaware corporation ("DTS"), and
certain shareholders of Pegasus and of DTS are parties to an Agreement and Plan
of Merger dated January 8, 1998 (the "Merger Agreement"). Terms defined in the
Merger Agreement are used herein with the same definitions unless otherwise
defined herein.
The Indemnitors were, immediately before the Merger, direct or indirect
shareholders of DTS.
At the Closing held today under the Merger Agreement, Merger Sub is
being merged with and into DTS, DTS is thereby becoming a wholly-owned
subsidiary of Pegasus, and the Indemnitors, as well as the other shareholders of
DTS immediately before the Merger, are receiving shares of Pegasus Class A
Common Stock as the Merger Consideration. It is a condition precedent to the
Closing that the parties execute and deliver this Agreement.
NOW, THEREFORE, in consideration of the completion of the transactions
contemplated by the Merger Agreement and of the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows,
intending to be legally bound.
Section 1. Agreement to Indemnify. Each Indemnitor shall severally
indemnify the Pegasus Indemnitees against any Adverse Consequences described in
Section 13.2(a) or (b) of the Merger Agreement. The liability of each of the
Indemnitors hereunder:
(a) shall, in the case of indemnification under Section
13.2(a) of the Merger Agreement, be in the proportion that the Merger
Consideration received by such Indemnitor bears to the Merger
Consideration received by all Shareholders;
(b) shall, in the case of indemnification under Section
13.2(b) of the Merger Agreement, be in the proportion that the Merger
Consideration received by such Indemnitor bears to the Merger
Consideration received by all Indemnitors and all Principal Company
Shareholders; and
(c) shall be subject to all limitations contained in Article
XIII of the Merger Agreement.
<PAGE>
Section 2. Miscellaneous.
(a) Notices. Except as otherwise provided below, whenever it is
provided in this Agreement that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties hereto, or whenever any of the parties hereto, wishes to provide
to or serve upon the other party any other communication with respect to this
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be delivered in person or sent
by telecopy, as follows:
(b) Entire Agreement. This Agreement and the Merger Agreement represent
the entire agreement and understanding among the parties hereto with respect to
the subject matter hereof and supersede any and all prior oral and written
agreements, arrangements and understandings among the parties hereto with
respect to such subject matter; and this Agreement can be amended, supplemented
or changed, and any provision hereof can be waived or a departure from any
provision hereof can be consented to, only by a written instrument making
specific reference to this Agreement signed by Pegasus and the Indemnitors.
(c) Paragraph Headings. The paragraph headings contained in this
Agreement are for general reference purposes only and shall not affect in any
manner the meaning, interpretation or construction of the terms or other
provisions of this Agreement.
(d) Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of Pennsylvania applicable to contracts to
be made, executed, delivered and performed wholly within such state and, in any
case, without regard to the conflicts of law principles of such state.
2
<PAGE>
(e) Severability. If any provision of this Agreement shall be held by
any court of competent jurisdiction to be illegal, void or unenforceable, such
provision shall be of no force and effect, but the illegality or
unenforceability of such provision shall have no effect upon and shall not
impair the enforceability of any other provision of this Agreement.
(f) No Waiver. The failure of any party at any time or times to require
performance of any provision hereof shall not affect the right at a later time
to enforce the same. No waiver by any party of any condition, and no breach of
any provision, term, covenant, representation or warranty contained in this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be construed as a further or continuing waiver of any such
condition or of the breach of any other provision, term, covenant,
representation or warranty of this Agreement.
(g) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same original instrument. Not all
parties need sign the same counterpart. Delivery by facsimile of a signature
page to this Agreement shall have the same effect as delivery of an original
executed counterpart.
(h) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors, assigns and transferees of each of the
parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed the date first written above.
PEGASUS COMMUNICATIONS CORPORATION
By: ________________________________
Title:
Indemnitors:
___________________________________
James B. Murray, Jr.
___________________________________
David P. Mixer
3
<PAGE>
___________________________________
Mark P. Warner
___________________________________
Robert B. Blow
___________________________________
Mark J. Kington
___________________________________
Harry F. Hopper, III
___________________________________
R. Philip Herget, III
___________________________________
Neil P. Byrne
___________________________________
Barton Schneider
___________________________________
James Fleming
[SUCCESSOR PRINCIPAL COMPANY SHAREHOLDERS]
4
<PAGE>
Exhibit 3
Form of Noncompetition Agreement -- Management
NONCOMPETITION AGREEMENT, dated ______________, 1998, between PEGASUS
COMMUNICATIONS CORPORATION, a Delaware corporation ("Pegasus"), and
_____________________ (the "Senior Manager").
RECITALS:
Pegasus and Digital Television Services, Inc. ("DTS") have entered into
that certain Agreement and Plan of Merger dated January 8, 1998 ("Merger
Agreement"). The Merger Agreement requires that the Senior Manager execute and
deliver this Agreement as a condition precedent to the obligations of Pegasus
under the Merger Agreement.
NOW, THEREFORE, in consideration of the premises, mutual promises,
covenants, agreements, representations and warranties contained herein and
intending to be legally bound hereby, the Senior Manager agrees as follows:
1. Definitions. Capitalized terms used and not otherwise defined herein
shall have the respective meanings assigned to them in the Merger Agreement.
2. Acknowledgments by Senior Manager. The Senior Manager acknowledges
that:
(a) Pegasus has required that Senior Manager make the
covenants set forth in this Agreement as a condition to Pegasus's
consummating the transactions contemplated by the Merger Agreement.
(b) [The Senior Manager is a shareholder of DTS. The portion
of the Merger Consideration deliverable to him is part of the
consideration for his undertakings herein, and such undertakings are a
material inducement to Pegasus to enter into the Merger Agreement and
complete the Merger.
(c)] Pegasus has consented to certain modifications to the
Senior Manager's employment arrangements with DTS favorable to the
Senior Manager. Those modifications are part of the consideration for
the Senior Manager's undertakings herein, and the Senior Manager's
agreement to undertake them is a material inducement to Pegasus to
consent to those modifications.
[(c)(d)] The provisions of this Agreement are reasonable and
necessary because of the unique nature of the Business.
<PAGE>
3. Noncompetition. The Senior Manager hereby agrees that, for a period
beginning on the date hereof and ending as provided below, the Senior Manager
will not own, control, manage or be financially interested in, directly or
indirectly, (1) any DirecTV Distribution Business (as defined below) in any C or
D county in the United States as determined by A. C. Nielsen Company; or (2) any
direct-to-home multichannel satellite service that is substantially similar to
any service offered by DirecTV, Inc. as of the date of this Agreement in any
geographic area (collectively, the "NRTC Service Areas") served by members and
affiliates of the National Rural Telecommunications Cooperative ("NRTC"). The
Senior Manager's obligations under the preceding sentence shall expire (a) three
years after the date of this Agreement, in the case of activities within NRTC
Service Areas, and (b) September 1, 1998, in the case of activities other than
within NRTC Service Areas. "DirecTV Distribution Business" means the
distribution of any service transmitted using the frequencies licensed to Hughes
Communications Galaxy, Inc. or its successors at the 101 (degrees) West orbital
location. Notwithstanding the foregoing, nothing herein shall be construed to
prohibit or restrict the Senior Manager from owning (i) Pegasus stock, or (ii)
securities that are listed on a national securities exchange or the Nasdaq Stock
Market, which securities constitute less than 1% of the outstanding voting stock
of the issuer thereof, ownership of which does not constitute control over such
issuer, and which are held solely for investment purposes. The Senior Manager
agrees that this covenant is reasonable with respect to its duration,
geographical area and scope.
4. Confidentiality. Except for disclosure compelled by subpoena or
other legal process, the Senior Manager shall not, at any time before or after
the expiration of the restrictions in Section 3, retain in writing, use,
divulge, furnish, or make accessable to anyone, without the express written
consent of Pegasus, any trade secret, private or confidential information or
knowledge of or about Pegasus, DTS or any subsidiary or Affiliate of either. All
computer software, address books, telephone lists, customer lists, price lists
and other pricing data, contract forms, books, records, files and know-how of
which the Senior Manager acquired knowledge while an employee of DTS are
acknowledged to be the property of DTS and Pegasus and shall not be duplicated,
removed from the possession of Pegasus or DTS or made use of other than in
pursuit of the business of Pegasus, DTS and their Subsidiaries during any period
of the Senior Manager's continued employment. Upon termination of the Senior
Manager's employment for any reason, the Senior Manager shall deliver to Pegasus
all copies of any such materials that are then in his possession or under his
control.
5. Remedies. If the Senior Manager breaches the covenants set forth in
Section 3 or 4 of this Agreement, Pegasus shall be entitled to damages and the
right to injunctive or other equitable relief to restrain any breach or
threatened breach or otherwise to specifically enforce the provisions of Section
3 or 4 of this Agreement.
-2-
<PAGE>
6. General.
(a) This Agreement shall be binding upon the parties hereto
and shall inure to the benefit of their affiliates and successors and assigns.
(b) The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(i) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other parties; (ii) no waiver that may be given
by a party will be applicable except in the specific instance for which it is
given; and (iii) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement.
(c) This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania without regard to conflicts of laws principles.
(d) Whenever possible, each provision and term of this
Agreement shall be interpreted in a manner to be effective and valid, but if any
provision or term of this Agreement is held to be prohibited by law or invalid,
then such provision or term shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or affecting in any manner
whatsoever the remainder of such provision or term or the remaining provisions
or terms of this Agreement. If any of the covenants set forth in Section 3 of
this Agreement is held to be invalid or unenforceable due to its scope, breadth
or duration, then it shall be modified to the scope, breadth or duration
permitted by law and shall be fully enforceable as so modified.
(e) This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original copy of this
Agreement and all of which, when taken together, shall be deemed to constitute
one and the same agreement.
(f) The headings of Sections in this Agreement are provided
for convenience only and shall not affect its construction or interpretation.
All references to "Section" or "Sections" refer to the corresponding Section or
Sections of this Agreement unless otherwise specified.
(g) This Agreement and the Merger Agreement constitute the
entire agreement between the parties with respect to the subject matter of this
Agreement and
-3-
<PAGE>
supersede all prior written and oral agreements and understandings with respect
to the subject matter of this Agreement. This Agreement may not be amended
except by a written agreement executed by the parties.
IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
PEGASUS COMMUNICATIONS CORPORATION
By:_______________________________
Name:
Title:
__________________________________
[Senior Manager]
-4-
<PAGE>
Exhibit 4
Form of Noncompetition Agreement -- Owners
NONCOMPETITION AGREEMENT, dated ______________, 1998, between PEGASUS
COMMUNICATIONS CORPORATION, a Delaware corporation ("Pegasus"), and
_____________________ (the "Owner").
RECITALS:
Pegasus and Digital Television Services, Inc. ("DTS") have entered into
that certain Agreement and Plan of Merger dated January 8, 1998 ("Merger
Agreement"). The Owner is a direct or indirect equity owner of DTS. The Merger
Agreement requires that the Owner execute and deliver this Agreement as a
condition precedent to the obligations of Pegasus under the Merger Agreement.
NOW, THEREFORE, in consideration of the premises, mutual promises,
covenants, agreements, representations and warranties contained herein and
intending to be legally bound hereby, the Owner agrees as follows:
1. Definitions. Capitalized terms used and not otherwise defined herein
shall have the respective meanings assigned to them in the Merger Agreement.
2. Acknowledgments by Owner. The Owner acknowledges that:
(a) Pegasus has required that Owner make the covenants set
forth in this Agreement as a condition to Pegasus's consummating the
transactions contemplated by the Merger Agreement.
(b) The portion of the Merger Consideration deliverable to the
Owner is part of the consideration for his undertakings herein, and
such undertakings are a material inducement to Pegasus to enter into
the Merger Agreement and complete the Merger.
(c) The provisions of this Agreement are reasonable and
necessary because of the unique nature of the Business.
3. Noncompetition. The Owner hereby agrees that, for a period beginning
on the date hereof and ending as provided below, the Owner will not own,
control, manage or be financially interested in, directly or indirectly, (1) any
DirecTV Distribution Business (as defined below) in any C or D county in the
United States as determined by A. C. Nielsen Company; or (2) any direct-to-home
multichannel satellite service that is substantially similar to any service
offered by DirecTV, Inc. as of the date of this Agreement in any geographic
<PAGE>
area (collectively, the "NRTC Service Areas") served by members and affiliates
of the National Rural Telecommunications Cooperative ("NRTC"). The Owner's
obligations under the preceding sentence shall expire three years after the date
of this Agreement. "DirecTV Distribution Business" means the distribution of any
service transmitted using the frequencies licensed to Hughes Communications
Galaxy, Inc. or its successors at the 101 (degrees) West orbital location.
Notwithstanding the foregoing, nothing herein shall be construed to prohibit or
restrict the Owner from owning (i) Pegasus stock, or (ii) securities that are
listed on a national securities exchange or the Nasdaq Stock Market, which
securities constitute less than 1% of the outstanding voting stock of the issuer
thereof, ownership of which does not constitute control over such issuer, and
which are held solely for investment purposes. The Owner agrees that this
covenant is reasonable with respect to its duration, geographical area and
scope.
4. Confidentiality. Except for disclosure compelled by subpoena or
other legal process, the Owner shall not, at any time before or after the
expiration of the restrictions in Section 3, retain in writing, use, divulge,
furnish, or make accessable to anyone (except Owner's employees or agents who
have a need to know and who shall be bound by this confidentiality provision),
without the express written consent of Pegasus, any trade secret, private or
confidential information or knowledge of or about Pegasus, DTS or any subsidiary
or Affiliate of either. All computer software, address books, telephone lists,
customer lists, price lists and other pricing data, contract forms, books,
records, files and know-how of which the Owner acquired knowledge while an
indirect owner of DTS are acknowledged to be the property of DTS and Pegasus and
shall not be duplicated or removed from the possession of Pegasus or DTS.
5. Remedies. If the Owner breaches the covenants set forth in Section 3
or 4 of this Agreement, Pegasus shall be entitled to damages and the right to
injunctive or other equitable relief to restrain any breach or threatened breach
or otherwise to specifically enforce the provisions of Section 3 or 4 of this
Agreement.
6. General.
(a) This Agreement shall be binding upon the parties hereto
and shall inure to the benefit of their affiliates and successors and assigns.
(b) The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(i) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other parties; (ii) no waiver that may be given
by a party will be applicable except in the
-2-
<PAGE>
specific instance for which it is given; and (iii) no notice to or demand on one
party will be deemed to be a waiver of any obligation of such party or of the
right of the party giving such notice or demand to take further action without
notice or demand as provided in this Agreement.
(c) This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania without regard to conflicts of laws principles.
(d) Whenever possible, each provision and term of this
Agreement shall be interpreted in a manner to be effective and valid, but if any
provision or term of this Agreement is held to be prohibited by law or invalid,
then such provision or term shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or affecting in any manner
whatsoever the remainder of such provision or term or the remaining provisions
or terms of this Agreement. If any of the covenants set forth in Section 3 of
this Agreement is held to be invalid or unenforceable due to its scope, breadth
or duration, then it shall be modified to the scope, breadth or duration
permitted by law and shall be fully enforceable as so modified.
(e) This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original copy of this
Agreement and all of which, when taken together, shall be deemed to constitute
one and the same agreement.
(f) The headings of Sections in this Agreement are provided
for convenience only and shall not affect its construction or interpretation.
All references to "Section" or "Sections" refer to the corresponding Section or
Sections of this Agreement unless otherwise specified.
(g) This Agreement and the Merger Agreement constitute the
entire agreement between the parties with respect to the subject matter of this
Agreement and
-3-
<PAGE>
supersede all prior written and oral agreements and understandings with respect
to the subject matter of this Agreement. This Agreement may not be amended
except by a written agreement executed by the parties.
IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
PEGASUS COMMUNICATIONS CORPORATION
By:_______________________________
Name:
Title:
__________________________________
[Owner]
-4-
<PAGE>
Exhibit 5
REGISTRATION RIGHTS AGREEMENT dated ____________, 1998 (the
"Agreement"), among PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation
(the "Company"), and the Persons executing this Agreement as Holders.
The Company, Pegasus DTS Merger Sub, Inc., a Delaware
corporation ("Merger Sub"), Digital Television Services, Inc., a Delaware
corporation ("DTS"), and certain shareholders of the Company and of DTS are
parties to an Agreement and Plan of Merger dated January 8, 1998 (the "Merger
Agreement"). The Holders (this and certain other terms are defined in Section 1)
are shareholders of DTS.
At the Closing held today under the Merger Agreement, Merger
Sub is being merged with and into DTS, DTS is thereby becoming a wholly-owned
subsidiary of the Company, and the Holders are receiving shares of Class A
Common Stock as the Merger Consideration. It is a condition precedent to the
Closing that the parties execute and deliver this Agreement.
NOW, THEREFORE, in consideration of the completion of the
transactions contemplated by the Merger Agreement and of the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows,
intending to be legally bound.
Section 1. Definitions. As used in this Agreement, the
following terms have the following meanings:
"Business Day": any day on which the New York Stock Exchange
is open for trading.
"Class A Common Stock": the Company's Class A Common Stock,
par value $0.01 per share.
"Closing Date": the date of this Agreement.
"Exchange Act": the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder, all as the same
shall be in effect at the relevant time.
"Holder": each Person (other than the Company) executing this
Agreement and each Permitted Transferee of a Holder, for so long as (and to the
extent that) such Person or Permitted Transferee owns any Registrable
Securities.
<PAGE>
"Merger Agreement": as defined in the recitals.
"Merger Consideration": as defined in the Merger Agreement;
any reference in this Agreement to a number or percentage of Registrable
Securities initially included in the Merger Consideration shall be appropriately
adjusted to reflect stock dividends, stock splits, reverse stock splits,
recapitalizations and similar transactions that occur after the Closing Date.
"Permitted Transferee": (a) in the case of an individual (1) a
family member of such individual, (2) a charitable organization (including a
private foundation) described in Section 501(c)(3) of the Internal Revenue Code
of 1986, as amended, to which a Holder may transfer any Registrable Securities,
(3) a trust for the benefit of any of such individual, such charitable
organizations or any family member of such individual, or (4) a Person
substantially all of the equity interests in which are owned by such individual
or by Persons described in clauses (a)(1), (2) and (3); and (b) in the case of a
Person that is not an individual, (1) any shareholder, partner, member or other
owner of equity interests in such Person, or (2) a Person all of the equity
interests in which are owned by such first Person.
"Person": an individual, a partnership (general or limited),
corporation, limited liability company, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a
quasi-governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
"Registrable Securities": (1) the Class A Common Stock
included in the Merger Consideration and (2) any additional shares of Class A
Common Stock or other equity securities of the Company issued or issuable after
the Closing Date in respect of the Class A Common Stock included in the Merger
Consideration (or other equity securities issued in respect thereof) by way of a
stock dividend or stock split, in connection with a combination, exchange,
reorganization, recapitalization or reclassification of Company securities, or
pursuant to a merger, division, consolidation or other similar business
transaction or combination involving the Company; provided that as to any
particular Registrable Securities, such securities shall cease to constitute
Registrable Securities (a) when a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of thereunder, (b) when such securities
shall have been disposed of pursuant to Rule 144 (or any successor provision to
such Rule) under the Securities Act, (c) when such securities shall have been
disposed of to a Person other than a Permitted Transferee, or (d) when such
securities shall have ceased to be outstanding.
"Registration Expenses": all expenses incident to the
Company's performance of or compliance with the registration requirements set
forth in this Agreement including, without limitation, the following: (a) the
fees, disbursements and expenses of the Company's counsel, accountants, and
experts in connection with the registration under the Securities Act of
Registrable Securities; (b) all expenses in connection with the preparation,
printing and filing of the
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registration statement, any preliminary prospectus or final prospectus, any
other offering document and amendments and supplements thereto, and the mailing
and delivering of copies thereof to underwriters and dealers, if any; (c) the
cost of printing or producing any agreement(s) among underwriters, underwriting
agreement(s) and blue sky or legal investment memoranda, any selling agreements,
and any other documents in connection with the offering, sale or delivery of
Registrable Securities to be disposed of; (d) the fees and expenses incurred in
connection with the listing of Registrable Securities on each securities
exchange on which Company securities of the same class are then listed or with
the Nasdaq National Market System (including, if applicable, the reasonable fees
and expenses of any "qualified independent underwriter" and its counsel); (e)
the reasonable fees and expenses of a single counsel retained by the Holders
participating in a particular registration pursuant to this Agreement, (f) any
SEC or blue sky registration or filing fees attributable to Registrable
Securities or transfer taxes applicable to Registrable Securities, (g) any other
expenses in connection with the qualification of Registrable Securities for
offer and sale under state securities laws, including the fees and disbursements
of counsel for the underwriters in connection with such qualification and in
connection with any blue sky and legal investment surveys; and (h) the filing
fees incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of Registrable Securities to
be disposed of; but the term "Registration Expenses" does not include (i)
underwriters' discounts or compensation, brokers' commissions or similar selling
expenses attributable to the sale of Registrable Securities.
"Registration Statement": a registration statement under the
Securities Act filed by the Company pursuant to this Agreement, including all
amendments thereto, all preliminary and final prospectuses included therein and
all exhibits thereto.
"SEC": the United States Securities and Exchange Commission,
or such other federal agency at the time having the principal responsibility for
administering the Securities Act.
"Securities Act": the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the relevant time.
Section 2. Underwritten Demand Registration.
(a) At any time on or after November 5, 1998, and before the
fifth anniversary of the Closing Date the Holder or Holders of ten percent or
more of the Registrable Securities initially included in the Merger
Consideration may (by written notice delivered to the Company) require
registration of all or any portion of such Registrable Securities for sale in an
underwritten public offering. In each such case, such notice shall specify the
number of Registrable Securities for which such underwritten offering is to be
made. Within ten Business Days after its receipt of any such notice, the Company
shall give written notice of such request to all other Holders, and all such
Holders shall have the right to have any or all Registrable Securities owned by
them included in the requested underwritten offering as they shall specify in a
written notice received by the Company within twenty Business Days after the
Company's notice is given. Within ten Business Days after the expiration of such
twenty Business Day period, the Company shall notify
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all Holders requesting inclusion of Registrable Securities in the proposed
underwriting of (1) the aggregate number of Registrable Securities proposed to
be included by all Holders in the offering, and (2) the proposed commencement
date of the offering, which shall be a date not more than thirty days after the
Company gives such notice. The managing underwriter for such offering shall be
chosen by the Holders of a majority of the Registrable Securities being included
therein and shall be satisfactory to the Company.
(b) If any request for an underwriting shall have been made
pursuant to subsection (a), the Company shall, at the request of the managing
underwriter for such offering, prepare and file a Registration Statement with
the SEC as promptly as reasonably practicable, but in any event within thirty
days after the managing underwriter's request therefor.
(c) Subject to Section 2(g) below, the Company shall not have
any obligation to permit or participate in more than two underwritten public
offerings pursuant to this Section, or to file a Registration Statement pursuant
to this Section with respect to less than ten percent of the Registrable
Securities initially included in the Merger Consideration.
(d) The Company shall have the right to defer the filing or
effectiveness of a Registration Statement relating to any registration requested
under this Section for a reasonable period of time not to exceed 90 days if (1)
the Company is, at such time, working on an underwritten public offering of its
securities for the account of the Company and is advised by its managing
underwriter that such offering would in its opinion be materially adversely
affected by such filing; or (2) the Company in good faith determines that any
such filing or the offering of any Registrable Securities would (A) materially
impede, delay or interfere with any proposed financing, offer or sale of
securities, acquisition, corporate reorganization or other significant
transaction involving the Company or (B) require the disclosure of material
non-public information, the disclosure of which would materially and adversely
affect the Company. If the Company shall exercise its deferral right under this
subsection, it may not do so again until 90 days shall have elapsed since the
expiration of such deferral.
(e) The Company shall have no obligation to file a
Registration Statement pursuant to this Section earlier than 360 days after the
effective date of a prior registration statement of the Company, if any,
covering an underwritten public offering for the account of the Company the
closing date of which is after the Closing Date if (1) the Company shall have
offered pursuant to Section 4 to include the Holders' Registrable Securities in
such Registration Statement; (2) the Holders shall not have elected to include
in such Registration Statement at least ten percent of the Registrable
Securities initially included in the Merger Consideration; (3) no Registrable
Securities requested to be included in such registration statement shall have
been excluded therefrom pursuant to Section 4(c); and (4) if such registration
statement is filed before November 5, 1998, the offering price per share of
Class A Common Stock is not less than $30.
(f) The Holders of any Registrable Securities requested to be
included in any offering pursuant to this Section may elect by written notice to
the Company not to include their Registrable Securities in the offering. If they
do so, the Company shall be obligated to proceed
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with the registration relating to the offering only if the offering continues to
include at least the number of shares of Registrable Securities specified in
Section 2(a). In any such case in which the Company is not obligated to and does
not proceed with the registration, the Holders that shall have requested
Registrable Securities to be included in the offering but that shall have
elected not to include their shares shall pay all Registration Expenses incurred
by the Company in connection with such offering.
(g) Subject to the rights, if any, of holders of registration
rights under the existing agreements identified on Exhibit A hereto (the
"Existing Registration Rights Holders"), neither the Company nor any other
Person not party to this Agreement shall be entitled to include any securities
held by it or any of them in any underwritten offering pursuant to this Section,
unless all Registrable Securities for which inclusion has been requested are
also included and unless the managing underwriter concludes that the inclusion
of other securities will not interfere with an orderly sale and distribution of
Registrable Securities being sold in such offering or adversely affect the price
of such Registrable Securities. If the managing underwriter does not so
conclude, the number of shares to be included in the registration shall be
reduced among the Holders and the Existing Registration Rights Holders pro rata
in accordance with the number of shares requested to be included by each, in
which case (1) the Company will bear all Registration Expenses relating to the
registration, whether or not the offering proceeds, and (2) the Holders shall be
entitled to one additional demand registration under this Section 2.
(h) No registration of Registrable Securities under this
Section shall relieve the Company of its obligation to effect registrations of
Registrable Securities pursuant to Sections 3 and 4.
Section 3. Shelf Registrations.
(a) At any time on or after November 5, 1998, and before the
fifth anniversary of the Closing Date, the Holder or Holders of 100,000 or more
shares of Registrable Securities may (by written notice to the Company) require
registration of all or any portion of such Registrable Securities for sale
through broker-dealers, through agents or directly to one or more purchasers in
one or more transactions in the over-the-counter market, through writing of
options or otherwise effected at market prices prevailing at the time of sale,
at prices related to such prevailing prices, at negotiated prices or at fixed
prices. Within ten Business Days after its receipt of such notice, the Company
shall give written notice of such request to all other Holders, and all such
Holders shall have the right to have any or all Registrable Securities owned by
them included in the requested registration as they shall specify in a written
notice received by the Company within ten Business Days after the Company's
notice is given. Within ten Business Days after the expiration of such ten
Business Day period, the Company shall notify all Holders requesting inclusion
of Registrable Securities in the requested registration of the aggregate number
of Registrable Securities proposed to be included by all Holders in this
registration.
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(b) If any request for registration shall have been made
pursuant to subsection (a), the Company shall prepare and file a Registration
Statement with the SEC as promptly as reasonably practicable, but in any event
within thirty days after the expiration of the ten Business Day period within
which Holders may request inclusion in the registration.
(c) The Company shall not have any obligation under this
Section to file a Registration Statement with respect to fewer than 100,000
shares of Registrable Securities.
(d) The Company shall have no obligation to file a
Registration Statement pursuant to this Section earlier than 180 days after the
effective date of any earlier Registration Statement filed pursuant to this
Section.
(e) The Holders of any of Registrable Securities requested to
be included in any registration pursuant to this Section may elect by written
notice to the Company not to include their Registrable Securities in such
registration. If they do so, the Company shall be obligated to proceed with the
registration only if it continues to include at least the number of shares of
Registrable Securities specified in Section 3(a). In any such case in which the
Company is not obligated to and does not proceed with the registration, the
Holders that shall have requested Registrable Securities to be included in the
registration but shall have elected not to include their shares shall pay all
Registration Expenses incurred by the Company in connection with such
registration.
(f) No registration of Registrable Securities under this
Section shall relieve the Company of its obligation to effect registrations of
Registrable Securities under Sections 2 and 4.
Section 4. Incidental Registration.
(a) From and after the Closing Date, if the Company proposes,
other than pursuant to Section 2 or 3, to file a Registration Statement under
the Securities Act to register any of its common equity securities for public
sale under the Securities Act (whether proposed to be offered for sale by the
Company or by any other Person), it will give prompt written notice (which
notice shall specify the intended method or methods of disposition) to the
Holders of its intention to do so, and upon the written request of any Holder
delivered to the Company within ten Business Days after any such notice (which
request shall specify the number of Registrable Securities intended to be
disposed of by such Holder), the Company shall, subject to the other provisions
of this Section 4, include in such Registration Statement all Registrable
Securities which the Company has been so requested to register by Holders.
(b) If at any time prior to the effective date of any
Registration Statement described in subsection (a), the Company shall in good
faith determine for any reason not to proceed with such registration, the
Company may, at its election, give written notice of such determination to the
Holders requesting registration and thereupon the Company shall be relieved of
its obligation to register such Registrable Securities in connection with such
registration.
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<PAGE>
(c) The Company will not be required to effect any
registration of Registrable Securities pursuant to this Section in connection
with an offering of securities for the account of the Company if the Company
shall have been advised in writing (with a copy to the Holders requesting
registration) by a nationally recognized investment banking firm (which may be
the managing underwriter for the offering) selected by the Company that, in such
firm's opinion, registration of Registrable Securities and of any other
securities requested to be included in such registration by Persons having
rights to include securities therein at that time may interfere with an orderly
sale and distribution of the securities being sold by the Company in such
offering or adversely affect the price of such securities; but if the inclusion
of less than all of the Registrable Securities requested to be registered by the
Holders and other securities requested to be included in such registration by
such other Persons would not, in the opinion of such firm, adversely affect the
distribution or price of the securities to be sold by the Company in the
offering, the aggregate number of Registrable Securities requested to be
included in such offering by the Holders shall be reduced pro rata in accordance
with the proportion that the number of shares proposed to be included in such
registration by Holders bears to the number of shares proposed to be included in
such registration by Holders and all other such Persons.
(d) The Company shall not be required to give notice of, or
effect any registration of Registrable Securities under this Section incidental
to the registration of any of its securities on Form S-4 or S-8 or in connection
with dividend reinvestment plans.
(e) No registration of Registrable Securities effected under
this Section shall relieve the Company of its obligations to effect
registrations of Registrable Securities pursuant to Sections 2 and 3.
Section 5. Holdbacks and Other Transfer Restrictions.
(a) No Holder shall sell, transfer or otherwise dispose of any
Registrable Securities or any interest therein before November 5, 1998, except
to a Permitted Transferee or pursuant to an effective Registration Statement
described in Section 4 that includes the Registrable Securities to be disposed
of.
(b) No Holder shall, if requested by the managing underwriter
in an underwritten offering that includes such Holder's Registrable Securities,
effect any public sale or distribution of securities of the Company of the same
class as the securities included in such Registration Statement (or convertible
into such class), including a sale pursuant to Rule 144(k) under the Securities
Act (except as part of such underwritten registration), during the ten day
period prior to, and during the 90-day period (or such longer period, not to
exceed 180 days, as the managing underwriter shall request) beginning on the
closing date of each underwritten offering made pursuant to such registration
statement, to the extent timely notified in writing by the Company or the
managing underwriter. If the Company or such managing underwriter so requests,
each Holder shall enter into a holdback agreement reflecting such restrictions.
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<PAGE>
(c) No Holder shall, during any period in which any of its
Registrable Securities are included in any effective Registration Statement, (1)
effect any stabilization transactions or engage in any stabilization activity in
connection with the Class A Common Stock or other equity securities of the
Company in contravention of Regulation M under the Exchange Act; or (2) permit
any Affiliated Purchaser (as that term is defined in Regulation M under the
Exchange Act) to bid for or purchase for any account in which such Holder has a
beneficial interest, or attempt to induce any other person to purchase, any
shares of Common Stock or Registrable Securities in contravention of Regulation
M under the Exchange Act.
(d) The Company, upon request by each Holder, shall, at the
Company's expense, in the case of a registration including Registrable
Securities to be offered by such Holder for sale through brokers transactions,
furnish each broker through whom such Holder offers Registrable Securities such
number of copies of the prospectus as the broker may require, and such Holder
shall otherwise comply with the prospectus delivery requirements under the
Securities Act, and the Company shall comply with Rule 153 under the Securities
Act.
Section 6. Registration Procedures. If and whenever the
Company is required by the provisions of this Agreement to effect a registration
of Registrable Securities:
(a) The Company shall prepare and file with the SEC, within
the time periods specified herein, a Registration Statement on Form S-3 or its
equivalent (or on such other registration form available to the Company that
permits the greatest extent of incorporation by reference of materials filed by
the Company, under the Exchange Act), and will use its best efforts to cause
such registration statement to become effective as promptly as practicable (and,
in any event, within sixty days) thereafter and to remain effective under the
Securities Act until (1) the earlier of such time as all securities covered
thereby have been disposed of pursuant to such Registration Statement or 180
days after such Registration Statement becomes effective, in the case of
registrations pursuant to Section 2, or (2) 90 days after such Registration
Statement becomes effective, in the case of registrations pursuant to Section 3,
in every case as any such period may be extended pursuant to subsection (h) or
Section 8.
(b) The Company shall prepare and file with the SEC such
amendments, post-effective amendments and supplements to such Registration
Statement and the prospectus used in connection therewith as may be necessary to
keep such Registration Statement effective for such period of time required by
subsection (a), as such period may be extended pursuant to subsection (h) or
Section 8.
(c) The Company shall comply in all material respects with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the period during which
any such Registration Statement is required to be effective.
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(d) The Company shall furnish to any Holder and any
underwriter of Registrable Securities (1) such number of copies (including
manually executed and conformed copies) of such Registration Statement and of
each amendment thereof and supplement thereto (including all annexes,
appendices, schedules and exhibits), (2) such number of copies of the prospectus
used in connection with such Registration Statement (including each preliminary
prospectus, any summary prospectus and the final prospectus and including
prospectus supplements), and (3) such number of copies of other documents, in
each case as such Holder or such underwriter may reasonably request.
(e) The Company shall use its best efforts to register or
qualify all Registrable Securities covered by such Registration Statement under
the securities or "blue sky" laws of such states of the United States as any
Holder or any underwriter shall reasonably request, and do any and all other
acts and things which may be reasonably requested by such Holder or such
underwriter to consummate the offering and disposition of Registrable Securities
in such jurisdictions; but the Company shall not be required to qualify
generally to do business as a foreign corporation or as a dealer in securities,
subject itself to taxation, or consent to general service of process in any
jurisdiction wherein it is not then so qualified or subject.
(f) The Company shall use its best efforts to cause the
Registrable Securities covered by such Registration Statement to be registered
with, or approved by, such other United States public, governmental or
regulatory authorities, if any, as may be required in connection with the
disposition of such Registrable Securities.
(g) The Company shall list the Registrable Securities covered
by such Registration Statement on any securities exchange (or if applicable, the
Nasdaq National Market System) on which any securities of the Company are then
listed.
(h) The Company shall notify each Holder as promptly as
practicable and, if requested by any Holder, confirm such notification in
writing, (1) when a prospectus or any prospectus supplement has been filed with
the SEC, and when a Registration Statement or any post-effective amendment
thereto has been filed with and declared effective by the SEC, (2) of the
issuance by the SEC of any stop order or the coming to its knowledge of the
initiation of any proceedings for that purpose, (3) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of any of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, (4) of the
occurrence of any event which requires the making of any changes to a
Registration Statement or related prospectus so that such documents will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading (and
the Company shall promptly prepare and furnish to each Holder a reasonable
number of copies of a supplemented or amended prospectus such that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading), and (5) of the
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Company's determination that the filing of a post-effective amendment to a
Registration Statement shall be necessary or appropriate. Upon the receipt of
any notice from the Company of the occurrence of any event of the kind described
in clause (4), the Holders shall forthwith discontinue any offer and disposition
of Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until all Holders shall have received copies of a
supplemented or amended prospectus which is no longer defective and, if so
directed by the Company, shall deliver to the Company all copies (other than
permanent file copies) of the defective prospectus covering such Registrable
Securities which are then in the Holders' possession. If the Company shall
provide any notice of the type referred to in the preceding sentence, the period
during which the Registration Statement is required by subsection (a) to be
effective shall be extended by the number of days from and including the date
such notice is provided, to and including the date when Holders shall have
received copies of the corrected prospectus.
(i) The Company shall enter into such agreements and take such
other appropriate actions as are customary and reasonably necessary to expedite
or facilitate the disposition of such Registrable Securities, and in that
regard, deliver to the Holders such documents and certificates as may be
reasonably requested by the Holders of a majority of the Registrable Securities
being sold or, as applicable, the managing underwriters, to evidence the
Company's compliance with this Agreement, including, in the case of any
underwritten offering, using commercially reasonable efforts to cause its
independent accountants to deliver to the managing underwriters an accountants'
comfort letter substantially similar to that in scope delivered in an
underwritten public offering and covering audited and interim financial
statements included in the registration statement, or if such letter can not be
obtained through the exercise of commercially reasonable efforts, cause its
independent accountants to deliver to the managing underwriters a comfort letter
based on negotiated procedures providing comfort with respect to the Company's
financial statements included or incorporated by reference in the registration
statement at the highest level permitted to be given by such accountants under
the then applicable standards of the American Institute of Certified Public
Accountants with respect to such Registration Statement.
Section 7. Underwriting.
(a) If requested by the underwriters for any underwritten
offering of Registrable Securities pursuant to a registration under Section 2,
the Company will enter into and perform its obligations under an underwriting
agreement with the underwriters for such offering, such agreement to contain
such representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, customary provisions
relating to indemnities and contribution and the provision of opinions of
counsel and accountants' comfort letters. If Registrable Securities are to be
distributed by such underwriters on behalf of any Holder, such Holder shall also
be a party to any such underwriting agreement.
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(b) If any registration pursuant to Section 4 shall involve an
underwritten offering, the Company may require Registrable Securities requested
to be registered pursuant to Section 4 to be included in such underwriting on
the same terms and conditions as shall be applicable to the securities being
sold through underwriters under such registration. In such case, each Holder
requesting registration shall be a party to any such underwriting agreement.
Such agreement shall contain such representations and warranties by the Holders
requesting registration and such other terms and provisions as are customarily
contained in underwriting agreements with respect to secondary distributions,
including, without limitation, provisions relating to indemnities and
contribution; provided, however, that no Holder shall be required to make
representations or warranties concerning the Company or any other Holder.
(c) In any offering of Registrable Securities pursuant to a
registration hereunder, each Holder requesting registration shall also enter
into such additional or other agreements as may be customary in such
transactions, which agreements may contain, among other provisions, such
representations and warranties as the Company or the underwriters of such
offering may reasonably request (including, without limitation, those concerning
such Holder, its Registrable Securities, such Holder's intended plan of
distribution and any other information supplied by it to the Company for use in
such registration statement), and customary provisions relating to indemnities
and contribution.
Section 8. Information Blackout.
(a) At any time when a Registration Statement is effective,
upon written notice from the Company to the Holders that the Company has
determined in good faith that sale of Registrable Securities pursuant to the
Registration Statement would require disclosure of non-public material
information, the disclosure of which would have a material adverse effect on the
Company, all Holders shall suspend sales of Registrable Securities pursuant to
such Registration Statement until the earlier of (1) 90 days after the Company
notifies the Holders of such good faith determination, and (2) such time as the
Company notifies the Holders that such material information has been disclosed
to the public or has ceased to be material or that sales pursuant to such
Registration Statement may otherwise be resumed (the number of days from such
suspension of sales by the Holders until the day when such sales may be resumed
hereunder is hereinafter called a "Sales Blackout Period").
(b) The time period set forth in Section 6(a)(1) or (2) shall
be extended for a number of days equal to the number of days in the Sales
Blackout Period.
(c) No Sales Blackout Period shall be commenced by the Company
within 60 days after the end of a Sales Blackout Period.
Section 9. Rule 144. The Company shall take all actions
reasonably necessary to comply with the filing requirements described in Rule
144(c)(1) under the Securities Act so as
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to enable the Holders to sell Registrable Securities without registration under
the Securities Act. Upon the written request of any Holder, the Company will
deliver to such Holder a written statement as to whether it has complied with
the filing requirements under such Rule 144(c)(1).
Section 10. Preparation; Reasonable Investigation;
Information. In connection with the preparation and filing of each Registration
Statement registering Registrable Securities under the Securities Act, (a) the
Company will give the Holders and the underwriters, if any, and their respective
counsel and accountants, drafts of such registration statement for their review
and comment prior to filing and (during normal business hours and subject to
such reasonable limitations as the Company may impose to prevent disruption of
its business) such reasonable and customary access to its books and records and
such opportunities to discuss the business of the Company with its officers and
the independent public accountants who have certified its financial statements
as shall be necessary, in the reasonable opinion of the Holders of a majority of
the Registrable Securities being registered and such underwriters or their
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act and (b) as a condition precedent to including any Registrable
Securities of any Holder in any such registration, the Company may require such
Holder to furnish the Company such information regarding such Holder and the
distribution of such securities as the Company may from time to time reasonably
request in writing or as shall be required by law or the SEC in connection with
any registration.
Section 11. Indemnification and Contribution.
(a) In the case of each offering of Registrable Securities
made pursuant to this Agreement, the Company shall indemnify and hold harmless
each Holder, its officers and directors, each underwriter of Registrable
Securities so offered and each Person, if any, who controls any of the foregoing
persons within the meaning of the Securities Act ("Holder Indemnitees"), from
and against any and all claims, liabilities, losses, damages, expenses and
judgments, joint or several, to which they or any of them may become subject,
including any amount paid in settlement of any litigation commenced or
threatened, and shall promptly reimburse them, as and when incurred, for any
legal or other expenses incurred by them in connection with investigating any
claims and defending any actions, insofar as such losses, claims, damages,
liabilities or actions shall arise out of, or shall be based upon, any violation
or alleged violation by the Company of the Securities Act, any blue sky laws,
securities laws or other applicable laws of any state or county in which the
Registrable Securities are offered, and relating to action taken or action or
inaction required of the Company in connection with such offering, or shall
arise out of, or shall be based upon, any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or in any
preliminary or final prospectus included therein) relating to the offering and
sale of such Registrable Securities, or any amendment thereof or supplement
thereto, or in any document incorporated by reference therein, or any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; but the
Company shall not be liable to any Holder Indemnitee in any such case to the
extent that any such loss, claim, damage,
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liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement, or any omission or alleged omission, if such statement
or omission shall have been made in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of such Holder
specifically for inclusion in the Registration Statement (or in any preliminary
or final prospectus included therein), or any amendment thereof or supplement
thereto. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of any Holder and shall survive the transfer
of such securities. The foregoing indemnity agreement is in addition to any
liability which the Company may otherwise have to any Holder Indemnitee.
(b) In the case of each offering of Registrable Securities
made pursuant to this Agreement, each Holder shall indemnify and hold harmless
the Company, its officers and directors and each person, if any, who controls
any of the foregoing within the meaning of the Securities Act (the "Company
Indemnitees"), from and against any and all claims, liabilities, losses,
damages, expenses and judgments, joint or several, to which they or any of them
may become subject, including any amount paid in settlement of any litigation
commenced or threatened, and shall promptly reimburse them, as and when
incurred, for any legal or other expenses incurred by them in connection with
investigating any claims and defending any actions, insofar as any such losses,
claims, damages, liabilities or actions shall arise out of, or shall be based
upon, any violation or alleged violation by such Holder of the Securities Act,
any blue sky laws, securities laws or other applicable laws of any state or
country in which the Registrable Securities are offered and relating to action
taken or action or inaction required of such Holder in connection with such
offering, or shall arise out of, or shall be based upon, any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or in any preliminary or final prospectus included therein) relating
to the offering and sale of such Registrable Securities or any amendment thereof
or supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that such untrue
statement is contained in, or such fact is omitted from, information furnished
in writing to the Company by or on behalf of such Holder specifically for
inclusion in such Registration Statement (or in any preliminary or final
prospectus included therein). Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of any Company
Indemnitee. The foregoing indemnity is in addition to any liability which Holder
may otherwise have to any Company Indemnitee.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 11, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in subsection (a) or (b) shall be available to any
person who shall fail to give notice as provided in this subsection (c) if the
indemnifying party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was materially prejudiced by the
failure to give such notice, but the failure to give such notice shall not
relieve the indemnifying party or parties from any liability which it or they
may have to the indemnified
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party for contribution or otherwise than on account of the provisions of
subsection (a) or (b). In case any such proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party and shall pay as incurred the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred the fees and expenses of the counsel retained by the indemnified
party in the event (1) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (2) the named parties
to any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel, in the written opinion of such counsel, would be
inappropriate due to actual or potential differing interests between them. The
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties (in
addition to local counsel). Such firm shall be designated in writing by the
Holders of a majority of the Registrable Securities disposed under the
applicable Registration Statements in the case of Holder Indemnitees and by the
Company in the case of Company Indemnitees. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written consent
but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 11 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) in respect of any losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) referred to therein, or if the
indemnified party failed to give the notice required under subsection (c), then
each indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect not only both the relative benefits received by such party (as
compared to the benefits received by all other parties) from the offering in
respect of which indemnity is sought, but also the relative fault of all parties
in connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by a party shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses) received by it bear
to the total amounts received by each other party. Relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The parties agree that it would not be just
and equitable if contributions pursuant to this subsection (d) were determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this
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subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The indemnity provided for hereunder shall not inure to
the benefit of any indemnified party to the extent that the claim is based on
such indemnified party's failure to comply with the applicable prospectus
delivery requirements of the Securities Act as then applicable to the person
asserting the loss, claim, damage or liability for which indemnity is sought.
Section 12. Expenses. In connection with any registration
under this Agreement the Company shall pay all Registration Expenses (to the
extent not borne by underwriters or others), except as provided in Section 2(f)
or 3(e), and each Holder shall pay its pro rata share of the items described in
clause (i) of the definition of "Registration Expenses" in Section 1.
Section 13. Notices. Except as otherwise provided below,
whenever it is provided in this Agreement that any notice, demand, request,
consent, approval, declaration or other communication shall or may be given to
or served upon any of the parties hereto, or whenever any of the parties hereto,
wishes to provide to or serve upon the other party any other communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be delivered in
person, delivered by the U.S. mail, delivered by overnight courier service, or
sent by telecopy, as follows: (a) if to a Holder, at the most current address
given by such Holder to the Company by means of a notice given in accordance
with the provisions of this Section 13, which address initially is, with respect
to the Holders who have executed this agreement, the addresses set forth in
Schedule A and with respect to all other holders is as set forth in the register
for the Registrable Securities; and (b) if to the Company, initially at the
Company's address set forth in the Merger Agreement and thereafter at such other
address, notice of which is given in accordance with the provisions of this
Section 13. The furnishing of any notice required hereunder may be waived in
writing by the party entitled to receive such notice. Every notice, demand,
request, consent, approval, declaration or other communication hereunder shall
be deemed to have been duly furnished or served on the party to which it is
addressed, in the case of delivery in person or by telecopy, on the date when
sent (with receipt personally acknowledged in the case of telecopied notice), in
the case of delivery by overnight courier service, on the dated delivered as
evidenced by delivery receipt, and in all other cases, five business days after
it is sent.
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Section 14. Entire Agreement. This Agreement represents the
entire agreement and understanding among the parties hereto with respect to the
subject matter hereof and supersedes any and all prior oral and written
agreements, arrangements and understandings among the parties hereto with
respect to such subject matter; and this Agreement can be amended, supplemented
or changed, and any provision hereof can be waived or a departure from any
provision hereof can be consented to, only by a written instrument making
specific reference to this Agreement signed by the Company and the Holders of a
majority of the Registrable Securities then outstanding.
Section 15. Headings. The section headings contained in this
Agreement are for general reference purposes only and shall not affect in any
manner the meaning, interpretation or construction of the terms or other
provisions of this Agreement.
Section 16. Applicable Law. This Agreement shall be governed
by, construed and enforced in accordance with the laws of Pennsylvania
applicable to contracts to be made, executed, delivered and performed wholly
within such state and, in any case, without regard to the conflicts of law
principles of such state.
Section 17. Severability. If any provision of this Agreement
shall be held by any court of competent jurisdiction to be illegal, void or
unenforceable, such provision shall be of no force and effect, but the
illegality or unenforceability of such provision shall have no effect upon and
shall not impair the enforceability of any other provision of this Agreement.
Section 18. No Waiver. The failure of any party at any time or
times to require performance of any provision hereof shall not affect the right
at a later time to enforce the same. No waiver by any party of any condition,
and no breach of any provision, term, covenant, representation or warranty
contained in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be construed as a further or continuing waiver of
any such condition or of the breach of any other provision, term, covenant,
representation or warranty of this Agreement.
Section 19. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same original instrument. Not
all parties need sign the same counterpart. Delivery by facsimile of a signature
page to this Agreement shall have the same effect or delivery of an original
executed counterpart.
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<PAGE>
Section 20. Successors and Assigns. This Agreement shall inure
to the benefit of and be binding upon the successors, assigns and transferees of
each of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders; but nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Registrable Securities
in violation of applicable law. If any Holder shall acquire Registrable
Securities, in any manner, whether by operation of law or otherwise, such
Registerable Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Registrable Securities such Holder
shall be conclusively deemed to have agreed to be bound by and to perform all of
the terms and provisions of this Agreement, including the restrictions on resale
set forth in this Agreement, and such Holder shall be entitled to receive the
benefits hereof.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered as of the date first above written.
PEGASUS COMMUNICATIONS CORPORATION
By ________________________________________
[HOLDERS]
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EXHIBIT A
to Registration Rights Agreement
Stockholders' Agreement dated as of October 8, 1996, among Pegasus, Pegasus
Communications Holdings, Inc. and Harron Communications Corp.
Stockholders Agreement dated as of October 8, 1996, among Pegasus, John W.
Bride, John H. Bride and Christopher McHenry Bride.
Stockholders' Agreement dated as of January 31, 1997, among Pegasus, and the
former shareholders of DBS of Indiana, Inc.
Stockholders' Agreement dated as of November 7, 1997, among Pegasus, Donald W.
Weber and Woodrow W. Griffin.
<PAGE>
Exhibit 6
VOTING AGREEMENT, dated _____________, 1998, among PEGASUS
COMMUNICATIONS CORPORATION, a Delaware corporation (the "Company"); COLUMBIA
CAPITAL CORPORATION, a Virginia corporation, COLUMBIA DBS CLASS A INVESTORS,
LLC., a Delaware limited liability company, COLUMBIA DBS, INC., a Virginia
corporation, and COLUMBIA DBS INVESTORS, L.P., a Delaware limited partnership;
WHITNEY EQUITY PARTNERS, L.P., a ______________ limited partnership; FLEET
VENTURE RESOURCES, INC., a Rhode Island corporation, FLEET EQUITY PARTNERS VI,
L.P., a Delaware limited partnership, CHISHOLM PARTNERS III, L.P., a Delaware
limited partnership, and KENNEDY PLAZA PARTNERS, a Rhode Island general
partnership; and PEGASUS COMMUNICATIONS HOLDINGS, INC. a Delaware corporation,
PEGASUS CAPITAL, L.P., a Pennsylvania limited partnership, and MARSHALL W.
PAGON, an individual.
The Company, Pegasus DTS Merger Sub, Inc., a Delaware corporation
("Merger Sub"), Digital Television Services, Inc., a Delaware corporation
("DTS"), and certain shareholders of the Company and of DTS are parties to an
Agreement and Plan of Merger dated January 8, 1998 (the "Merger Agreement").
Certain of the DTS Parties (this and certain other terms are defined in Section
1) or certain of their equity holders are shareholders of DTS.
PCH and PCLP hold all the issued and outstanding shares of Class B
Common Stock. Pagon controls PCH and PCLP.
At the Closing held today under the Merger Agreement, Merger Sub is
being merged with and into DTS, DTS is thereby becoming a wholly-owned
subsidiary of the Company, and certain of the DTS Parties or certain of their
equity holders are receiving shares of Class A Common Stock as the Merger
Consideration. It is a condition precedent to the Closing that the parties
execute and deliver this Agreement.
NOW, THEREFORE, in consideration of the completion of the transactions
contemplated by the Merger Agreement and of the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows,
intending to be legally bound.
<PAGE>
SECTION 1
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms have
the following terms have the following meanings:
"Audit Committee": the audit committee of the Board of
Directors referred to in Section 3.4.
"Board of Directors": the Board of Directors of the Company.
"Chisholm": Chisholm Partners III, L.P., a Delaware limited
partnership.
"Chisholm Designee": a person designated by Chisholm to serve
as a director in accordance with this Agreement.
"Class A Common Stock": the Company's Class A Common Stock,
par value $0.01 per share.
"Class B Common Stock": the Company's Class B Common Stock,
par value $0.01 per share.
"Columbia Capital": Columbia Capital Corporation, a Virginia
corporation.
"Columbia Designee": a person designated by Columbia Capital
to serve as a director in accordance with this Agreement.
"Columbia Parties": Columbia Capital, Columbia DBS Class A
Investors, LLC, a Delaware limited liability company, Columbia DBS, Inc., a
Virginia corporation, and Columbia DBS Investors, L.P., a Delaware limited
partnership.
"Columbia Principals": each of James B. Murray, Jr., David P.
Mixer, Mark R. Warner, Robert B. Blow, Mark J. Kington, Harry F. Hopper, III, R.
Philip Herget, III, Neil P. Byrne, Barton Schneider and James Fleming.
"Committee": the Audit Committee, the Compensation Committee
or the Nominating Committee.
"Compensation Committee": the compensation committee of the
Board of Directors referred to in Section 3.4.
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"Covered Shares": (a) the shares of Class A Common Stock
received as the Merger Consideration by the shareholders of DTS that are parties
to this Agreement; and (b) all shares of voting securities of the Company now or
hereafter beneficially owned (within the meaning of the Securities Exchange Act
of 1934) by PCH, PCLP or Pagon.
"Designation Right Loss Event": With respect to any person,
any of the following, as determined by a majority of the Independent Directors
(whose determination shall be conclusive):
(a) such person's designee as a director commits a breach of
fiduciary duty to the Company or a material violation of any federal or
state securities law in connection with the purchase or sale of any of
the Company's securities;
(b) such person (or, in the case of Columbia Capital, any
Columbia Principal who owns at the time 100,000 or more shares of Class
A Common Stock) commits a material violation of any federal or state
securities law in connection with the purchase or sale of any of the
Company's securities;
(c) such person materially breaches its or his noncompetition
or confidentiality agreement with the Company;
(d) such person shall own, control, manage or be financially
interested, directly or indirectly, in any business (other than a less
than 5% interest in a publicly held company) that competes with the
Company or any of its Subsidiaries in any geographic area in which the
Company does business; but this paragraph (d) shall not apply (1) to
any investment held on November 5, 1997, (2) to any investment in a
business that comes into competition with the Company or any of its
Subsidiaries as a result of the Company's acquisition or establishment
of a new business or its expansion into a geographic area in which it
did not previously operate if such person shall have held such
investment before the Company's management proposes to the Board of
Directors such acquisition, establishment or expansion, (3) to any
investment in an investment fund or pool that itself makes or holds an
investment in a competitive business if such person (A) is regularly
engaged in making investment of that kind and (B) does not have the
power to, and does not in fact, exercise an influence on the decision
of the fund or pool in making the investment in the competitive
business, and (4) unless prior to the exercise by a majority of the
Independent Directors of the right to terminate the relevant person's
right to designate a director, such person is given notice of the
potential applicability of this paragraph (d) and a reasonable
opportunity to cure or modify the relationship to the satisfaction of a
majority of the Independent Directors;
(e) such person shall violate Section 2; or
(f) any director designated by such person shall take or omit
to take any action in his capacity as a director or Committee member in
a manner materially
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inconsistent with this Agreement, and the Person who has the right to
designate such director has not obtained such director's resignation as
a director within 30 days after being requested to do so by the Board
of Directors.
"Director" or "director": a member of the Board of Directors.
"DTS": as defined in the recitals.
"DTS Designee": a Columbia Designee, a Chisholm Designee or a
Whitney Designee.
"DTS Parties": the Columbia Parties, Whitney and the Fleet
Parties.
"Fleet Parties": Chisholm, Fleet Venture Resources, Inc., a
Rhode Island corporation, Fleet Equity Partners VI, L.P., a Delaware limited
partnership, and Kennedy Plaza Partners, a Rhode Island general partnership.
"Independent Director": a natural person who (a) is not
Marshall W. Pagon or a Columbia Principal or an officer, employee or principal
of the Company, PCH, PCLP, any of the Columbia Parties, Whitney, any of the
Fleet Parties, DTS, or any of their subsidiaries or affiliates, or any spouse or
sibling, or any ancestor or lineal descendant of any such person, spouse or
sibling ("immediate family") (b) is not a former officer or employee of any such
person, (c) does not in addition to such person's role as a director, act on a
regular basis, either individually or as a member or representative of an
organization, serving as a professional adviser, legal counsel or consultant to
any such person, if, in the reasonable discretion of the Nominating Committee,
such relationship is material to any such person, and (d) does not represent,
and is not a member of the immediate family of, a person who would not satisfy
the requirements of the preceding clauses (a), (b) and (c) of this sentence. A
person who has been or is a partner, officer or director of an organization that
has customary commercial, industrial, banking or underwriting relationships with
any of the persons named in clause (a) of the preceding sentence that are
carried on in the ordinary course of business and on an arms-length basis and
who otherwise satisfies the requirements set forth in clauses (a), (b), (c) and
(d) of the first sentence of this definition, may qualify as a Independent
Director unless, in the reasonable discretion of the Nominating Committee, such
person is not independent or may not be independent with respect to the
management of the business and affairs of the Company. A person shall not be
disqualified as an Independent Director under clause (b), (c) or (d) above
solely because of such person's (or a member of such person's immediate
family's) having served in any capacity with a business (other than DTS)
acquired by the Company, or solely because such person is a representative or
designee of any such business (whether or not the Company shall enter into a
consulting agreement with such person in connection with such acquisition).
"Merger Agreement": as defined in the recitals.
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"Merger Consideration": as defined in the Merger Agreement.
"Pagon": Marshall W. Pagon, an individual.
"Pagon Designee": a person designated by Pagon (or, in the
event of his death or incapacity, by PCLP or another person appointed by Pagon
for this purpose) to serve as a director in accordance with this Agreement.
"PCH": Pegasus Communications Holdings, Inc., a Delaware
corporation.
"PCLP": Pegasus Capital, L.P., a Pennsylvania limited
partnership.
"Permitted Transferee": as defined in the Company's
certificate of incorporation on the date hereof.
"Person or "person": an individual, a partnership (general or
limited), corporation, limited liability company, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a
quasi-governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
"Subsidiary": as defined in the Merger Agreement.
"Whitney": Whitney Equity Partners, L.P., a Delaware limited
partnership.
"Whitney Designee": a person designated by Whitney to serve as
a director in accordance with this Agreement.
SECTION 2
VOTING
Section 2.1 Each party warrants to the others that it has voting
control over the number of Covered Shares set forth opposite its name on Exhibit
A. Each party shall vote all Covered Shares held by it, or over which it has the
power to direct the voting, as specified in this Agreement and shall take any
and all other action necessary or appropriate to implement the provisions of
this Agreement, including without limitation proposing and voting on amendments
to the Company's certificate of incorporation and by-laws as may be necessary to
fully implement the provisions hereof. No party shall permit any Covered Shares
held by it, or over which it has the power to direct the voting, to be voted in
any manner inconsistent with this Agreement. "Voting" includes the execution of
written consents.
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SECTION 3
COMPOSITION OF BOARD OF DIRECTORS
AND COMMITTEES
Section 3.1 Board of Directors. Except as otherwise provided in Section
3.3, the Board of Directors shall consist of nine members, of whom:
(a) three will be Pagon Designees;
(b) one will be a Columbia Designee until Columbia Capital
ceases to have the right to designate a director under Section 4.1;
(c) one will be a Whitney Designee until Whitney ceases to
have the right to designate a director under Section 4.1;
(d) one will be a Chisholm Designee until Chisholm ceases to
have the right to designate a director under Section 4.1; and
(e) three will be Independent Directors, who shall be the
persons identified in Section 3.5(e) (so long as they continue to
satisfy the definition of "Independent Director") or their successors
(who satisfy the definition of "Independent Director") nominated by the
Nominating Committee.
Section 2.1 shall apply to the election of directors specified in this Section
3.1.
Section 3.2 Vacancies Caused by Resignation, etc.. Any vacancy in the
Board of Directors or a Committee caused by the resignation, removal, incapacity
or death of a Pagon Designee or a DTS Designee shall be filled by a person
designated by the party that had the right to designate the resigned, removed,
incapacitated or dead director or Committee member, except as provided in
Section 3.3. Section 2.1 shall apply to the election of directors and Committee
members specified in this Section 3.2.
Section 3.3 Other Vacancies.
(a) If Columbia Capital, Whitney or Chisholm ceases to have
the right to designate a director pursuant to Section 4.1, such party shall
promptly cause the director designated by it to resign if so requested by Pagon
(or, in the event of his death or incapacity, by PCLP or another person
appointed for Pagon for this purpose), except that in case of the loss pursuant
to Section 4.1(a)(1), (b)(1) or (c)(1) of the right of Columbia Capital, Whitney
or Chisholm to designate a director, as the case may be, which also results in
the termination of this Agreement pursuant to Section 4.3, such party shall
cause the director designated by it to resign not later than the date on which
this Agreement terminates. Failing such resignation,
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such director may be removed in the manner provided by law. If a vacancy occurs
in the Board of Directors by reason of any such required resignation or
permitted removal, the Board of Directors (as constituted after giving effect to
such vacancy) shall either (1) reduce the number of directors to eliminate the
vacancy or (2) instruct the Nominating Committee to nominate an Independent
Director to fill the vacancy.
(b) The size of the Board of Directors may be increased as
provided by law. Each director elected to fill any position created by an
increase in the size of the Board of Directors shall be an Independent Director.
(c) No party to this Agreement will take any action to fill a
vacancy created under this Section 3.3 by a person who is not an Independent
Director. Otherwise, Section 2.1 shall not apply to the election of directors to
fill vacancies created under this Section 3.3
Section 3.4 Committees. The Board of Directors shall establish an Audit
Committee, a Nominating Committee and a Compensation Committee, each of which
shall consist of three directors who shall be (1) a director designated by
Pagon, (2) a director designated by a majority of the DTS Designees then serving
as directors; and (3) one of the Independent Directors specified in Section
3.1(e) designated by the Board of Directors in the manner provided by law.
[NOTE: Need to consider suitability of DTS designees for Compensation Committee
for purposes of Section 16 and Section 162(m)]. The Audit Committee and the
Compensation Committee shall have the powers and functions of the present audit
committee and compensation committee of the Board of Directors. The Nominating
Committee shall nominate all persons (other than the Pagon Designees and the DTS
Designees) to serve as directors, which nominee shall be subject to election by
the shareholders of the Company or subject to appointment by the Board of
Directors to fill vacancies. The Company shall not establish a committee with
the authority to act on all or substantially all matters on which the Board of
Directors may act (commonly known as an "executive committee") without the
consent of a majority of the DTS Designees.
Section 3.5 Initial Designations. The parties make the following
designations pursuant to this Section 3:
(a) The Pagon Designees are Pagon, Robert N. Verdecchio and
__________.
(b) The Columbia Designee is __________.
(c) The Whitney Designee is ___________.
(d) The Chisholm Designee is ___________.
(e) The Independent Directors specified in Section 3.1(e) are
James J. McEntee, III, Mary C. Metzger and Donald W. Weber, each of
whom is currently a director of the Company.
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(f) The Audit Committee shall consist of the persons serving
thereon on the date of this Agreement (_____________ and _____________)
and __________. [DTS Designee].
(g) The Nominating Committee shall consist of the persons
serving thereon on the date of this Agreement (_______________ and
_______________) and __________ [DTS Designee].
(h) The Compensation Committee shall consist of the persons
serving thereon on the date of this Agreement (______________ and
_______________) and __________ [DTS Designee].
Immediately following the execution of this Agreement, the Board of Directors
shall take such action as shall be required to create vacancies on the Board of
Directors and the present audit, nominating and compensation committees of the
Board of Directors, and to elect persons to the Board of Directors and to the
Committees as specified in this Section 3.5
Section 3.6 Subsequent Designations. Except as provided in Section 3.5,
each party to this Agreement that is entitled to designate one or more directors
or Committee members shall do so by written notice to each of the other parties
to this Agreement and to the Secretary of the Company, signed by the Person
making such designation.
Section 3.7 Removal. Any director may be removed by the shareholders of
the Company in the manner provided by law, except that no DTS Designee may be
removed without the written consent of the party that designated him unless such
party shall have ceased to have the right to designate a director pursuant to
Section 4.1. Section 2.1 shall apply to this Section 3.7.
Section 3.8 Chairman, President and Chief Executive Officer. For so
long as this Agreement is in effect, Pagon will be elected by the Board of
Directors as Chairman, President and Chief Executive Officer of the Company,
except in case of incapacity.
Section 3.9 Preferred Stock. If the holders of the Company's 12-3/4%
Series A Cumulative Exchangeable Preferred Stock shall become entitled to elect
directors in accordance with the terms thereof, this Agreement shall not apply
to any additional directorships to which their rights apply.
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SECTION 4
TERMINATION
Section 4.1 Termination of Designation Rights.
(a) Columbia Capital shall cease to have the right to
designate a director if at any time (1) the Columbia Parties and the Columbia
Principals collectively own less than half the Covered Shares received by the
Columbia Parties and the Columbia Principals pursuant to the Merger Agreement,
or (2) a Designation Right Loss Event occurs with respect to any Columbia Party
or any Columbia Principal.
(b) Whitney shall cease to have the right to designate a
director if at any time (1) Whitney owns less than half the Covered Shares
received by it pursuant to the Merger Agreement, or (2) a Designation Right Loss
Event occurs with respect to Whitney.
(c) Chisholm shall cease to have the right to designate a
director if at any time (1) the Fleet Parties collectively own less than half
the Covered Shares received by them pursuant to the Merger Agreement, or (2) a
Designation Right Loss Event occurs with respect to any Fleet Party.
(d) For purposes of this Section 4.1, a party no longer owns
Covered Shares distributed to its equity holders unless the distributee is also
a party to this Agreement or, in the case of the Columbia Parties, is a Columbia
Principal. Continuing ownership of Covered Shares shall be determined by the
specific identification method.
(e) For purposes of this Section 4.1, if the Columbia Parties,
the Columbia Principals, the Fleet Parties and Whitney, or any of them, shall
transfer any Covered Shares to a partnership or limited liability company wholly
owned by such transferors immediately following the Closing, then for purposes
of this Section 4.1 the transferor shall be deemed to own a portion of the
Covered Shares transferred to such partnership or limited liability company,
which portion shall be designated in writing by such partnership or limited
liability company to the Company at the time of the transfer of such Covered
Shares, as long as (i) such partnership or limited liability company continues
to own such Covered Shares, and (ii) such transferors continue to own all of the
equity interests in such partnership or limited liability company.
Section 4.2 Termination of Voting Obligations.
(a) The obligations of any party under Section 2.1 shall
terminate with respect to any Covered Share upon the sale or other transfer of
such Covered Share to any person who is not a party to this Agreement and is not
required by subsection (b) to become a party to this Agreement.
9
<PAGE>
(b) PCH or PCLP shall not sell or otherwise transfer any
Covered Shares to a Permitted Transferee unless the Permitted Transferee agrees
in writing to be bound by, and to become a party to, this Agreement (including
the requirements of this subsection) to the same extent as its transferor, as it
relates to the Covered Shares so transferred.
Section 4.3 Termination of Agreement. This Agreement shall terminate in
its entirety on the date of the meeting of the Company's shareholders at which
directors are scheduled to be elected next following the date on which all of
Columbia Capital, Whitney and Chisholm shall cease to have the right to
designate a director pursuant to Section 4.1. Neither Section 2 nor the
requirements of this Agreement relating to actions by the Nominating Committee
shall apply to the election of directors to occur at such meeting.
SECTION 5
MISCELLANEOUS
Section 5.1 Notices. Except as otherwise provided below, whenever it is
provided in this Agreement that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties hereto, or whenever any of the parties hereto, wishes to provide
to or serve upon the other party any other communication with respect to this
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be delivered in person or sent
by telecopy, as follows:
10
<PAGE>
Section 5.2 Entire Agreement. This Agreement represents the entire
agreement and understanding among the parties hereto with respect to the subject
matter hereof and supersedes any and all prior oral and written agreements,
arrangements and understandings among the parties hereto with respect to such
subject matter; and this Agreement can be amended, supplemented or changed, and
any provision hereof can be waived or a departure from any provision hereof can
be consented to, only by a written instrument making specific reference to this
Agreement signed by all parties to this Agreement other than (a) the Columbia
Parties if Columbia Capital shall no longer have the right to designate a
director pursuant to Section 4.1, (b) Whitney if Whitney shall no longer have
the right to designate a director pursuant to Section 4.1, or (c) the Fleet
Parties if Chisholm shall no longer have the right to designate a director under
Section 4.1.
Section 5.3 Paragraph Headings. The paragraph headings contained in
this Agreement are for general reference purposes only and shall not affect in
any manner the meaning, interpretation or construction of the terms or other
provisions of this Agreement.
Section 5.4 Applicable Law. This Agreement shall be governed by,
construed and enforced in accordance with the laws of Delaware applicable to
contracts to be made, executed, delivered and performed wholly within such state
and, in any case, without regard to the conflicts of law principles of such
state.
Section 5.5 Severability. If any provision of this Agreement shall be
held by any court of competent jurisdiction to be illegal, void or
unenforceable, such provision shall be of no force and effect, but the
illegality or unenforceability of such provision shall have no effect upon and
shall not impair the enforceability of any other provision of this Agreement.
Section 5.6 No Waiver. The failure of any party at any time or times to
require performance of any provision hereof shall not affect the right at a
later time to enforce the same. No waiver by any party of any condition, and no
breach of any provision, term, covenant, representation or warranty contained in
this Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be construed as a further or continuing waiver of any such
condition or of the breach of any other provision, term, covenant,
representation or warranty of this Agreement.
Section 5.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same original instrument. Not all
parties need sign the same counterpart. Delivery by facsimile of a signature
page to this Agreement shall have the same effect as delivery of an original
executed counterpart.
11
<PAGE>
Section 5.8 Successors and Assigns. Subject to Section 4.1(d), this
Agreement shall inure to the benefit of and be binding upon the successors,
assigns and transferees of each of the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed the date first written above.
PEGASUS COMMUNICATIONS CORPORATION
By: ____________________________________________
Title:
PEGASUS CAPITAL, L.P.
By: Pegasus Capital, Ltd., General Partner
By: ____________________________________________
Title:
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By: ____________________________________________
Title:
________________________________________________
Marshall W. Pagon
WHITNEY EQUITY PARTNERS, L.P.
By: J.H. Whitney Equity Partners LLC
Its General Partner
By: ____________________________________________
Title: Managing Member
12
<PAGE>
FLEET VENTURE RESOURCES, INC.
By: _________________________________________
Title: Senior Vice President
FLEET EQUITY PARTNERS VI, L.P.
By: Fleet Growth Resources II, Inc.
Its General Partner
By: _________________________________________
Title: Senior Vice President
CHISHOLM PARTNERS III, L.P.
By: Silverado III L.P., its general partner
By: Silverado III Corp., its general partner
By: _________________________________________
Title: Senior Vice President
KENNEDY PLAZA PARTNERS
By: _________________________________________
Title: General Partner
COLUMBIA CAPITAL CORPORATION
By: _________________________________________
COLUMBIA DBS CLASS A INVESTORS, LLC.
By: _________________________________________
Title: Member
13
<PAGE>
COLUMBIA DBS INVESTORS, L.P.
By: Columbia Capital Corporation
Its General Partner
By: _________________________________________
Title:
COLUMBIA DBS, INC.
By: _________________________________________
Title:
14
<PAGE>
Exhibit 7
CERTIFICATE OF MERGER
of
PEGASUS DTS MERGER SUB, INC.
with and into
DIGITAL TELEVISION SERVICES, INC.
Under Section 251 of the General Corporation Law
of the State of Delaware
------------------------------------------------------------------------------
DIGITAL TELEVISION SERVICES, INC. hereby certifies that:
1. The name and state of incorporation of each of the constituent
corporations to the merger are:
(a) Digital Television Services, Inc., a Delaware corporation (the
"Surviving Corporation"); and
(b) Pegasus DTS Merger Sub, Inc., a Delaware corporation ("Pegasus
Merger Sub").
2. An Agreement and Plan of Merger (the "Merger Agreement") among Pegasus
Communications Corporation, a Delaware corporation, the Surviving
Corporation and certain of its shareholders, Pegasus Merger Sub and
certain of its shareholders has been approved, adopted, certified,
executed and acknowledged by the Surviving Corporation and Pegasus
Merger Sub in accordance with the provisions of Section 251 of the
General Corporation Law of the State of Delaware.
3. The name of the corporation surviving the merger is Digital Television
Services, Inc.
4. The Certificate of Incorporation of the Surviving Corporation is
amended as follows:
(a) The first paragraph of Article FOURTH is amended in its entirety
to read as follows:
<PAGE>
"FOURTH: The aggregate number of shares of capital
stock which the Corporation shall have authority to issue is
two thousand (2,000) shares, of which one thousand (1,000)
shares shall be designated common stock, par value $.01 per
share (the "Common Stock"), and one thousand (1,000) shares
shall be designated preferred stock, par value $.01 per share
(the "Preferred Stock")."
(b) Paragraph (1) of Article SEVENTH is amended in its entirety to
read as follows:
"(1) Election of directors need not be by written
ballot unless the by-laws of the Corporation so provide."
5. An executed copy of the Merger Agreement is on file at 5 Radnor
Corporate Center, Suite 454, 100 Matsonford Road, Radnor, Pennsylvania
19087.
6. A copy of the Merger Agreement will be furnished by the Surviving
Corporation, on request and without cost, to any stockholder of Pegasus
Merger Sub or the Surviving Corporation.
IN WITNESS WHEREOF, the Surviving Corporation has caused this
Certificate of Merger to be signed by a duly authorized officer thereof, as of
the _____ day of ____________, 1998.
DIGITAL TELEVISION SERVICES, INC.
By:____________________________________
Name:
Title:
-2-
<PAGE>
EXHIBIT 8
PEGASUS COMMUNICATIONS CORPORATION
AND
PEGASUS DTS MERGER SUB, INC.
368(a)(2)(E) CERTIFICATE
TO
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
Re: Agreement and Plan of Merger among Digital Television Services,
Inc. (the "Company") and certain of its Shareholders, Pegasus
Communications Corporation (the "Parent"), certain of Parent's
Shareholders and Pegasus DTS Merger Sub, Inc. (the "Subsidiary")
dated as of January 8, 1998 (the "Acquisition Agreement").
Gentlemen:
This Certificate is supplied to you in connection with the issuance of your
Section 368(a)(2)(E) tax opinion in accordance with Section 10.4(ix) of the
Acquisition Agreement. Capitalized terms used and not defined herein have the
meanings set forth in the Acquisition Agreement including exhibits and schedules
attached thereto. All Section references, unless otherwise indicated, are to the
Internal Revenue Code of 1986, as amended to the date hereof (the "Code").
The undersigned officers of the Parent and the Subsidiary hereby certify to
Nelson Mullins Riley & Scarborough, L.L.P. for the purpose of making certain
factual representations upon which Nelson Mullins Riley & Scarborough, L.L.P. is
entitled to rely in rendering its legal opinion regarding certain federal income
tax consequences of the Merger, as follows:
1. To the best knowledge of the undersigned, the fair market value of the
Pegasus Class A Common Stock to be received by each Shareholder in the Merger
will be approximately equal to the fair market value of the Company Capital
Stock surrendered by each such Shareholder in exchange therefor.
2. The undersigned confirm that the Company will hold substantially all (within
the meaning of Code Section 368(a)(2)(E)) of the assets of the Subsidiary
immediately after the Closing, and the undersigned have no reason to believe
that the Company would not hold "substantially all" (within the meaning of Code
Section 368(a)(2)(E)) of the assets of the Company immediately after the
Closing.
3. Prior to the Merger, Parent will be in control of Subsidiary within the
meaning of Section 368(c) of the Code.
<PAGE>
4. Parent has no plan or intention to cause the Company to issue additional
shares of Company Capital Stock following the Merger that would result in Parent
losing Control of the Company within the meaning of Section 368(c) of the Code.
5. Parent has no plan or intention to reacquire any of the Pegasus Class A
Common Stock issued in the Merger.
6. Parent has no plan or intention to liquidate the Company; to merge the
Company with or into another corporation; to sell or otherwise dispose of the
stock of the Company except for transfers of stock to corporations controlled by
Parent (within the meaning of Section 368(c)); or to cause the Company to sell
or otherwise dispose of any of its assets or any of the assets acquired from
Subsidiary, except for dispositions made in the ordinary course of business or
transfers of assets to a corporation controlled by the Company (within the
meaning of Section 368(c)).
7. Subsidiary will have no liabilities assumed by the Company, and will not
transfer to the Company any assets subject to liabilities, in the Merger.
Subsidiary is a wholly-owned subsidiary of Parent and was organized by Parent
solely for purposes of the Merger and Subsidiary has not, and prior to the
Merger will not, engage in any business or activities whatsoever except for such
activities as may be contemplated by the Acquisition Agreement.
8. Following the Merger, Parent shall cause the Company to continue the historic
business of the Company or use a significant portion of the Company's historic
business assets in a business.
9. Parent does not own nor has it owned during the past five years, any shares
of the stock of the Company.
10. Neither Parent nor Subsidiary is an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
11. Parent and Subsidiary will pay their respective expenses incurred in
connection with the Merger.
12. There is no intercompany indebtedness existing between Parent and the
Company or between Subsidiary and the Company that was issued, acquired, or will
be settled at a discount.
13. The Pegasus Class A Common Stock to be received by Shareholders of the
Company constitutes voting stock of Parent.
14. The payment (if any) of cash in lieu of fractional shares of Parent Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Parent of issuing fractional shares and from Parent's perspective does not
represent separately bargained-for consideration.
-2-
<PAGE>
15. The undersigned officers of Parent and Subsidiary are authorized to execute
this Certificate and each of Parent and Subsidiary is authorized to make all
representations made by it and set forth herein.
The undersigned have executed this Certificate as of the _____ day of
___________, 1998.
PEGASUS COMMUNICATION CORPORATION
By:______________________________
Name:_______________________
Title:______________________
PEGASUS DTS MERGER SUB, INC.
By:______________________________
Name:_______________________
Title:______________________
-3-
<PAGE>
================================================================================
CREDIT AGREEMENT
among
PEGASUS MEDIA & COMMUNICATIONS, INC.
THE SEVERAL LENDERS FROM
TIME TO TIME PARTIES HERETO
and
BANKERS TRUST COMPANY
as Agent for such Lenders
Dated as of December 10, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE NO.
<S> <C> <C>
RECITALS ...................................................................... 1
I. GENERAL TERMS.................................................................... 2
1.01 Revolver Facilities................................................... 2
1.02 Letters of Credit..................................................... 3
1.03 Interest on the Notes................................................. 7
1.04 Loan Requests; Type of Loan........................................... 10
1.05 Loan Disbursements.................................................... 11
1.06 Payments, Prepayments and Termination or Reduction of the
Commitments........................................................... 11
1.07 Commitment Fee........................................................ 15
1.08 Requirements of Law................................................... 16
1.09 Limitations on LIBOR Loans; Illegality................................ 17
1.10 Taxes................................................................. 18
1.11 Indemnification....................................................... 19
1.12 Payments Under the Notes.............................................. 20
1.13 Set-Off, Etc.......................................................... 20
1.14 Pro Rata Treatment; Sharing........................................... 21
1.15 Non-Receipt of Funds by the Agent..................................... 22
1.16 Replacement of Notes.................................................. 23
II. SECURITY; SUBORDINATION; USE OF PROCEEDS......................................... 23
2.01 Security for the Obligations; Subordination; Etc...................... 23
2.02 Use of Proceeds....................................................... 25
III. CONDITIONS OF MAKING THE LOANS................................................... 25
3.01 Conditions to the First Loans and the First Issuance
of the Letters of Credit.............................................. 25
3.02 Acquisition Loans..................................................... 28
3.03 All Loans............................................................. 31
3.04 Lender Approvals...................................................... 32
<PAGE>
IV. REPRESENTATIONS AND WARRANTIES................................................... 32
4.01 Financial Statements.................................................. 32
4.02 Organization, Qualification, Etc...................................... 33
4.03 Authorization; Compliance; Etc........................................ 33
4.04 Governmental and Other Consents, Etc.................................. 34
4.05 Litigation............................................................ 34
4.06 Compliance with Laws and Agreements................................... 34
4.07 Franchises............................................................ 35
4.08 Licenses.............................................................. 35
4.09 The Systems........................................................... 36
4.10 Rate Regulations...................................................... 38
4.11 The Stations.......................................................... 38
4.12 DBS Rights............................................................ 39
4.13 Title to Properties; Condition of Properties.......................... 40
4.14 Interests in Other Businesses......................................... 40
4.15 Solvency.............................................................. 40
4.16 Full Disclosure....................................................... 41
4.17 Margin Stock.......................................................... 41
4.18 Tax Returns........................................................... 41
4.19 Pension Plans, Etc.................................................... 41
4.20 Material Agreements................................................... 42
4.21 Projections........................................................... 42
4.22 Brokers, Etc.......................................................... 42
4.23 Capitalization........................................................ 42
4.24 Environmental Compliance.............................................. 43
4.25 Investment Company Act................................................ 44
4.26 Labor Matters......................................................... 44
4.27. Delaware Code Provisions.............................................. 44
V. FINANCIAL COVENANTS.............................................................. 44
5.01 Leverage.............................................................. 44
5.02 Interest Coverage..................................................... 45
5.03 Fixed Charge Coverage................................................. 45
5.04 Maximum Average Subscriber Acquisition Cost........................... 46
5.05 Restricted Payments................................................... 46
VI. AFFIRMATIVE COVENANTS............................................................ 47
6.01 Preservation of Assets; Compliance with Laws, Etc..................... 47
6.02 Insurance............................................................. 48
6.03 Taxes, Etc............................................................ 51
6.04 Notice of Proceedings, Defaults, Adverse Change, Etc.................. 51
6.05 Financial Statements and Reports...................................... 51
6.06 Inspection............................................................ 54
6.07 Accounting System..................................................... 55
6.08 Additional Assurances................................................. 55
6.09 Renewal of DBS Agreements, FCC Licenses and
CATV Franchises....................................................... 56
6.10 Compliance with Environmental Laws.................................... 56
6.11 Interest Rate Protection.............................................. 57
<PAGE>
VII. NEGATIVE COVENANTS............................................................... 58
7.01 Indebtedness.......................................................... 58
7.02 Liens................................................................. 59
7.03 Disposition of Assets; etc............................................ 60
7.04 Fundamental Changes; Acquisitions..................................... 61
7.05 Local Marketing Agreements, Etc....................................... 61
7.06 Management............................................................ 61
7.07 Sale and Leaseback.................................................... 61
7.08 Investments........................................................... 62
7.09 Change in Business.................................................... 62
7.10 Accounts Receivable................................................... 62
7.11 Transactions with Affiliates.......................................... 62
7.12 Amendment of Certain Agreements, Etc.................................. 62
7.13 ERISA................................................................. 63
7.14 Margin Stock.......................................................... 63
7.15 Negative Pledges, etc................................................. 63
VIII. DEFAULTS ...................................................................... 63
IX. REMEDIES ON DEFAULT, ETC......................................................... 67
X. THE AGENT ...................................................................... 67
10.01 Appointment, Powers and Immunities.................................... 67
10.02 Reliance by Agent..................................................... 68
10.03 Events of Default..................................................... 69
10.04 Rights as a Lender.................................................... 69
10.05 Indemnification....................................................... 69
10.06 Non-Reliance on Agent and other Lenders............................... 69
10.07 Failure to Act........................................................ 70
10.08 Resignation of Agent.................................................. 70
10.09 Cooperation of Lenders................................................ 70
XI. DEFINITIONS...................................................................... 71
XII. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS;
SEPARATE ACTIONS BY THE LENDERS.................................................. 98
XIII. BENEFIT OF AGREEMENT; ASSIGNMENTS AND
PARTICIPATIONS................................................................... 100
<PAGE>
XIV. MISCELLANEOUS.................................................................... 102
14.01 Survival.............................................................. 102
14.02 Fees and Expenses; Indemnity; Etc..................................... 103
14.03 Notice................................................................ 104
14.04 Governing Law......................................................... 105
14.05 CONSENT TO JURISDICTION; WAIVER OF
JURY TRIAL............................................................ 106
14.06 Severability.......................................................... 106
14.07 Section Headings, Etc................................................. 106
14.08 Several Nature of Lenders' Obligations................................ 106
14.09 Counterparts.......................................................... 107
14.10 Knowledge and Discovery............................................... 107
14.11 Amendment of Other Agreements......................................... 107
14.12 FCC and Municipal Approvals........................................... 107
14.13 Disclaimer of Reliance................................................ 108
14.13 Disclaimer of Reliance................................................ 108
</TABLE>
<PAGE>
INDEX OF SCHEDULES
Schedule 1.01(a) Allocation of Loans and Commitments
Schedule 1.01(c) Reducing Revolving Credit Note
Schedule 1.02 Letter of Credit Request
Schedule 1.04(a) Loan Request
Schedule 1.04(d) Interest Rate Option Notice
Schedule 1.06 Commitment Reduction Notice
Schedule 2.01(a) Exceptions to Security
Schedule 2.01(b) Form of Seller Subordination Agreement
Schedule 2.02 Sources and Uses of Proceeds
Schedule 3.01 Omnibus Officer's Certificate(s) and
Compliance Certificate/Closing
Schedule 3.02(d) Officer's Certificate/Acquisition Loans
Schedule 3.02(g)(i) Form of General Counsel Opinion/Acquisition Loans
Schedule 3.02(g)(ii) Forms of FCC Counsel Opinion/Acquisition Loans
Schedule 3.02(g)(iii) Form of Local Counsel Opinion/Acquisition Loans
Schedule 4.01(a) Financial Statements
Schedule 4.01(b) Opening Balance Sheet
Schedule 4.02 Organization, Qualification, Etc.
Schedule 4.04 Governmental and Other Consents
Schedule 4.05 Litigation
Schedule 4.07 CATV Franchises
Schedule 4.08 FCC Licenses
Schedule 4.10 Rate Regulation
Schedule 4.12 DBS Agreements and Service Areas
Schedule 4.13 Head-End and Tower Site Leases, Etc.
Schedule 4.14 Interests in Other Businesses
Schedule 4.19 Pension Plans
Schedule 4.20 Material Agreements
Schedule 4.21 Projections
Schedule 4.23 Capitalization
Schedule 4.24 Environmental Compliance
Schedule 6.05 Compliance Certificate
Schedule 7.01 Indebtedness
Schedule 7.02 Liens
Schedule 11.01(a) Officer's Certificate/Permitted Acquisitions
Schedule 11.01(b) Form of General Counsel Opinion/Permitted Acquisitions
Schedule 11.01(c) Form of FCC Counsel Opinion/Permitted Acquisitions
Schedule 11.01(d) Form of Local Counsel Opinion/Permitted Acquisitions
Schedule 13 Form of Assignment and Acceptance
<PAGE>
CREDIT AGREEMENT
AGREEMENT dated as of December 9, 1997, by and among the financial
institutions which are now, or in accordance with Article XIII hereafter become,
parties hereto (collectively, the "Lenders" and each individually, a "Lender");
BANKERS TRUST COMPANY, as agent for the Lenders (in such capacity, together with
its successors and assigns in such capacity, the "Agent"); and PEGASUS MEDIA &
COMMUNICATIONS, INC., a Delaware corporation (the "Borrower") and a wholly owned
subsidiary of Pegasus Communications Corporation, a Delaware corporation (the
"Parent"). Certain capitalized terms used herein without definition are defined
in Article XI of this Agreement.
RECITALS
A. The Borrower's various direct and indirect Subsidiaries (1) own the
rights to deliver direct broadcast satellite ("DBS") service in various
territories in the United States, (2) own and operate cable television systems
located in Connecticut, Massachusetts and Puerto Rico and (3) own and operate
broadcast television stations located in Florida, Maine, Mississippi,
Pennsylvania and Tennessee. Certain special purpose subsidiaries of the
Borrower, referred to herein as the License Subsidiaries, own the licenses for
each broadcast television station.
B. Certain of the foregoing DBS rights were acquired on October 21, 1997
pursuant to the transfer by Pegasus Satellite Holdings, Inc., an Affiliate of
the Borrower ("PSH"), to PST Holdings, Inc., a wholly owned Subsidiary of the
Borrower ("PSTH"), of all of the capital stock of the DBS Subsidiaries.
C. On October 21, 1997, the Parent offered (the "Offering") its 95/8%
Senior Notes due 2005 in the aggregate principal amount of $115,000,000 (the
"PCC Senior Notes"), issued pursuant to an Indenture dated as of such dated
between the Parent and First Union National Bank, as trustee (the "PCC
Indenture"). In connection with the sale of the PCC Senior Notes, the Parent
prepared and circulated an Offering Memorandum dated October 15, 1997, setting
forth information regarding the Parent, the Borrower and its Subsidiaries and
the PCC Senior Notes (the "Offering Memorandum").
D. $85,000,000 of the gross proceeds of the Offering were contributed
to the equity capital of the Borrower to retire existing indebtedness of the
Borrower, including indebtedness of PSH assumed by the Borrower in connection
with the DBS Transfer.
E. The Borrower desires to obtain additional funds (1) to support the
issuance of letters of credit, (2) for working capital, Capital Expenditures and
general corporate purposes and (3) subject to availability, to finance Permitted
Acquisitions.
<PAGE>
F. The Lenders are willing to provide such funds, all subject to the
terms and conditions of this Agreement.
NOW THEREFORE, the parties hereto, intending to be legally bound, and in
consideration of the foregoing and the mutual covenants contained herein, hereby
agree as follows:
I. GENERAL TERMS.
Section 1.01. Revolver Facilities.
(a) On the Closing Date, subject to the terms and conditions contained in
this Agreement, the Lenders agree to establish in favor of the Borrower reducing
revolving credit facilities (the "Revolvers") in the aggregate principal amount
of $180,000,000, allocated among the Lenders as set forth in Schedule 1.01(a)
(collectively, in either case, as reduced pursuant to Section 1.01(e) and
subject to Section 1.01(b), the "Commitments" and, with respect to each Lender's
allocation of the Revolvers, its "Commitment"), which shall expire on December
31, 2003 (such date, or such earlier date as the Commitments shall expire or be
terminated hereunder, being referred to herein as the "Expiration Date").
(b) The Lenders shall have no obligation to make any loans under the
Commitments (the "Loans") if, after giving effect to such Loans, the sum of (A)
the aggregate amount of all outstanding Loans plus (B) the Letter of Credit
Exposure plus (C) that portion of the Permitted Seller Debt Outstandings not
secured by Letters of Credit (such sum being referred to herein as the
"Aggregate Exposure") would exceed the aggregate Commitments then in effect. For
purposes of this Agreement, the term "Available Commitments" shall mean, at any
time, the aggregate amount of the Commitments then in effect minus the Letter of
Credit Exposure minus that portion of the Permitted Seller Debt Outstandings not
secured by Letters of Credit.
(c) The borrowings under this Section 1.01 shall be evidenced by the
Borrower's Reducing Revolving Credit Notes, each in the form attached hereto as
Schedule 1.01(c) (together with any additional Reducing Revolving Credit Notes
issued to any assignee(s) of the Commitments under Article XIII or otherwise
issued in substitution therefor or replacement thereof, the "Notes"). The Notes
are hereby incorporated by reference herein and made a part hereof.
(d) The aggregate principal amount of Loans made by the Lenders as
requested in any Loan Request shall be (i) at least $1,000,000 and, if more, a
multiple of $100,000 in the case of LIBOR Loans, and $500,000, and, if more, a
multiple of $100,000, in the case of Base Rate Loans or (ii) such lesser amount
as equals the then unadvanced portion of the aggregate Available Commitments.
From the Closing Date to and including the Expiration Date and within the limits
of the aggregate Available Commitments, the Borrower may borrow, repay and
reborrow under this Section 1.01.
<PAGE>
(e) The Commitments (i) shall be automatically permanently reduced on
September 30, 1999 and each Payment Date thereafter, on each of which dates the
Borrower shall repay such amount of the aggregate Loans as shall cause the
aggregate outstanding principal balance thereunder to be less than or equal to
the Available Commitments, as so reduced, and (ii) shall expire on the
Expiration Date, when all outstanding principal and accrued interest on the
Notes shall be due and payable in full. Such quarterly reductions of the
Commitments shall be in the amounts set forth below, without giving effect to
any other mandatory or optional Commitment reductions and, after giving effect
to such quarterly automatic reductions, the maximum aggregate amount of the
Commitments shall not exceed the levels set forth below:
Aggregate Amount of Automatic Permanent
---------------------------------------
Payment Date Reduction Maximum Commitments
- ------------ --------- -------------------
Closing Date $-0- $180,000,000
September 30, 1999 $ 2,700,000 $177,300,000
December 31, 1999 $ 2,700,000 $174,600,000
March 31, 2000 $ 3,600,000 $171,000,000
June 30, 2000 $ 3,600,000 $167,400,000
September 29, 2000 $ 3,600,000 $163,800,000
December 29, 2000 $ 3,600,000 $160,200,000
March 30, 2001 $ 9,000,000 $151,200,000
June 29, 2001 $ 9,000,000 $142,200,000
September 28, 2001 $ 9,000,000 $133,200,000
December 31, 2001 $ 9,000,000 $124,200,000
March 31, 2002 $ 14,400,000 $109,800,000
June 30, 2002 $ 14,400,000 $95,400,000
September 30, 2002 $ 14,400,000 $81,000,000
December 31, 2002 $ 14,400,000 $66,600,000
March 31, 2003 $16,650,000 $49,950,000
June 30, 2003 $16,650,000 $33,300,000
September 30, 2003 $16,650,000 $16,650,000
December 31, 2003 $16,650,000 -0-
Section 1.02. Letters of Credit. From time to time from the date of
this Agreement to but not including the date which is ten (10) Business Days
prior to the Expiration Date, and on the terms and subject to the conditions
contained in this Agreement, the Agent shall cause the Issuing Bank to issue
stand-by letters of credit in Dollar denominations for the account of the
Borrower (each a "Letter of Credit" and collectively, the "Letters of Credit")
as follows:
(a) Issuance of Letters of Credit. The obligation of the Issuing Bank
to issue any Letter of Credit requested by the Borrower is subject to the
following conditions:
<PAGE>
(i) The Issuing Bank shall not issue any Letter of Credit if,
after giving effect to the issuance thereof, (A) the Aggregate Exposure
would exceed the aggregate Commitments then in effect, (B) the
aggregate NRTC Letter of Credit Exposure would exceed $20,000,000, (C)
the aggregate General Purpose Letter of Credit Exposure would exceed
$5,000,000, (D) the aggregate Seller Letter of Credit Exposure would
exceed $25,000,000 or (E) the sum of the aggregate General Purpose
Letter of Credit Exposure plus the aggregate Seller Letter of Credit
Exposure would exceed $25,000,000.
(ii) Each Letter of Credit shall be issued (i) in favor of the
NRTC, as beneficiary, to secure obligations of the Companies under the
NRTC Member Agreements, (ii) in favor of one or more Sellers, to secure
obligations of the Companies under Permitted Seller Debt or (iii) for
such other valid business purpose of the Companies or any of them as
the Borrower shall determine.
(iii) Letters of Credit shall be issued hereunder on a sight
basis only.
(iv) Each Letter of Credit and any related documentation shall
be in a form and scope and upon terms acceptable to the Issuing Bank,
in its sole discretion but, in any event, in accordance with its
customary practices (collectively with the Letters(s) of Credit issued
pursuant hereto, the "Letter of Credit Documents"). Whenever the
Borrower desires that a Letter of Credit be issued, the Borrower shall
give the Agent and the Issuing Bank a written notice requesting such
issuance at least three (3) Business Days (or such shorter period as
may be acceptable to the Issuing Bank) prior to the proposed issuance
date. Each such notice shall be in the form of Schedule 1.02 (each, a
"Letter of Credit Request").
(v) Each Letter of Credit shall have an expiry date occurring
not later than the earlier of the date which is one year from the date
of issuance and the date which is ten (10) Business Days prior to the
Expiration Date. The expiry date for any Letter of Credit may be
automatically extended for successive periods; each of up to one year,
but no such extension shall extend beyond the date which is ten (10)
Business Days prior to the Expiration Date.
(vi) The Issuing Bank will not issue any Letter of Credit after
it has received notice that any Default exists, until such time as the
Issuing Bank receives a notice of (i) the recession of such notice of
Default, provided by the party or parties originally delivering the
same, or (ii) the waiver of such Default, provided by the Lenders.
Notwithstanding the foregoing, in the event a Lender Default exists,
the Issuing Bank shall not be required to issue any Letter of Credit
unless the Issuing Bank has entered into arrangements satisfactory to
it and to the Borrower to eliminate the Issuing Bank's risk with
respect to the participation of the Defaulting Lender or Lenders in
Letters of Credit.
<PAGE>
(b) Letter of Credit Fees. The Borrower shall pay (i) to the Issuing
Bank, for its own account, a non-refundable issuance fee computed at the rate of
.125% per annum amount of each Letter of Credit, (the "Issuance Fee") provided
that (A) in no event shall the annual Issuance Fee with respect to any Letter of
Credit be less than $500.00 and (B) in any instance where such minimum Issuance
Fee applies, such minimum shall be paid in full on the date of issuance of the
respective Letter of Credit and on each anniversary date thereof, if any, and
(ii) to the Agent, for the ratable account of each Lender, a non-refundable fee
(the "Letter of Credit Fee") which shall be computed at a per annum rate equal
to the Applicable Margin for LIBOR Loans in effect from time to time under the
Commitments. The Issuance Fee and Letter of Credit Fee shall accrue on the daily
stated amount of each Letter of Credit from and including the issuance date of
such Letter of Credit to and including the expiry date thereof and (except as
otherwise provided in clause (B) above) shall be payable quarterly in arrears on
each Quarterly Date and on the Expiration Date, without setoff, deduction or
counterclaim. The Issuance Fee and Letter of Credit Fee shall be calculated on
the basis of the actual number of days elapsed in a 360-day year. Upon receipt
from the Borrower of payment of the Letter of Credit Fee, the Agent will
promptly remit to each Lender such Lender's share of the Letter of Credit Fee.
In addition to the Issuance Fee and the Letter of Credit Fee, the Borrower will
pay the Issuing Bank, upon each issuance of, payment under and/or amendment to
each Letter of Credit, such amount as shall at such time be the administrative
charge which the Issuing Bank is customarily assessing for such operations.
(c) Obligation of Borrower to Repay Letter of Credit Disbursements,
etc. The Borrower assumes all risks in connection with the Letters of Credit and
the Borrower's obligation to repay any payments made by the Issuing Bank on a
demand presented under any Letter of Credit (each a "Letter of Credit
Disbursement") shall be absolute, unconditional and irrevocable under any and
all circumstances and irrespective of:
(i) any lack of validity or enforceability of any Letter
of Credit;
(ii) the existence of any claim, setoff, defense or other
right which the Borrower or any other person may at any time have
against the beneficiary under any Letter of Credit, the Agent, the
Issuing Bank, any Lender or any other Person, whether in connection
with this Agreement or otherwise;
(iii) any demand or other document presented under a Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any
respect, unless payment by the Issuing Bank under such Letter of Credit
(A) shall have been made against presentation of demands or documents
that, on their face, do not substantially conform to the requirements
of such Letter of Credit, or (B) shall have been the result of the
gross negligence or willful misconduct of the Issuing Bank, as finally
determined by a court of competent jurisdiction; and
(iv) any other circumstance or event whatsoever, whether or
not similar to any of the foregoing, provided that such circumstance or
event shall not have been the result of the gross negligence or willful
misconduct of the Issuing Bank.
<PAGE>
(d) Participation by Lenders. Promptly after the issuance of or
amendment of any Letter of Credit, the Issuing Bank shall give the Agent and
each Lender written notice of such issuance and/or amendment, accompanied by a
copy of such Letter of Credit and/or amendment. By the issuance of a Letter of
Credit and without any further action, the Issuing Bank hereby grants to each
Lender, and each Lender hereby agrees to acquire from the Issuing Bank, a
participation in such Letter of Credit equal to such Lender's pro rata share of
the face amount thereof, determined as provided in Section 1.14, effective upon
the date of issuance. In furtherance of the foregoing, each Lender hereby
absolutely and unconditionally agrees to pay to the Agent, for the account of
the Issuing Bank, the amount of such Lender's pro rata share of each Letter of
Credit Disbursement. Each Lender acknowledges and agrees that its obligation to
acquire participations pursuant to this Section 1.02(d) is absolute and
unconditional and shall not be affected by any circumstances whatsoever, and
that each payment obligation arising from a Letter of Credit Disbursement shall
be made promptly by each Lender to the Agent without any offset, abatement,
withholding or reduction whatsoever.
(e) Payments by Lenders to Issuing Bank. Upon notification by the Issuing
Bank to the Agent that a Letter of Credit Disbursement has been made and that
the Borrower has failed to meet its reimbursement obligations to the Issuing
Bank, the Agent shall promptly notify the Issuing Bank and each other Lender of
the amount of the Letter of Credit Disbursement and, in the case of each Lender,
its pro rata share thereof. Each Lender shall pay to the Agent, not later than
2:00 P.M., New York time, on such date, provided that such notice shall have
been provided by the Agent by 11:00 A.M., New York time, on such date (or,
otherwise, not later than 12:00 Noon, New York time, on the next following
Business Day), such Lender's pro rata share of such Letter of Credit
Disbursement, which the Agent shall promptly pay to the Issuing Bank. The Agent
will promptly remit to each Lender its share of any amounts subsequently
received by the Issuing Bank or the Agent from the Borrower in respect of all
Letter of Credit Disbursements.
(f) Cash Collateral.
(i) At any time and from time to time after the occurrence and
during the continuance of an Event of Default, upon notice from the Agent,
at the direction or with the consent of the Required Lenders (and, in the
case of any Event of Default referred to in paragraph (m) or (n) of Article
VIII, forthwith, without any demand or the taking of any other action by
the Agent or such Lenders), the Borrower shall immediately deliver to the
Agent, for deposit in the Collateral Account, such additional amount of
cash as is equal to the aggregate Letter of Credit Exposure (whether or not
any beneficiary under any Letter of Credit shall have drawn or be entitled
at such time to draw thereunder).
(ii) In addition, in the event of a mandatory prepayment under
Section 1.06 resulting in payment in full of all outstanding Loans, the
Agent will retain such amount as may then be required to be retained as
cover for the Letter of Credit Exposure, as contemplated by Section
1.06(g)(ii).
(iii) In the event of a drawing, and subsequent payment by the
Issuing Bank under any Letter of Credit at any time during which any
amounts are held in respect thereof in the Collateral Account, the Agent
will deliver to the Issuing Bank an amount equal to the Reimbursement
Obligation created as a result of such payment (or, if the amounts so held
are less than such Reimbursement Obligation, all of such amounts) to
reimburse the Issuing Bank therefor, in each case in the order in which
each such drawing is presented to the Issuing Bank.
<PAGE>
(iv) Any such amounts remaining in the Collateral Account
after the expiration of all Letters of Credit and the reimbursement in full
of the Issuing Bank for all of its obligations thereunder shall be held by
the Agent, for the benefit of the Borrower, to be applied against the
Obligations in such order and manner as the Agent may direct.
(v) If the Borrower is required to provide cover for the
Letter of Credit Exposure pursuant to Section 1.06(g)(ii), such amount (to
the extent not applied as aforesaid) shall be returned to the Borrower on
demand, provided that, after giving effect to such return, (A) the
Aggregate Exposure at such time would not exceed the aggregate Commitments
at such time and (B) no Default shall have occurred and be continuing at
such time. If the Borrower is required to provide cover for the Letter of
Credit Exposure as a result of an Event of Default, as provided under
paragraph (i) above, such amount (to the extent not applied as aforesaid)
shall be returned to the Borrower within three (3) Business Days after (1)
any grace or cure periods applicable to unmatured Defaults shall have
expired and (2) all Events of Default shall have been cured or waived.
Section 1.03. Interest on the Notes.
(a) Interest Rate . Subject to the terms and conditions set forth in this
Section 1.03, the Borrower may elect an interest rate for the outstanding
principal balances from time to time of the Notes, or any portion thereof, based
on either the Base Rate or the applicable LIBOR Rate and determined as of any
date, as set forth in the Table below, as follows:
(i) the rate for any Base Rate Loan shall be the Base Rate plus
the Applicable Margin for Base Rate Loans then in effect; and
(ii) the rate for any LIBOR Loan shall be the applicable LIBOR
Rate plus the Applicable Margin for LIBOR Loans in effect on the first
day of the applicable Interest Period.
(b) Determination of Applicable Margin.
(i) The Applicable Margin for Loans during the period commencing
on the date hereof and ending on February 14, 1998 shall be 1.25%, with
respect to Base Rate Loans, and 2.50%, with respect to LIBOR Loans. The
Applicable Margin for Loans during the Pricing Period commencing on
February 15, 1998 and ending on May 14, 1998 and during each Pricing
Period thereafter shall be determined based upon the PCC Consolidated
Leverage Ratio as of the last day of the fiscal quarter immediately
preceding the first day of such Pricing Period (the "Pricing Ratio"), as
indicated in the following Table:
<PAGE>
- --------------------------------------------------------------------------------
Applicable Margin for Loans
- --------------------------------------------------------------------------------
PCC Consolidated
Leverage Ratio Base Rate Loans LIBOR Loans
- --------------------------------------------------------------------------------
Greater than or equal to 6.50:1.00
1.25% 2.50%
- --------------------------------------------------------------------------------
Less than 6.50:1.00 but greater than
or equal to 6.00:1.00 1.00% 2.25%
- --------------------------------------------------------------------------------
Less than 6.00:1.00 but greater than
or equal to 5.50:1.00 .75% 2.00%
- --------------------------------------------------------------------------------
Less than 5.50:1.00 but greater than
or equal to 5.00:1.00 .50% 1.75%
- --------------------------------------------------------------------------------
Less than 5.00:1.00 but greater than .25% 1.50%
or equal to 4.50:1.00
- --------------------------------------------------------------------------------
Less than 4.50:1.00 .00 % 1.25%
- --------------------------------------------------------------------------------
(c) Computations, Pricing Period, Etc.
(i) Nothing in Section 1.03(b) shall be deemed to constitute a
waiver of the requirements of Section 5.01, default under which will
result in an Event of Default and the application of the default rate of
interest specified in Section 1.03(e).
(ii) As used in Section 1.03, the first "Pricing Period" shall
commence on February 15, 1998 and end on May 14, 1998 and, thereafter,
the term "Pricing Period" shall mean each period commencing on (A) the
last date as of which the Borrower is required, under Section 6.05(b) and
Section 6.05(d), to deliver financial statements and a Compliance Report
indicating the applicable Pricing Ratio, being February 15, May 15,
August 15 and November 15 of each year (in each case, a "Compliance
Report Delivery Date"), and ending on (B) the next following Compliance
Report Delivery Date.
(iii) The determination of the Applicable Margin for any Pricing
Period shall be based on the quarterly financial statements and
Compliance Report required to be delivered on the first date of such
Pricing Period, as provided above. Notwithstanding the preceding
sentence, in the event of any discrepancy between the computation based
on such financial statements and Compliance Report and the related
audited financial statements furnished pursuant to Section 6.05(a) (the
"Audited Financial Statements") or any information disclosed in
connection therewith, the computation based upon the Audited Financial
Statements shall govern, retroactive to the first day of the applicable
Pricing Period. In the event of a retroactive correction in the
determination of the Applicable Margin in favor of the Borrower, the
amount of interest thereby refundable to the Borrower shall be applied on
the date of such retroactive correction, to prepay interest payable on
the Notes. If the retroactive correction is in favor of the Lenders, the
amount of interest due to the Lenders shall be paid in full to the Agent
within five (5) days after written notice of such correction is provided
to the Borrower.
<PAGE>
(iv) Notwithstanding the foregoing, no downward adjustment of
the Applicable Margin hereunder shall be permitted (A) unless the
Compliance Report for the relevant fiscal period delivered to the Agent
includes a request by the Borrower for such adjustment or (B) during the
existence of any Default.
(v) Interest on Base Rate Loans shall be computed on the basis
of the actual number of days elapsed over a 365 or 366-day year, as
applicable (unless such interest is based upon the Federal Funds Rate, in
which case interest shall be computed on the basis of the actual number
of days elapsed over a 360-day year). Interest on LIBOR Loans shall be
computed on the basis of the actual number of days elapsed over a 360-day
year.
(d) Interest Payment Dates. Interest on the Loans shall be payable in
arrears, without setoff, deduction or counterclaim, as follows:
(i) Interest on each Base Rate Loan shall be due and payable on
the Quarterly Dates, commencing January 30, 1998, and at maturity,
whether by reason of acceleration, prepayment, payment or otherwise,
provided that interest accrued on any Base Rate Loan which is converted
to a LIBOR Loan shall be paid on the Quarterly Date following the date of
such conversion (or, if accrued on a Base Rate Loan which is so converted
on a Quarterly Date, on such Quarterly Date). The interest rate on Base
Rate Loans shall change on the date of any change in the applicable Base
Rate.
(ii) Interest on each LIBOR Loan shall be due and payable on the
last day of the Interest Period applicable to such Loan and, if such
Interest Period exceeds three (3) months, every three (3) months after
the beginning thereof, until and at maturity, whether by reason of
acceleration, prepayment, payment or otherwise.
(e) Effect of Defaults, Etc.
(i) During the existence of any Event of Default, the
outstanding principal under the Notes and, to the extent permitted by
applicable law, overdue interest, fees or other amounts payable hereunder
or under the other Loan Documents (including without limitation
Reimbursement Obligations) shall bear interest, from and including the
date such Event of Default occurred until such Event of Default is waived
in writing as provided herein, at a rate per annum (computed on the basis
of the actual number of days elapsed over a 360-day year) equal to two
percent (2.00%) above (a) the interest rate or rates then applicable to
Base Rate Loans and overdue interest, fees and other expenses, or (b)
with respect to any LIBOR Loans then in effect (and only until the end of
the Interest Period applicable to such LIBOR Loans) the interest rate or
rates then applicable to such LIBOR Loans.
<PAGE>
(ii) Nothing in this Section 1.03(e) shall affect the rights of
the Agent or the Lenders to exercise any rights or remedies under the
Loan Documents or applicable law arising upon the occurrence of an Event
of Default.
Section 1.04. Loan Requests; Type of Loan.
(a) Loan Requests. Each request by the Borrower for Loans under the
Revolvers (other than the initial Loans, if made concurrently herewith) shall be
made not later than (i) 11:00 A.M. (New York time) on the Business Day prior to
the proposed Borrowing Date, if such Loans are Base Rate Loans, or (ii) 11:00
A.M. (New York time) on the third Business Day prior to the proposed Borrowing
Date, if any of such Loans are LIBOR Loans, by a written Loan Request, in the
form of Schedule 1.04(a) (each, a "Loan Request"), signed by a duly authorized
representative of the Borrower and indicating (i) the date of such Loans, (ii)
whether such Loans shall be Base Rate Loans or LIBOR Loans or a combination of
the two types of Loans and, if so, the Interest Period for such LIBOR Loans, and
(iii) the use of proceeds thereof, to the extent any such proceeds are not being
used for working capital purposes. The Agent shall promptly notify the Lenders
of such Loan Request and the information contained therein. Such Loan Request
shall be irrevocable and binding on the Borrower.
(b) Conversion to a Different Type of Loan. The Borrower may elect from
time to time to convert any outstanding Loans to Base Rate Loans or LIBOR Loans,
as the case may be, provided that (i) with respect to any such conversion of
LIBOR Loans to Base Rate Loans, the Borrower shall provide the appropriate
Interest Rate Option Notice by 11:00 A.M. (New York time) on the date of such
proposed conversion; (ii) with respect to any such conversion of Base Rate Loans
to LIBOR Loans, the Borrower shall provide the appropriate Interest Rate Option
Notice by 11:00 A.M. (New York time ) at least three Business Days' prior to the
date of such proposed conversion; (iii) with respect to any such conversion of
LIBOR Loans into Base Rate Loans, such conversion shall only be made on the last
day of the related Interest Period; (iv) no Loans may be converted into LIBOR
Loans when any Default has occurred and is continuing, unless the Required
Lenders shall consent to such conversion; (v) the Borrower may have no more than
six (6) LIBOR Loans outstanding at any time; (vi) any conversion of less than
all of the outstanding Base Rate Loans into LIBOR Loans shall be in a minimum
aggregate principal amount of $1,000,000 and, if greater, an integral multiple
of $100,000; and (vii) any conversion of less than all of the outstanding LIBOR
Loans into Base Rate Loans shall be in a minimum aggregate principal amount of
$1,000,000 and, if greater, an integral multiple of $100,000. The Agent shall
promptly notify the Lenders of such Interest Rate Option Notice and the
information contained therein.
(c) Continuance of an Interest Rate Option. The Borrower may continue any
LIBOR Loans as such upon the expiration of the related Interest Period by
providing to the Agent (i) an Interest Rate Option Notice in compliance with the
notice provisions set forth in Section 1.04(b) or (ii) standing written
instructions authorizing the automatic continuation of such Loans, which
instructions shall be effective until notice to the Agent by the Borrower
revoking the same (such notice to take effect no sooner than three Business Days
after receipt by the Agent); provided that no LIBOR Loans may be continued when
any Default has occurred and is continuing, but shall be automatically converted
to Base Rate Loans on the last day of the first applicable Interest Period which
ends during the continuance of such Default. Base Rate Loans shall be deemed to
continue as such until receipt of an Interest Rate Option Notice requesting
conversion thereof to LIBOR Loans.
<PAGE>
(d) Form of Notice. Each Interest Rate Option Notice shall be
substantially in the form of Schedule 1.04(d) and shall specify: (i) the
aggregate principal amount of Loans to be continued or converted; (ii) the
proposed date thereof; (iii) the Interest Period for such LIBOR Loans; and (iv)
whether such Loans shall be LIBOR Loans or Base Rate Loans.
Section 1.05. Loan Disbursements. The Loans shall be made by the
applicable Lenders pro rata as provided in Section 1.14. Not later than 12:00
noon (New York time), in the case of LIBOR Loans, or 2:00 P.M. (New York time),
in the case of Base Rate Loans, on the date specified for any Loans, each
applicable Lender shall make available to the Agent the portion of the Loans to
be made by it on such date, in immediately available funds, for the account of
the Borrower. The amount so received by the Agent shall, subject to the terms
and conditions of this Agreement, be made available to the Borrower by
depositing the same in immediately available funds in the appropriate account or
accounts of the Borrower and by disbursing such funds as indicated in writing in
the related Loan Request prior to the date such Loans are proposed to be made.
Section 1.06. Payments, Prepayments and Termination or Reduction of the
Commitments.
(a) Voluntary Reductions of Commitments and Related Prepayments. At any
time prior to the Expiration Date, upon at least three (3) Business Days'
written notice to the Agent in the form of Schedule 1.06 (each, a "Commitment
Reduction Notice") signed by a duly authorized representative of the Borrower,
the Borrower may permanently terminate or permanently reduce any of the
Commitments, provided as follows:
(i) any such reduction shall be in an aggregate amount of not
less than $1,000,000 or, if greater, an integral multiple thereof;
(ii) after giving effect to any such reduction, the aggregate
unutilized portion of the aggregate Available Commitments shall equal or exceed
$15,000,000;
(iii) any such reduction shall apply to each Lender's
Commitment pro rata as provided in Section 1.14; and
(iv) simultaneously with each such reduction, the Borrower (A)
shall pay to the Agent, for the ratable account of each Lender, any then accrued
unpaid Commitment Fee on the terminated or reduced portion of the respective
Commitments, (B) shall pay any indemnification payments due in accordance with
Section 1.11 in respect of LIBOR Loans so prepaid and (C) shall repay such
amount of the aggregate principal amount of the Notes as shall cause the
outstanding principal balance thereunder to be less than or equal to the
aggregate Available Commitments, after giving effect to such reduction, provided
that any such prepayment shall be an aggregate amount of not less than
$1,000,000 or, if greater, an integral multiple of $250,000, in the case of
LIBOR Loans so prepaid, or $250,000 or, if greater, integral multiples thereof,
with respect to Base Rate Loans so prepaid.
<PAGE>
Each Commitment Reduction Notice shall specify the date fixed for such
termination or reduction, the aggregate principal amount thereof and the
aggregate principal amount of the Notes required to be repaid hereunder on such
date.
(b) Mandatory Commitment Reductions and Prepayments; Casualty Events.
Subject to the provisions of Section 6.02, within one hundred eighty (180) days
following the receipt by the Borrower or any of the Subsidiaries of the proceeds
of insurance, condemnation award or other compensation in respect of any
Casualty Event (or upon such earlier date as the Borrower or any Subsidiary
shall have determined not to restore, repair or replace the asset or property
affected by such Casualty Event), which proceeds, together with all other such
proceeds theretofore received in respect of Casualty Events and not so applied,
exceed $500,000 in the aggregate, (i) the Commitments shall be automatically
reduced in an aggregate amount, if any, equal to the aggregate amount of such
proceeds not theretofore applied to the repair or replacement of such asset or
property under Section 6.02(b) and (ii) the Borrower shall prepay the Notes
accordingly, all as provided in Section 1.06(f) and (g), respectively. Nothing
in this Section 1.06(b) shall be deemed (i) to limit any obligation of the
Companies pursuant to the Security Agreements to remit to the Collateral Account
the proceeds of insurance, condemnation award or other compensation received in
respect of any Casualty Event, (ii) to obligate the Agent to release any of such
proceeds from the Collateral Account to the Borrower or any Subsidiary during
the existence of any Default or (iii) to apply to temporary prepayments of the
Notes from insurance proceeds pending completion of repairs, replacements and
restoration within the one hundred eighty (180) day period referred to above.
(c) Mandatory Commitment Reductions and Prepayments; Excess Cash Flow. On
or before May 1 of each year, commencing May 1, 2000, (i) the Commitments shall
be automatically reduced by an aggregate amount equal to fifty percent (50%) of
Excess Cash Flow for the immediately preceding fiscal year and (ii) the Borrower
shall prepay the Notes accordingly, all as provided in Sections 1.06(f) and (g).
(d) Mandatory Prepayments; Equity Issuances. Without limiting the
obligation of the Borrower to obtain any required consent thereto of the
Required Lenders under Section 7.04, upon any issuance of additional equity
securities of the Borrower, and any cash capital contribution made by the Parent
to the Borrower, the Borrower shall prepay the Notes in an aggregate amount
equal to the net cash proceeds thereof, as provided in Section 1.06(g).
(e) Mandatory Commitment Reductions and Prepayments; Dispositions of
Assets. Without limiting the obligation of the Borrower under Section 7.03 to
obtain the consent of the Required Lenders to any Disposition not otherwise
permitted hereunder, the Borrower agrees (i) two (2) Business Days prior to the
occurrence of any Disposition other than an Excluded Disposition, to deliver to
the Agent (in sufficient copies for each Lender) a statement, certified by the
chief executive officer or chief financial officer of the Borrower and in
reasonable detail, of the estimated amount of the Net Cash Proceeds of such
Disposition and (ii) that in the event such Disposition (other than an Excluded
Disposition) is completed, the Commitments shall be automatically reduced as
follows:
<PAGE>
(A) on the date of such Disposition, in an aggregate
amount equal to 100% of the Net Cash Proceeds of such Disposition
received by the Borrower or any of the Subsidiaries on the date of such
Disposition; and
(B) thereafter, quarterly, on the date of the delivery
to the Agent pursuant to Section 6.05 hereof of the financial statements
for each fiscal quarter or (if earlier) the date which is forty-five (45)
days after the end of such fiscal quarter, to the extent the Borrower or
any Subsidiary shall receive Net Cash Proceeds during such fiscal quarter
under deferred payment arrangements or investments entered into or
received in connection with any Disposition, an amount equal to 100% of
the aggregate amount of such Net Cash Proceeds, provided that if, prior
to the date upon which the Borrower would otherwise be required to make a
prepayment under this paragraph (B) with respect to any fiscal quarter,
all such Net Cash Proceeds received in cash shall aggregate an amount
that will require a prepayment of $250,000 or more under this paragraph
(B) with respect to such fiscal quarter, then the Borrower shall
immediately make a prepayment under this paragraph (B) in an amount equal
to such required prepayment.
In connection with each such reduction of the Commitments, the Borrower shall
prepay the Notes accordingly, as provided in Section 1.06(g). Notwithstanding
the foregoing, provided that no Default exists as of the date of any such
Disposition, no reduction of the Commitments or prepayment of the Notes shall be
required under this Section 1.06(e) with respect to the first $25,000,000 in Net
Cash Proceeds from any such Disposition, or all Dispositions in the aggregate,
consummated after the date hereof in the event that the Borrower advises the
Agent at the time the Net Cash Proceeds from such Disposition (or the last in
any such series of Dispositions) are received that it intends to reinvest such
Net Cash Proceeds in replacement assets pursuant to one or more Permitted
Acquisitions, so long as:
(1) such Net Cash Proceeds are (x) held by the Agent in
the Collateral Account pending such reinvestment, in which event the
Agent need not release such Net Cash Proceeds except upon presentation of
evidence satisfactory to it that such Net Cash Proceeds are to be so
reinvested in compliance with the provisions of this Agreement, (y)
applied by the Borrower to the prepayment of the Notes without permanent
reduction of the Commitments in such amount (in which event the Borrower
agrees to advise the Agent in writing at the time of such prepayment of
Notes that such prepayment is being made from the proceeds of a
Disposition) or (z) held and applied in any combination of clauses (x)
and (y) above; and
(2) the Net Cash Proceeds from any such Disposition are
in fact so reinvested prior to the earlier to occur of (x) 180 days
following the date of such Disposition, unless one or more definitive
agreements with respect to such Permitted Acquisition(s) utilizing Net
Cash Proceeds shall have been entered into within such period, or (y) in
such event, 270 days following such Disposition, it being understood
that, in the event Net Cash Proceeds from more than one Disposition are
paid into the Collateral Account or applied to the prepayment of the
Notes as provided in subparagraph (1) above, such Net Cash Proceeds shall
be deemed to be released in the same order in which such Dispositions
occurred.
<PAGE>
Accordingly, any such Net Available Proceeds so held for more than the 180 or
270 day period, as applicable, referred to in subparagraph (2) above shall be
forthwith applied to the prepayment of the Notes and the reduction of the
Commitments (by an amount equal to the portion of such prepayments applied to
the Notes) as provided above. Nothing in this Section 1.06 shall be deemed to
obligate the Agent to release any of such proceeds from the Collateral Account
to the Borrower or any Subsidiary for purposes of reinvestment as aforesaid
during the existence of any Default.
(f) Application of Reductions of the Commitments. Upon the occurrence of
any of the events described in the above paragraphs of this Section 1.06, the
amount of the proposed or required reduction of the Commitments, if any, shall
be applied to the reduction of the Lenders' respective Commitments on a pro rata
basis, as provided in Section 1.14. Each such reduction of the aggregate
Commitments shall be applied as follows:
(i) in the case of reductions made out of Excess Cash Flow under
Section 1.06(c), to subsequent scheduled automatic reductions of the
Commitments under Section 1.01(e) in the inverse order in which they
appear; and
(ii) in the case of all other reductions, to reduce the dollar
levels of each of the Commitments shown in the Table of scheduled
automatic reductions under Section 1.01(e) for reduction dates occurring
after the date of the applicable reduction ratably in accordance with the
dollar levels shown in such Table.
(g) Mandatory Prepayments; Applications of Prepayments.
(i) Simultaneously with the termination of the Commitments or
any mandatory automatic reduction of the Commitments under Section
1.01(e) or Section 1.06(c) or (e), the Borrower (A) shall pay to the
Agent, for the ratable account of each Lender, any then accrued unpaid
Commitment Fee on the reduced portion of the Commitments, (B) shall
repay such amount of the aggregate principal amount of the Notes as
shall cause the Aggregate Exposure to be less than or equal to the
aggregate Commitments, after giving effect to such termination or
reduction and (C) shall pay any indemnification payments due in
accordance with Section 1.11 in respect of LIBOR Loans so prepaid.
<PAGE>
(ii) If and to the extent that the repayment in full of all
outstanding Loans is insufficient to cause the Aggregate Exposure to be
less than or equal to the aggregate Commitments, the Borrower shall,
without notice or demand, immediately make payment to the Agent, for
deposit in the Collateral Account, as cover for the Letter of Credit
Exposure, as described in Section 1.02(f).
(iii) All voluntary and mandatory prepayments of the Notes
under Sections 1.06(a), (c), (d) and (e) and Section 1.06(g)(i) above
(A) shall be made without set-off, deduction or counterclaim, and (B)
unless otherwise specified in this Section 1.06, shall be applied
first, to overdue interest, fees and expenses hereunder, second, to pay
principal of the Notes, and third, to the extent of any excess
remaining after application as provided above, to pay any outstanding
Reimbursement Obligations and, thereafter, to cash collateralize the
Letter of Credit Exposure as provided in Section 1.02(f), provided, in
each case, that (A) payments of principal of the Notes shall be applied
to the Lenders' respective Notes pro rata as provided in Section 1.14,
unless otherwise agreed to by the Lenders, and (B) applications of
prepayments to principal shall be made first to Base Rate Loans and
then to LIBOR Loans.
Section 1.07. Commitment Fee.
(a) The Borrower shall pay to the Agent, for the ratable account of each
Lender, a non-refundable fee (the "Commitment Fee") on the aggregate daily
unutilized portion of the Commitments from the Closing Date to and including the
earlier of the termination of the Commitments or the Expiration Date, at the
Commitment Fee Rate (computed on the basis of the actual number of days elapsed
over a 365 -366-day year), payable quarterly in arrears on each Quarterly Date,
commencing January 30, 1998, without setoff, deduction or counterclaim, with a
final payment at the maturity of the Notes, whether by payment, prepayment,
acceleration or otherwise.
(b) The Commitment Fee Rate during the period commencing on the date
hereof and ending on February 14, 1998 shall be .50%. The Commitment Fee Rate
during the Pricing Period commencing on February 15, 1998 and ending on May 14,
1998 and during each Pricing Period thereafter shall be determined based upon
the Pricing Ratio, as indicated in the following Table:
------------------------------------------------------------------
Pricing Ratio Commitment Fee Rate
------------------------------------------------------------------
Greater than 4.50:1.00 .500%
------------------------------------------------------------------
Less than or equal to 4.50:1.00 .375%
------------------------------------------------------------------
<PAGE>
Section l.08. Requirements of Law.
(a) In the event that any Regulatory Change shall:
(i) change the basis of taxation of any amounts payable to any
Lender under this Agreement or any Notes in respect of any Loans,
including without limitation LIBOR Loans made by it or any Letters of
Credit issued or participated in by it (other than taxes imposed on the
overall net income of such Lender in its jurisdiction of organization
or in the jurisdiction where its lending office is located);
(ii) impose or modify any reserve, compulsory loan assessment,
special deposit or similar requirement relating to any extensions of
credit or other assets of, or any deposits with or other liabilities
of, any office of such Lender (including any of such Loans or any
deposits referred to in the definition of "LIBOR Base Rate" in Article
XI); or
(iii) impose any other conditions affecting this Agreement in
respect of Loans, including without limitation LIBOR Loans and Letters
of Credit (or any of such extensions of credit, assets, deposits or
liabilities);
and the result of any of the foregoing shall be to increase such Lender's costs
of making or maintaining any Loans, including without limitation LIBOR Loans, or
any Commitment or of issuing or maintaining (or participating in) any Letters of
Credit, or to reduce any amount receivable by such Lender hereunder in respect
of any of its LIBOR Loans or any Commitment, in each case only to the extent
that such additional amounts are not included in the LIBOR Base Rate or Base
Rate applicable to such Loans or the Letter of Credit Fee applicable to such
Letters of Credit, then the Borrower shall pay on demand to such Lender, through
the Agent, and from time to time as specified by such Lender, such additional
amounts as such Lender shall reasonably determine are sufficient to compensate
such Lender for such increased cost or reduced amount receivable.
<PAGE>
(b) If at any time after the date of this Agreement any Lender shall
have determined that the applicability of any law, rule, regulation or guideline
adopted pursuant to or arising out of the July 1988 report of the Basle
Committee on Lending Regulations and Supervisory Practices entitled
"International Convergence of Capital Measurement and Capital Standards", or the
adoption or implementation of any Regulatory Change regarding capital adequacy,
or any change therein, or any change in the interpretation or administration
thereof by any Governmental Authority, central bank or comparable agency charged
with the interpretation or administration thereof (whether or not having the
force of law), has or will have the effect of reducing the rate of return on
such Lender's capital or on the capital of such Lender's holding company, if
any, as a consequence of the existence of its obligations hereunder (whether
with respect to the Commitments, the Loans, any Letter of Credit or any other
Obligation) to a level below that which such Lender or its holding company could
have achieved but for such adoption, change or compliance (taking into
consideration such Lender's policies with respect to capital adequacy) by an
amount reasonably deemed by such Lender to be material, then from time to time
following written notice by such Lender to the Borrower as provided in paragraph
(c) of this Section, within fifteen (15) days after demand by such Lender, the
Borrower shall pay to such Lender, through the Agent, such additional amount or
amounts as such Lender shall reasonably determine will compensate such Lender or
such corporation, as the case may be, for such reduction, provided that to the
extent that any or all of the Borrower's liability under this Section arises
following the date of the adoption of any such Regulatory Change (the "Effective
Date"), such compensation shall be payable only with respect to that portion of
such liability arising after notice of such Regulatory Change is given by such
Lender to the Borrower (unless such notice is given within sixty (60) days after
the Effective Date, in which case such compensation shall be payable in respect
of all periods before and after the Effective Date).
(c) If any Lender becomes entitled to claim any additional amounts
pursuant to this Section, it shall promptly notify the Borrower of the event by
reason of which it has become so entitled. A certificate setting forth in
reasonable detail the computation of any additional amounts payable pursuant to
this Section submitted by such Lender to the Borrower shall be delivered to the
Borrower and the other Lenders promptly after the initial incurrence of such
additional amounts and shall be conclusive in the absence of manifest error. The
covenants contained in this Section shall survive for six months following the
termination of this Agreement and the payment of the outstanding Notes. No
failure on the part of any Lender to demand compensation under paragraph (a) or
(b) above on any one occasion shall constitute a waiver of its rights to demand
compensation on any other occasion. The protection of this Section shall be
available to each Lender regardless of any possible contention of the invalidity
or inapplicability of any law, regulation or other condition which shall give
rise to any demand by such Lender for compensation thereunder.
Section 1.09. Limitations on LIBOR Loans; Illegality.
(a) Anything herein to the contrary notwithstanding, if, on or prior to
the determination of an interest rate for any LIBOR Loans for any applicable
Interest Period, the Agent shall determine (which determination shall be
conclusive absent manifest error) that:
(i) by reason of any event affecting United States money
markets or the London interbank market, quotations of interest rates
for the relevant deposits are not being provided in the relevant
amounts or for the relevant maturities for purposes of determining the
rate of interest for such Loans under this Agreement; or
(ii) the rates of interest referred to in the definition of
"LIBOR Base Rate" in Article XI, on the basis of which the rate of
interest on any LIBOR Loans for such period is determined, do not
accurately reflect the cost to the Lenders of making or maintaining
such LIBOR Loans for such period; then the Agent shall give the
Borrower prompt notice thereof (and shall thereafter give the Borrower
prompt notice of the cessation, if any, of such condition), and so long
as such condition remains in effect, the Lenders shall be under no
obligation to make LIBOR Loans or to convert Base Rate Loans into LIBOR
Loans and the Borrower shall, on the last day(s) of the then current
Interest Period(s) for any outstanding LIBOR Loans, either prepay such
LIBOR Loans in accordance with Sections 1.01 and 1.06 or convert such
Loans into Base Rate Loans in accordance with Section 1.04.
<PAGE>
(b) Notwithstanding any other provision herein, if for any reason a
Lender shall be unable to make or maintain LIBOR Loans as contemplated by this
Agreement, such Lender shall provide prompt written notice to the Borrower and
(i) such Lender's commitment hereunder to make LIBOR Loans, continue LIBOR Loans
as such and convert Base Rate Loans to LIBOR Loans shall thereupon terminate and
(ii) such Lender's Loans then outstanding as LIBOR Loans, if any, shall be
converted automatically to Base Rate Loans on the respective last days of the
then current Interest Periods with respect to such Loans or within such earlier
period as required by law. If any such conversion of a LIBOR Loan occurs on a
day which is not the last day of the then current Interest Period with respect
thereto, and if the reason for such Lender's inability to make or maintain LIBOR
Loans as contemplated by this Agreement is a Regulatory Change, then the
Borrower shall pay to such Lender such amounts, if any, as may be required
pursuant to Section 1.11.
<PAGE>
Section 1.10. Taxes.
(a) All payments made by the Borrower under this Agreement and the
Notes shall be made free and clear of, and without deduction or withholding for
or on account of, any present or future income, stamp or other taxes, levies,
imposts, duties, charges, fees, deductions or withholdings, now or hereafter
imposed, levied, collected, withheld or assessed by any Governmental Authority
(all such taxes, levies, imposts, duties, charges, fees, deductions and
withholdings being hereinafter called "Taxes"); provided, however, that the term
"Taxes" shall not include net income taxes, franchise taxes (imposed in lieu of
net income taxes) and general intangibles taxes (such as those imposed by the
State of Florida) imposed on the Agent or any Lender, as the case may be, as a
result of a present or former connection or nexus between the jurisdiction of
the government or taxing authority imposing such tax (or any political
subdivision or taxing authority thereof or therein) and the Agent or such Lender
other than that arising solely from the Agent or such Lender having executed,
delivered or performed its obligations or received a payment under, or enforced,
this Agreement, the Notes or any of the Security Documents. If any Taxes are
required to be withheld from any amounts payable to the Agent or any Lender
hereunder or under the Notes or the Letter of Credit Documents, the amounts so
payable to the Agent or such Lender shall be increased to the extent necessary
to yield to the Agent or such Lender (after payment of all Taxes) interest or
any such other amounts payable hereunder at the rates or in the amounts
specified in this Agreement and the Notes or in the Letter of Credit Documents,
as the case may be. Whenever any Taxes are payable by the Borrower in respect of
this Agreement or the Notes or the Letter of Credit Documents, as promptly as
possible thereafter the Borrower shall send to the Agent for its own account or
for the account of such Lender, as the case may be, a certified copy of an
original official receipt received by the Borrower showing payment thereof. If
the Borrower fails to pay any Taxes when due to the appropriate taxing authority
or fails to remit to the Agent the required receipts or other required
documentary evidence, the Borrower shall indemnify the Agent and the Lenders for
any incremental taxes, interest or penalties that may become payable by the
Agent or any Lender as a result of any such failure. If, after any payment of
Taxes by the Borrower under this Section, any part of any Tax paid by the Agent
or any Lender is subsequently recovered by the Agent or such Lender, the Agent
or such Lender shall reimburse the Borrower to the extent of the amount so
recovered. A certificate of an officer of the Agent or such Lender setting forth
the amount of such recovery and the basis therefor shall, in the absence of
manifest error, be conclusive. The Agent and the Lenders shall use reasonable
efforts to notify the Borrower of their attempts, if any, to obtain abatements
of any such Taxes and the receipt by the Agent or the Lenders of any funds in
connection therewith. The agreements in this subsection shall survive the
termination of this Agreement and the payment of the Notes and all other amounts
payable hereunder.
(b) Each Lender, if any, that is not incorporated under the laws of the
United States or a state thereof agrees that prior to the date any payment is
required to be made to it hereunder it will deliver to the Borrower and the
Agent (i) two duly completed copies of United States Internal Revenue Service
Form 1001 or 4224 or successor applicable form, as the case may be, and (ii) an
Internal Revenue Service Form W-8 or W-9 or successor applicable form. Each such
Lender also agrees to deliver to the Borrower and the Agent two further copies
of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms
or other manner of certification, as the case may be, on or before the date that
any such form expires or becomes obsolete or after the occurrence of any event
requiring a change in the most recent form previously delivered by it to the
Borrower, and such extensions or renewals thereof as may reasonably be requested
by the Borrower or the Agent, unless in any such case an event (including,
without limitation, any change in treaty, law or regulation) has occurred prior
to the date on which any such delivery would otherwise be required which renders
all such forms inapplicable or which would prevent such Lender from duly
completing and delivering any such form with respect to it and such Lender so
advises the Borrower and the Agent. Such Lender shall certify (x) in the case of
a Form 1001 or 4224, that it is entitled to receive payments under this
Agreement without deduction or withholding of any United States federal income
taxes and (y) in the case of a Form W-8 or W-9, that it is entitled to an
exemption from United States backup withholding tax.
<PAGE>
Section 1.11. Indemnification. The Borrower shall pay to the Agent, for
the account of each Lender, upon the request of such Lender delivered to the
Agent and thereafter delivered by the Agent to the Borrower, such amount or
amounts as shall compensate such Lender for any loss, cost or expense incurred
by such Lender (as reasonably determined by such Lender) as a result of:
(a) any payment or prepayment or conversion of any LIBOR Loan held by
such Lender on a date other than the last day of the Interest Period for such
LIBOR Loan (including without limitation any such payment, prepayment or
conversion required under Section 1.04 or 1.06); or
(b) any failure by the Borrower to borrow, convert into or continue a
LIBOR Loan on the date for such borrowing specified in the relevant Loan Request
or Interest Rate Option Notice under Section 1.04 or otherwise.
Such indemnification may include an amount equal to the excess, if any, of (i)
the amount of interest which would have accrued on the amount so prepaid, or not
so borrowed, converted or continued, for the period from the date of such
prepayment or of such failure to borrow, convert or continue to the last day of
such Interest Period (or, in the case of a failure to borrow, convert or
continue, the Interest Period that would have commenced on the date of such
failure) in each case at the applicable rate of interest for such Loans provided
for herein (excluding, however, the Applicable Margin included therein, if any)
over (ii) the amount of interest (as reasonably determined by such Lender) which
would have accrued to such Lender on such amount by placing such amount on
deposit for a comparable period with leading banks in the interbank eurodollar
market. This covenant shall survive the termination of this Agreement and the
payment of the Loans and all other amounts payable hereunder. The determination
by each such Lender of the amount of any such loss or expense, when set forth in
a written notice delivered to the Agent (and thereafter delivered by the Agent
to the Borrower), containing such Lender's calculation thereof in reasonable
detail, shall be conclusive in the absence of manifest error.
Section 1.12. Payments Under the Notes. All payments and prepayments
made by the Borrower of principal of, and interest on, the Notes and other sums
and charges payable under this Agreement, including without limitation the
Commitment Fee and any payments under Sections 1.08, 1.10 and 1.11, shall be
made in immediately available funds to the Agent (as specified in Section 14.03)
for the accounts of the Lenders as provided in Section 1.14 and otherwise herein
and, with respect to fees payable to the Agent and its affiliates, the Fee
Letter, not later than 2:00 P.M. (New York Time), on the date on which such
payment shall become due. The failure by the Borrower to make any such payment
by such hour shall not constitute a Default hereunder so long as payment is
received later that day, provided that any such payment made after 2:00 P.M.
(New York Time), on such due date shall be deemed to have been made on the next
Business Day for the purpose of calculating interest on amounts outstanding on
the Notes. The Borrower shall, at the time of making each payment under this
Agreement or the Notes, specify to the Agent the Notes or amounts payable by the
Borrower hereunder to which such payment is to be applied (and in the event that
it fails to so specify, or if an Event of Default has occurred and is
continuing, the Agent may distribute such payments in such manner as the
Required Lenders may direct or, absent such direction, as it determines to be
appropriate, subject to the provisions of Section 1.14). Except as otherwise
provided in the definition of "Interest Period" with respect to LIBOR Loans, if
any payment hereunder or under the Notes shall be due and payable on a day which
is not a Business Day, such payment shall be deemed due on the next following
Business Day and interest shall be payable at the applicable rate specified
herein through such extension period. The Agent, or any Lender for whose account
any such payment is made, may (but shall not be obligated to) debit the amount
of any such payment which is not made by such time to any deposit account of the
Borrower with the Agent or such Lender, as the case may be. Each payment
received by the Agent under this Agreement or any Note for the account of a
Lender shall be paid promptly to such Lender, in immediately available funds,
for the account of such Lender for the Note in respect to which such payment is
made.
<PAGE>
Section 1.13. Set-Off, Etc. The Borrower agrees that, in addition to
(and without limitation of) any right of set-off, bankers' lien or counterclaim
a Lender may otherwise have and in addition to the debit right afforded in
Section 1.12, each Lender (and each subsequent holder of any Note) shall be
entitled, at its option, to offset balances held by it, or by any of its
respective branches or agencies, for the account of the Borrower at any of its
or their offices, in Dollars or in any other currency, against any principal of
or interest on the Notes held by such Lender (or subsequent noteholder) or other
fees or charges owed to such Lender (or subsequent noteholder) hereunder which
are not paid when due (regardless of whether such balances are then due to the
Borrower and regardless of whether the Lenders are otherwise fully secured), in
which case it shall promptly notify the Borrower and the Agent thereof, provided
that such Lender's (or subsequent noteholder's) failure to give such notice
shall not affect the validity thereof and (as security for any Indebtedness
hereunder) the Borrower hereby grants to the Agent and the Lenders a continuing
security interest in any and all balances, credit, deposits, accounts or moneys
of the Borrower maintained with the Agent and any Lender now or hereafter. If a
Lender (or subsequent noteholder) shall obtain payment of any principal,
interest or other amounts payable under this Agreement through the exercise of
any right of set-off, banker's lien or counterclaim or otherwise or pursuant to
the debit right provided in Section 1.12, it shall promptly purchase from the
other Lenders participations in (or, if and to the extent specified by such
Lender, direct interests in) the Note(s) held by the other Lenders in such
amounts, and make such other adjustments from time to time as shall be
equitable, to the end that all the Lenders shall share the benefit of such
payment (net of any expenses which may be incurred by such Lender in obtaining
or preserving such benefit) pro rata based upon with the unpaid principal
amounts of and interest on the Note(s) held by each of them. To such end, the
Lenders shall make appropriate adjustments among themselves (by the resale of
participations sold or otherwise) if such payment is rescinded or must otherwise
be restored. The Borrower agrees that any Lender or any other Person which
purchases a participation (or direct interest) in the Note(s) held by any or all
of the Lenders (each being hereinafter referred to as a "Participant") may
exercise all rights of set-off, bankers' lien, counterclaim or similar rights
with respect to such participation as fully as if such Participant were a direct
holder of Notes in the amount of such participation, provided that the Borrower
was notified of such purchase. Nothing contained herein shall be deemed to
require any Participant to exercise any such right or shall affect the right of
any Participant to exercise, and retain the benefits of exercising, any such
right with respect to any indebtedness or obligation of the Borrower, other than
the Borrower's indebtedness and obligations under this Agreement.
<PAGE>
Section 1.14. Pro Rata Treatment; Sharing.
(a) Except to the extent otherwise provided herein and, with respect to
fees payable to the Agent and its affiliates, the Fee Letter, and except as
otherwise agreed by the Lenders: (i) each borrowing from the Lenders under the
Commitments shall be made from the Lenders and each payment of the Commitment
Fee under Section 1.07 shall be made to the Lenders pro rata according to the
amounts of their respective unutilized Commitments; (ii) the principal amount of
LIBOR Loans made by each Lender shall be determined on a pro rata basis in
accordance with its respective Commitment (when making Loans) or the outstanding
principal amount of the Loans owed to such Lender (in the case of conversions to
or continuations of Loans as LIBOR Loans); (iii) each Lender's share of each
Letter of Credit under Section 1.02 and of the Letter of Credit Fee shall be
determined pro rata according to the amounts of the Lenders' respective
Commitments; (iv) each payment and prepayment of principal of the Notes and
repayments of Letter of Credit Disbursements shall be allocated to the Lenders
pro rata in accordance with the unpaid principal amounts of the respective Notes
held by the Lenders; (v) each payment of interest on the Notes shall be
allocated to the Lenders pro rata in accordance with the unpaid principal
amounts of their respective Loans; (vi) each payment of any other sums and
charges payable for the Lenders' account under this Agreement (except for the
Issuance Fee which shall be retained by the Issuing Bank and the fees payable
under the Fee Letter, which are payable solely in accordance therewith) shall be
allocated to the Lenders pro rata in accordance with the respective unpaid
principal amounts of the aggregate Loans made by each of them; (vii) each
payment under Section 1.08, 1.10 or 1.11 shall be made to each Lender in the
amount required to be paid to such Lender to adequately indemnify or compensate
such Lender for losses suffered or costs incurred by such Lender as provided in
such Section; and (viii) notwithstanding the foregoing, after and during the
continuance of a Default, each distribution of cash, property, securities or
other value received by any Lender, directly or indirectly, in respect of the
Borrower's Indebtedness hereunder, whether pursuant to any attachment,
garnishment, execution or other proceedings for the collection thereof or
pursuant to any bankruptcy, reorganization, liquidation or other similar
proceeding or otherwise, after payment of collection and other expenses as
provided herein and in the Security Documents, shall be apportioned among the
Lenders pro rata based upon the respective aggregate unpaid principal amount of
all Loans owed to each of them and their respective shares of the aggregate
Letter of Credit Exposure.
<PAGE>
(b) Notwithstanding the foregoing, if any Lender (a "Recovering Party")
shall receive any such distribution referred to in Section 1.14 (a)(viii) above
(a "Recovery") in respect thereof, such Recovering Party shall pay to the Agent
for distribution to the Lenders as set forth herein their respective pro rata
shares of such Recovery, based on the Lenders' pro rata shares of all Loans
outstanding at such time, unless the Recovering Party is legally required to
return any Recovery, in which case each party receiving a portion of such
Recovery shall return to the Recovering Party its pro rata share of the sum
required to be returned without interest. For purposes of this Agreement,
calculations of the amount of the pro rata share of each Lender shall be rounded
to the nearest whole dollar.
(c) The Borrower acknowledges and agrees that, if any Recovering Party
shall be obligated to pay to the other Lenders a portion of any Recovery
pursuant to Section 1.14(b) and shall make such recovery payment, the Borrower
shall be deemed to have satisfied its obligations in respect of Indebtedness
held by such Recovering Party only to the extent of the Recovery actually
retained by such Recovering Party after giving effect to the pro rata payments
by such Recovering Party to the other Lenders. The obligations of the Borrower
in respect of Indebtedness held by each other Lender shall be deemed to have
been satisfied to the extent of the amount of the Recovery distributed to each
such other Lender by the Recovering Party.
Section 1.15. Non-Receipt of Funds by the Agent. Unless the Agent shall
have been notified in writing by a Lender or the Borrower prior to the date on
which such Lender or the Borrower is scheduled to make payment to the Agent of
(in the case of a Lender) the proceeds of a Loan to be made by it hereunder or
(in the case of the Borrower) a payment to the Agent for the account of any or
all of the Lenders hereunder (such payment being herein referred to as a
"Required Payment"), which notice shall be effective upon actual receipt, that
it does not intend to make such Required Payment to the Agent, the Agent may
(but shall not be required to) assume that the Required Payment has been made
and may (but shall not be required to), in reliance upon such assumption, make
the amount thereof available to the intended recipient(s) on such date and, if
such Lender or the Borrower (as the case may be) has not in fact made the
Required Payment to the Agent, the recipient(s) of such payment shall, on
demand, or with respect to payment received by the Borrower, within three (3)
Business Days after such receipt repay to the Agent for the Agent's own account
the amount so made available together with interest thereon in respect of each
day during the period commencing on the date such amount was so made available
by the Agent until the date the Agent recovers such amount at a rate per annum
equal to (a) the Federal Funds Rate for such day, with respect to interest paid
by such Lender, or (b) the applicable rate provided under Section 1.03, with
respect to interest paid by the Borrower.
Section 1.16. Replacement of Notes. Upon receipt of evidence reasonably
satisfactory to the Borrower of the loss, theft, destruction or mutilation of
any Note and (a) in the case of any such loss, theft or destruction, upon
delivery of an indemnity agreement reasonably satisfactory to the Borrower
(provided, however, that if the holder of such Note is the original holder of
such Note or a financial institution with net capital, capital surplus and
undivided profits in excess of $50,000,000 its own agreement of indemnity shall
be deemed to be satisfactory), or (b) in the case of any such mutilation, upon
the surrender of such Note for cancellation, the Borrower will execute and
deliver, in lieu of such lost, stolen, destroyed, or mutilated Note, a new Note
of like tenor.
<PAGE>
II. SECURITY; SUBORDINATION; USE OF PROCEEDS.
Section 2.01. Security for the Obligations; Subordination; Etc.
(a) Collateral. Except as specified in Schedule 2.01(a) hereto, the
Borrower's obligations hereunder, under the Notes and in respect of any Rate
Hedging Obligations entered into with any Hedging Lenders shall be secured at
all times by:
(i) the unconditional guaranty of each of the Subsidiaries and
the Parent (provided that the Parent's guaranty shall be non-recourse,
except to the extent of the Collateral required to be provided by the
Parent under subparagraph (v) below);
(ii) a first priority perfected security interest in and lien
upon all presently owned and hereafter acquired tangible and intangible
personal property and fixtures of each of the Borrower and the
Subsidiaries, including without limitation the PCT-CONN Note Documents,
the MCT Note Documents and any other intercompany notes, obligations or
agreements, subject only to (A) any prior Permitted Liens and (B) the
exclusion of any FCC License or CATV Franchise, except to the extent (if
any) that such a security interest is permitted or not prohibited by the
Communications Act of 1934, as amended, and the rules, regulations and
policies of the FCC or the laws governing such CATV Franchise, as
applicable (but including, to the maximum extent permitted by law, all
rights incident or appurtenant to any such FCC License or CATV Franchise
including without limitation the right to receive all proceeds derived or
arising from or in connection with the sale, assignment or transfer
thereof);
(iii) first mortgages on all presently owned and hereafter
acquired real estate owned by each of the Borrower and the Subsidiaries,
subject only to any prior Permitted Liens, together with mortgagee's
title insurance policies acceptable to the Lenders;
(iv) first priority perfected collateral assignments of or
leasehold mortgages on all real estate leases in which any of the
Borrower and the Subsidiaries now has or may in the future have an
interest, subject only to any prior Permitted Liens, and such third party
consents, lien waivers, non-disturbance agreements and estoppel
certificates as the Agent shall reasonably require, together with
mortgagee's title insurance policies acceptable to the Agent;
(v) a first priority perfected collateral assignment and/or
pledge of all of the issued and outstanding ownership interests of each
of the Borrower and the Subsidiaries and all warrants, options and other
rights to purchase such ownership interests;
<PAGE>
(vi) without limiting the generality of Section 2.01(a)(i), a
first priority perfected assignment of such of the related Acquisition
Documents as the Agent shall reasonably require, and, on a best efforts
basis, the written consent(s) thereto of the related Seller(s) and its
or their Affiliates, as necessary; and
(vii) without limiting the generality of Section 2.01(a)(i), first
priority perfected collateral assignments of (i) all NRTC Member
Agreements and any other satellite broadcasting distribution
agreements, (ii) all CATV Franchises and (iii) all such management
agreements, programming agreements, network affiliation agreements and
agreements as the Agent shall reasonably deem necessary to protect the
interests of the Lenders, together with such third party consents, lien
waivers and estoppel certificates as the Agent shall reasonably
require.
(b) Subordination.
(i) All existing and hereafter arising indebtedness of the
Borrower and the Subsidiaries, if any, to Sellers which constitutes
Permitted Seller Subordinated Debt shall be subordinated to any
Indebtedness of the Companies to the Agent or the Lenders pursuant to
subordination agreements substantially in the form of Schedule 2.01(b)
with any material changes thereto to be satisfactory to the Required
Lenders, in their sole discretion (each, a "Seller Subordination
Agreement", and collectively, the "Seller Subordination Agreements").
Notwithstanding the foregoing, the consent of the Agent (in its sole
discretion) shall be sufficient (without further approval by the Lenders)
to approve revisions to such form necessary (i) to permit the issuance to
any subordinated Seller of Junior Reorganization Securities and (ii) to
waive the requirement that the promissory notes evidencing such Seller's
Permitted Seller Subordinated Debt be pledged and delivered to the Agent
as security.
(ii) Without limiting the generality of Section 7.01, all
existing and hereafter arising indebtedness of the Borrower and the
Subsidiaries to the Parent and its other subsidiaries, including without
limitation the Manager, excluding the Parent Loans (provided the same are
repaid in full as required under Section 3.01(e)), shall be subordinated
to any Indebtedness of the Companies to the Lenders pursuant to
subordination agreements satisfactory in form and substance to the
Required Lenders (each, an "Affiliate Subordination Agreement", and
collectively, the "Affiliate Subordination Agreements").
(c) Security Documents. All agreements and instruments described or
contemplated in this Section 2.01, together with any and all other agreements
and instruments heretofore or hereafter securing the Notes, the Rate Hedging
Obligations and the other Obligations or otherwise executed in connection with
this Agreement, are sometimes hereinafter referred to collectively as the
"Security Documents" and each individually as a "Security Document". The
Borrower agrees to execute and deliver any and all Security Documents, in form
and substance satisfactory to the Agent, and take such action as the Lenders may
reasonably request from time to time in order to cause the Agent and the Lenders
to be secured at all times as described in this Section.
<PAGE>
Section 2.02. Use of Proceeds. The proceeds of the Loans shall be used
(a) for the purposes specified in Section 5.05(b)(vii), (b) to repay the Parent
Loans, (c) to support the issuance of Letters of Credit, (d) for working
capital, Capital Expenditures and general corporate purposes and (e) subject to
availability, to finance Permitted Acquisitions, including Transaction Costs.
Attached as Schedule 2.02 hereto is the Borrower's current projection, as of the
date hereof, of its sources and uses of proceeds as of the Closing Date.
III. CONDITIONS OF MAKING THE LOANS.
Section 3.01. Conditions to the First Loans and the First Issuance of the
Letters of Credit. The obligations of the Lenders to enter into this Agreement,
to make Loans to the Borrower and to issue Letters of Credit on the Closing Date
are subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
the Borrower and its Affiliates set forth in this Agreement and in the other
Loan Documents shall be true and correct in all material respects on and as of
the date hereof and on the Closing Date and the Borrower shall have performed
all obligations which were to have been performed by it hereunder prior to the
Closing Date.
(b) Loan Documents and Organizational Documents. The Borrower shall have
executed and/or delivered to the Agent (or shall have caused to be executed and
delivered to the Agent by the appropriate Persons), the following:
(i) The Notes;
(ii) All of the Security Documents, including without limitation
all Uniform Commercial Code Financing Statements and Termination
Statements and all mortgages, deeds of trusts and amendments thereto,
lessor consents and waivers and related title insurance policies, if any,
required by the Agent or its counsel, in connection with the Borrower's
compliance with the provisions of Section 2.01;
(iii) Certified copies (attached as required in Part A of the
form attached as Schedule 3.01) of the resolutions of the Board of
Directors of each Company, or of each Company's stockholders, partners,
managers, officers and/or corporate general partner, as the case may be,
authorizing the execution and delivery of the Loan Documents to which it
is a party;
(iv) A copy of (A) the Certificate or Articles of Incorporation
of each corporate Company and each corporate general partner of each
partnership Company, with any amendments thereto, certified by the
appropriate Secretary of State and by the Secretary or an Assistant
Secretary of such Company or general partner, and (B) the Certificate of
Limited Partnership of each Company which is a limited partnership,
certified by the appropriate Secretary of State and the Secretary of the
corporate general partner of such Company (in each case, attached as
required in Part A of the form attached as Schedule 3.01);
<PAGE>
(v) A copy of the By-Laws of each corporate Company, with any
amendments thereto, certified by such Company's Secretary (attached as
required in Part A of the form attached as Schedule 3.01);
(vi) A copy of the partnership agreement of each Company which
is a partnership, with any amendments thereto, certified by the Secretary
of such Company's corporate general partner (attached as required in Part
A of the form attached as Schedule 3.01);
(vii) For each Company, certificates of legal existence and good
standing (both as to corporate law, if applicable, and, if available, tax
matters) issued as of a reasonably recent date by such Company's state of
organization or formation and any other state in which such Company is
authorized or qualified to transact business;
(viii) No later than three (3) Business Days prior to the
Closing Date, to the extent requested by the Agent, true and correct
copies of all CATV Franchises, FCC Licenses, NRTC Member Agreements and
other DBS Agreements, all other material governmental licenses,
franchises and permits, all material CATV Franchise Consents, FCC
Consents, NRTC Consents and other third party consents and all other
material leases, contracts, agreements, instruments and other documents
specified in Schedules 4.04, 4.06, 4.07, 4.08, 4.12, 4.13, 4.20 and 4.23;
(ix) Such Uniform Commercial Code, Federal tax lien and judgment
searches with respect to the Companies, any Seller being paid with the
proceeds of any Loans (and the assets to be acquired under the related
Acquisition Agreement) and any other third parties as the Agent shall
require, the results thereof to be satisfactory to the Agent;
(x) The Opening Balance Sheet;
(xi) The Environmental Site Assessments and similar diligence
referenced to in Section 4.24 and Schedule 4.24;
(xii) Certificates of insurance evidencing the insurance
coverage and policy provisions required in this Agreement; and
(xiii) Such other supporting documents and certificates as the
Agent or the Lenders may reasonably request from time to time.
<PAGE>
(c) The DBS Transfer. The Agent shall have received satisfactory evidence
of the consummation of the DBS Transfer, including without limitation true and
complete copies of all relevant documents.
(d) The Offering. The Agent shall have received satisfactory evidence of
the consummation of the Offering substantially in accordance with the Offering
Memorandum and the PCC Indenture and the Parent's cash capital contribution to
the Borrower of $85,000,000 from the proceeds thereof to the Borrower, including
without limitation true and complete copies of the PCC Indenture, the Senior
Notes and all other documents executed in connection therewith.
(e) Repayment of Parent Loans. On or before the date of the first Loans
hereunder, the Borrower shall repay the Parent Loans in full.
(f) Officer's Certificates as to Compliance, Documents, Etc. The Borrower
shall have provided to the Agent a compliance certificate substantially in the
form of Part B of the form attached as Schedule 3.01 hereto or such other form
as shall be satisfactory to the Agent, duly executed on behalf of the Borrower
by its chief executive officer or chief financial officer, certifying as to
satisfaction by the Borrower of the conditions to lending set forth in this
Section 3.01 and in Sections 3.02 and 3.03, if and as applicable, and,
specifically, as to certain matters specified therein.
(g) No Material Adverse Change. As of the date hereof and as of the
Closing Date, and since December 31, 1996, no event or circumstance shall have
occurred which could have a Material Adverse Effect.
(h) Company Counsel Opinions. The Agent shall have received:
(i) the favorable written opinion of Drinker Biddle & Reath LLP
(including opinions with respect to matters of local Pennsylvania law),
counsel to the Companies, dated as of the date hereof, addressed to the
Agent and the Lenders and reasonably satisfactory to the Agent in scope
and substance;
(ii) the favorable written opinions of special communications
counsel to the Companies with respect to both cable and broadcast
matters, each dated as of the date hereof, addressed to the Agent and
the Lenders and reasonably satisfactory to the Lenders in scope and
substance; and
(iii) the favorable written opinions of special local counsel to
the Companies in the States of Connecticut, Florida, Georgia, Maine and
Mississippi and the Commonwealth of Puerto Rico dated as of the date
hereof, addressed to the Agent and the Lenders and reasonably
satisfactory to the Lenders in scope and substance.
(i) Legal and Other Fees. As of the date hereof and as of the Closing
Date, all fees owed to the Agent, the Lenders and their respective Affiliates
under the Fee Letter and all legal fees and expenses of counsel to the Agent
incurred through such date shall have been paid in full.
<PAGE>
(j) Review by Agent's Counsel. All legal matters incident to the
transactions hereby contemplated shall be reasonably satisfactory to counsel for
the Agent.
Section 3.02. Acquisition Loans. Without in any way limiting the
discretion of the Required Lenders to approve or withhold approval (if required
hereunder) of any Acquisition or to impose additional conditions upon their
consent (if required hereunder) to such Acquisitions, the obligations of the
Lenders to make any Loans to finance any Permitted Acquisition (collectively,
"Acquisition Loans") are subject to the following conditions:
(a) Revolver Availability. After giving effect to any such Acquisition
Loans, the unutilized portion of the aggregate Adjusted Available Commitments
shall equal or exceed $15,000,000.
(b) Acquisition Closings.
(i) The transactions contemplated by the applicable
Acquisition Agreement shall have been consummated (except for the payment
of that portion of the purchase price thereunder being paid with the
proceeds of Loans) substantially in accordance with the terms thereof
and, in any event, in a manner reasonably satisfactory to the Agent,
including without limitation the valid assumption by the Borrower or such
Subsidiary of all liabilities of the applicable Sellers in respect of the
assets and properties transferred under such Acquisition Agreement, other
than liabilities not subject to assumption under such Acquisition
Agreement which are otherwise addressed in a manner reasonably
satisfactory to the Agent.
(ii) The Agent shall have received evidence of the
issuance and receipt, or execution and delivery, as the case may be, of
(A) all CATV Franchises, FCC Licenses and NRTC Member Agreements, (B) all
CATV Franchise Consents, FCC Consents, NRTC Consents and (C) all other
licenses, permits, approvals and consents, if any, required with respect
to such Acquisition, the proposed Loans and any other related transaction
contemplated by this Agreement and any other consents or filings of or
with applicable Governmental Authorities or other third parties.
(iii) The Borrower shall have obtained from the applicable
Sellers, on a best efforts basis, such Sellers' consents to the
collateral assignment to the Agent of the rights of the Borrower or the
applicable Subsidiary under the Acquisition Agreement and any other agreements
executed thereunder, as required under Section 2.01(a).
(iv) The Agent shall have received copies of the legal
opinions delivered by the
Seller(s) pursuant to the applicable Acquisition Agreement in connection with
the Acquisition, and, on a best efforts basis, a letter from each Person
delivering an opinion (or authorization within the opinion) authorizing reliance
thereon by the Agent and the Lenders.
<PAGE>
(v) Any other conditions imposed by the Required Lenders
in giving their consent (if
required hereunder) to such Permitted Acquisition shall have been satisfied.
(c) Due Diligence. The Agent and its counsel shall have completed their
due diligence review with respect to the proposed Permitted Acquisition,
including a review of all material agreements, and shall be reasonably satisfied
with the results of such review.
(d) Officer's Certificates as to Compliance, Documents, Etc. The Borrower
shall have provided to the Agent a compliance certificate, substantially in the
form of Schedule 3.02(d) hereto or such other form as shall be satisfactory to
the Agent, duly executed on behalf of the Borrower by its chief executive
officer or chief financial officer, certifying as to satisfaction by the
Borrower of the conditions to the consummation of such Acquisition as a
Permitted Acquisition under Section 7.04 and the conditions to lending set forth
in this Section 3.02 and in Section 3.03.
(e) Additional Compliance Certificate. If required by the Agent, the
Borrower shall have executed and delivered (or caused to be executed and
delivered by the appropriate Subsidiaries) to the Agent a certificate of
representations, warranties and compliance reasonably satisfactory in form and
substance to the Agent, together with updated versions of Schedules to this
Agreement and to any applicable Security Documents, to the extent appropriate in
connection with such Permitted Acquisition.
(f) Other Deliveries. The Companies shall have executed and/or delivered
to the Agent (or shall have caused to be executed and delivered to the Agent by
the appropriate persons), the following:
(i) With respect to the assets to be acquired pursuant to such
Acquisition, and the applicable Seller(s), all Uniform Commercial Code
Financing Statements and Termination Statements and all security
agreements, pledge agreements, mortgages, deeds of trusts (and amendments
thereto) and related title insurance policies and other Security
Documents necessary and required by the Agent or its counsel in
connection with the Borrower's compliance with the provisions of Section
2.01;
(ii) Certified copies of the resolutions of the Board of
Directors, stockholders, partners, managers, officers or corporate
general partner of each applicable Company authorizing such Permitted
Acquisition, which resolutions shall not be required, unless requested by
the Agent, if the opinion of general counsel required under Section
3.02(g) is provided;
(iii) Such certificates of public officials and copies of
material consents, agreements and other documents and such other
supporting documents and information as the Agent shall reasonably
request;
(iv) If reasonably requested by the Agent, Environmental Site
Assessments, Environmental Questionnaires and other information with
respect to owned and leased real properties being acquired, which shall
be reasonably satisfactory in all respects to the Required Lenders;
<PAGE>
(v) Such Uniform Commercial Code, Federal tax lien and judgment
searches as the Agent shall reasonably require, the results thereof to
disclose no liens except liens permitted by this Agreement and liens to
be discharged upon completion of the Permitted Acquisition;
(vi) A consolidated balance sheet for the Companies, giving pro
forma effect to Permitted Acquisitions and the proposed Loans, reflecting
compliance with the provisions of Article V;
(vii) Updated Projections, giving pro forma effect to the
Permitted Acquisition and the proposed Loans;
(viii) If applicable, Subscriber Reports as of the Borrowing
Date for such Loans;
(ix) In connection with an Acquisition involving properties in a
new jurisdiction, or the purchase or formation of a new Subsidiary, or if
required by the Agent, updated certificates of insurance evidencing the
additional insurance coverage and policy provisions required in this
Agreement; and
(ix) Such other supporting documents and certificates as the
Agent or the Lenders may reasonably request. Such additional documents
shall include, in the event a new Subsidiary is formed or acquired, such
organizational and other documents as the Agent shall reasonably request
with respect thereto.
(g) General and Local Counsel Opinions.
(i) In connection with an Acquisition involving the purchase or
formation of a new Subsidiary and/or the execution of additional Security
Documents or any other Loan Document, or otherwise, if reasonably
required by the Agent, the Agent shall have received the favorable
written opinions of (A) Drinker Biddle & Reath LLP and (B) special FCC
counsel to the Companies (in the case of acquisitions of cable and
broadcast television properties), in each case dated the date of such
Loans, addressed to the Agent and the Lenders and substantially in the
forms attached as Schedules 3.02(g)(i) and (ii) (subject to changes
approved by the Agent), respectively.
(ii) Only if reasonably requested in connection with the
recording of any mortgages or similar instruments or any material issues
of state law raised in connection with such Loans or the related
Permitted Acquisition, the Agent shall have received the favorable
opinion of local counsel to the Companies, dated the date of such Loans,
addressed to the Agents and the Lenders and substantially in the form
attached as Schedule 3.02(g)(iii) (subject to changes approved by the
Agent).
<PAGE>
(h) Legal Fees. All reasonable legal fees and expenses of counsel to the
Agent incurred through the date of such Loans shall have been paid in full.
(i) Review by Agent's Counsel. All legal matters incident to the
transactions hereby contemplated shall be reasonably satisfactory to counsel for
the Agent.
Section 3.03. All Loans. The obligations of the Lenders to make any Loans
(including Loans made on the Closing Date, if any, and in respect of Permitted
Acquisitions consummated thereafter) and the obligation of the Issuing Bank to
issue any Letters of Credit are, in each case, subject to the following
conditions:
(a) All warranties and representations set forth in this Agreement and
the other Loan Documents shall be true and correct in all material respects as
of the date such Loans are made or such Letter of Credit is issued (except to
the extent they expressly relate to an earlier specified date or are affected by
transactions or events occurring after the Closing Date and permitted or not
prohibited hereunder). Each telephonic or written request for Loans or for a
Letter of Credit shall constitute a representation to such effect as of the date
of such request and as of the date such Loans are made or such Letter of Credit
is issued.
(b) As of the date such Loans are made or such Letter of Credit is
issued, as the case may be, and since the Closing Date, no event or circumstance
shall have occurred which has had or could have a Material Adverse Effect. Each
telephonic or written request for Loans or for a Letter of Credit shall
constitute a representation to such effect as of the date of such request and as
of the date such Loans are made or such Letter of Credit is issued.
(c) After giving effect to such Loans or the issuance of such Letter of
Credit (both as of the proposed date thereof and, on a pro forma basis, the last
day of the most recent month for which financial statements have been delivered
to the Lenders under Section 6.05) and the use of proceeds thereof (whether for
a Permitted Acquisition or otherwise), no Default shall have occurred and be
continuing. Each telephonic or written request for Loans or for a Letter of
Credit shall constitute a representation to such effect as of the date of such
request and as of the date such Loans are made or such Letter of Credit is
issued.
(d) If applicable, the Agent shall have received a properly completed
Loan Request, together with all such financial and other information as the
Agent shall require to substantiate the current and pro forma certifications of
no Default contained therein.
(e) The Agent shall have received such other supporting documents and
certificates as the Agent and the Required Lenders may reasonably request.
Section 3.04. Lender Approvals. For purposes of determining compliance
with the conditions precedent referred to in Sections 3.01, 3.02 and 3.03, on
the date of the first Loans hereunder, each of the Lenders shall be deemed to
have consented to, approved or accepted or be satisfied with each document or
other matter which is the subject of such Lender's consideration under any of
the provisions of such Sections, unless an officer of the Agent responsible for
the transactions contemplated by the Loan Documents shall have received notice
from such Lender prior to the first Loans hereunder specifying its objection
thereto and such Lender shall have failed to make available to the Agent such
Lender's ratable share of the first Loans.
<PAGE>
IV. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants
to the Agent and the Lenders (which representations and warranties shall give
effect to the consummation of all of the transactions referred to in Section
3.01 and shall survive the delivery of the Notes, the making of the Loans and
the issuance of Letters of Credit) that:
Section 4.01. Financial Statements. The Borrower has heretofore furnished
to the Lenders:
(a) the audited and unaudited balance sheets and related statements of
operations, stockholders' equity and cash flow of the Parent, the Borrower and
its Subsidiaries listed on Schedule 4.01(a) (the "Financial Statements"); and
(b) the September 30, 1997 balance sheet of the Borrower and the
Subsidiaries showing their pro forma financial condition after the consummation
of any and all transactions contemplated to have occurred as of the Closing
Date, as if they occurred on September 30, 1997, attached as Schedule 4.01(b)
(the "Opening Balance Sheet").
The Financial Statements have been prepared in accordance with GAAP.
Since December 31, 1996, except for the Offering, there has been no material
adverse change in the assets, properties, business or condition (financial or
otherwise) of the Parent or any of the Companies and no dividends or
distributions have been declared or paid by the Parent or any of the Companies.
Neither the Parent nor any of the Companies has any contingent obligations,
liabilities for taxes or unusual forward or long-term commitments except as
specified in such Financial Statements and except for the Offering. The Opening
Balance Sheet fairly represents the pro forma financial condition of the
Companies as of its date. All financial projections submitted to the Lenders by
the Borrower (including all projections set forth in the Budget) are believed by
the Borrower to be reasonable in light of all information presently known by the
Borrower. Except as set forth on Schedule 4.01(c), as of the date of this
Agreement, neither the Parent nor any of the other Parent Affiliates has any
Indebtedness. (Notwithstanding the foregoing, the representations set forth
above with respect to the Parent and the other Parent Affiliates are made and,
shall be deemed made, solely as of the date hereof and the Closing Date.)
Section 4.02. Organization, Qualification, Etc. Each of the Companies (a)
is a corporation or limited partnership, duly organized or formed, validly
existing and in good standing under the laws of its state of organization or
formation, all as specified in Schedule 4.02, (b) has the power and authority to
own its properties and to carry on its business as now being conducted and as
presently contemplated, (c) has the power and authority to execute and deliver,
and perform its respective obligations under, this Agreement, the Notes and the
Security Documents and all other Loan Documents contemplated hereby and (d) is
duly qualified to transact business in the jurisdictions specified in such
Schedule 4.02 and in each other jurisdiction where the nature of its activities
requires such qualification. As of the date of this Agreement none of the
Companies has any Subsidiaries, except as described in Schedule 4.23.
<PAGE>
Section 4.03. Authorization; Compliance; Etc. The execution and delivery
of, and performance by the Companies of their respective obligations under, this
Agreement, the Notes, the Security Documents, the Acquisition Agreements and the
other agreements and instruments relating thereto (all of the foregoing being
hereinafter referred to collectively as the "Transaction Documents") have been
duly authorized by all requisite corporate and partnership action and will not
violate any provision of law (including without limitation the Communications
Act of 1934, as amended, the Copyright Revisions Act of 1976, as amended, the
Rate Regulation Act, the Rate Regulation Rules and all other rules, regulations,
administrative orders and policies of the FCC, the FAA and the Copyright
Office), any order, judgment or decree of any court or other agency of
government, the corporate charter or by-laws or partnership agreement, as the
case may be, of any Company or any indenture, agreement or other instrument to
which any Company or the Parent is a party, or by which any Company or the
Parent is bound (including without limitation the PCC Indenture, the PCC Senior
Notes, the Subordinated Debt Documents, the PCC Preferred Stock Designation and
any DBS Agreement), or be in conflict with, result in a breach of, or constitute
(with due notice or lapse of time or both) a default under, or except as may be
permitted under this Agreement, result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the property or
assets of any Company or the Parent pursuant to, any such indenture, agreement
or instrument. Each of the Transaction Documents constitutes the valid and
binding obligation of each of the Companies and their Affiliates party thereto,
enforceable against such party in accordance with its terms, subject, however to
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
the rights and remedies of creditors generally or the application of principles
of equity, whether in any action in law or proceeding in equity, and subject to
the availability of the remedy of specific performance or of any other equitable
remedy or relief to enforce any right under any such agreement.
Section 4.04. Governmental and Other Consents, Etc.
(a) Except for filings and recordings required under Section 2.01 and
the Security Documents and except as set forth in Schedule 4.04, none of the
Companies or the Parent is required to obtain any consent, approval or
authorization from, to file any declaration or statement with or to give any
notice to, any Governmental Authority (including without limitation, any
Specified Authority), the NRTC, DirecTv or any other Person (including, without
limitation, any notices required under the applicable bulk sales law) in
connection with or as a condition to the execution, delivery or performance of
any of the Transaction Documents. Except as set forth in such Schedule 4.04, all
consents, approvals and authorizations described in such Schedule have been duly
granted and are in full force and effect on the date hereof and all filings
described in such Schedule have been properly and timely made.
<PAGE>
(b) Notwithstanding the foregoing, (i) from time to time, the Companies
may be required to obtain certain authorizations of or to make certain filings
with the FCC and local franchising authorities which are required in the
ordinary course of business, (ii) copies of certain documents, including without
limitation certain Transaction Documents, may be required to be filed with the
FCC pursuant to 47 C.F.R. ss.73.3613 and with local franchising authorities,
(iii) the FCC must be notified of the consummation of any assignments or
transfers of control of FCC authorizations for any television broadcast stations
and ownership reports are required to be filed with the FCC after such
consummation pursuant to 47 C.F.R. ss.73.3615, and similar requirements of local
franchising authorities exist under state and local law, and (iv) prior to the
exercise of certain rights or remedies under the Loan Documents by the Agent or
the Lenders, FCC consents and notifications and similar actions with respect to
local franchising authorities with respect to such exercise may be required to
be timely obtained or made.
Section 4.05. Litigation. Except as specified in Schedule 4.05, there is
no action, suit or proceeding at law or in equity or by or before any
Governmental Authority (including without limitation any Specified Authority)
now pending or, to the knowledge of the Borrower, threatened (nor is any basis
therefor known to the Borrower), (a) which questions the validity of any of the
Transaction Documents, or any action taken or to be taken pursuant hereto or
thereto, in a manner or to an extent which could reasonably be expected to have
a Material Adverse Effect, or (b) against or affecting any Company or the Parent
which, if adversely determined, either in any case or in the aggregate, would
have a Material Adverse Effect.
Section 4.06. Compliance with Laws and Agreements. Except as disclosed
in this Agreement, none of the Companies is a party to any agreement or
instrument or subject to any corporate, partnership or other restriction which
could have a Material Adverse Effect. None of the Companies or the Parent is in
violation of any provision of its corporate charter or by-laws, certificate of
limited partnership or partnership agreement, as the case may be, or of any
material indenture, agreement or instrument to which it is a party or by which
it is bound (including without limitation the PCC Indenture, the PCC Senior
Notes, the Subordinated Debt Documents, the PCC Preferred Stock Designation and
any DBS Agreement) or, to the best of the Borrower's knowledge and belief, of
any provision of law (including without limitation the Communications Act of
1934, as amended, the Copyright Revisions Act of 1976, as amended, the Rate
Regulation Act, the Rate Regulation Rules and all other rules, regulations,
administrative orders and policies of the FCC, the FAA and the Copyright
Office), the violation of which could have a Material Adverse Effect, or any
order, judgment or decree of any court or other Governmental Authority
(including without limitation any Specified Authority). Without limiting the
generality of the foregoing, all of the Obligations (a) are permitted under, and
do not and will not violate, the PCC Preferred Stock Designation, the PCC
Indenture, the PCC Senior Notes and the Subordinated Debt Documents, (b)
constitute "Senior Debt" and, with the exception of Rate Hedging Obligations,
"Designated Senior Debt" under the Exchange Note Indenture (as defined in the
PCC Preferred Stock Designation) and the Subordinated Indenture, (c) constitute
"Permitted Debt" and "Eligible Indebtedness" under the PCC Indenture and (d)
with the exception of Rate Hedging Obligations, are hereby designated as
"Designated Senior Debt" under the Exchange Note Indenture and the Subordinate
Indenture.
Section 4.07. Franchises.
(a) Schedule 4.07 sets forth a complete and correct list of all CATV
Franchises (identified by issuing authority, Franchise Area, franchisee and
expiration date) granted, issued or assigned to any Company as of the Closing
Date. The Companies possess all such CATV Franchises and all copyrights,
licenses, trademarks, service marks, trade names and other contract rights,
including licenses and permits granted by the FCC, agreements with public
utilities and microwave transmission companies, pole or conduit attachment, use,
access or rental agreements, utility easements and agreements the delivery of
pay programming to subscribers that are necessary for the operation and planned
expansion of the Systems, free and clear of any Liens other than Permitted
Liens, except to the extent the absence thereof could not reasonably be expected
to have a Material Adverse Effect. Each of such CATV Franchises, copyrights,
licenses, patents, trademarks, service marks, trade names and other rights and
agreements is in full force and effect and no material default has occurred and
is continuing thereunder.
<PAGE>
(b) No approval, application, filing, registration, consent or other
action of any Governmental Authority (including any Specified Authority) is
required to enable any Company to take advantage of the rights and privileges
intended to be conferred by the CATV Franchises, except for approvals,
applications, filings, registrations, consents or other actions that (if not
made or obtained) could not reasonably be expected to have a Material Adverse
Effect. None of the Companies has received any notice with respect to any breach
of any covenant under, or any default with respect to, any CATV Franchise.
Complete and correct copies of all CATV Franchises have heretofore been
delivered to the Agent.
Section 4.08. Licenses. Schedule 4.08 accurately and completely lists
all Licenses (identified by issuing authority, licensee, Station call letters
and expiration date) granted, issued or assigned to any Company as of the date
hereof. Each FCC License is held by a License Company. The Companies hold all
such Licenses and all copyrights, licenses, trademarks, service marks, trade
names and other contract rights, including agreements with public utilities,
use, access or rental agreements, utility easements, network affiliation
agreements, film rental agreements and talent employment agreements that are
necessary for the operation of the Stations, free and clear of any Liens other
than Permitted Liens, except to the extent the absence thereof could not
reasonably be expected to have a Material Adverse Effect. Each of such Licenses,
copyrights, licenses, patents, trademarks, service marks, trade names and other
rights and agreements is in full force and effect and no material default by any
Company has occurred and is continuing thereunder. As of the date hereof, except
as limited by the provisions of the Communications Act of 1934, as amended, and
the FCC's rules and regulations and as otherwise specified on the face of any
FCC License, none of the FCC Licenses is subject to any restriction or condition
that would limit in any material respect the operation of the business as it is
now conducted. Except as specified in Schedule 4.08, (a) there is not, as of the
date hereof, pending or to, the knowledge of the Borrower threatened any action
by or before the FCC to revoke, cancel, rescind or modify (including a reduction
in coverage area) any of the FCC Licenses (other than proceedings to amend FCC
rules of general applicability) or refuse to renew the FCC Licenses, and (b)
there is not now issued or outstanding, pending or, to the knowledge of the
Borrower threatened by or before the FCC, any order to show cause, notice of
violation, notice of apparent liability, or notice of forfeiture or complaint
against Borrower and or any of its Subsidiaries with respect to any of the FCC
Licenses. Except as specified in Schedule 4.08, none of the FCC Licenses is the
subject of a pending license renewal application and the Borrower has no reason
to believe that any of the FCC Licenses will be revoked or will not be renewed
in the ordinary course.
<PAGE>
Section 4.09. The Systems.
(a) Each of the Companies and the Systems are in compliance with all
applicable federal, state and local laws, rules and regulations, including
without limitation the Telecommunications Act of 1996, the Communications Act of
1934, as amended, the Cable Communications Policy Act of 1984, the Cable
Television Consumer Protection and Competition Act of 1992, the Copyright
Revisions Act of 1976, and the rules and policies of the FCC, the FAA and the
Copyright Office, including without limitation rules, regulations and laws
governing system registration, use of aeronautical frequencies and signal
carriage, equal employment opportunity, cumulative leakage index testing and
reporting, signal leakage and subscriber privacy, except to the extent that the
failure to so comply could not (either individually or in the aggregate)
reasonably be expected to have a Material Adverse Effect. Without limiting the
generality of the foregoing (except to the extent that the failure to comply
with any of the following could not, either individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect):
(i) the communities included in the Franchise Areas have been
registered with the FCC;
(ii) all of the annual performance tests on the Systems
required under the rules and policies of the FCC have been performed
and the results of such tests demonstrate satisfactory compliance with
the applicable requirements being tested in all material respects;
(iii) the Companies have filed all material reports and other
submissions required to be filed with the FCC with respect to the
Systems and their operations;
(iv) the Systems currently meet or exceed the technical
standards set forth in the rules and policies of the FCC, including,
without limitation, the leakage limits contained in 47 C.F.R. Section
76.605(a)(11);
(v) the channel capacities of the New England Systems range
from 36 to 62 channels; the MCT Systems have a capacity of 60-channels;
the San German System has a capacity of 50 channels; and each System is
fully addressable or capable thereof and delivers picture quality that
complies in all material respects with applicable FCC requirements and
the requirements of the applicable CATV Franchises;
(vi) the Systems are being operated in compliance with the
provisions of 47 C.F.R. Sections 76.610 through 76.619 (mid-band and
super-band signal carriage), including 47 C.F.R. Section 76.611
(compliance with the cumulative signal leakage index);
(vii) the Systems are being operated in compliance with the
requirements of the applicable CATV Franchises;
<PAGE>
(viii) where required, appropriate authorizations from the FCC
have been obtained for the use of all aeronautical frequencies in use
in the Systems and the Systems are presently being operated in
compliance with such authorizations;
(ix) all of the existing towers used in the operation of the
Systems are obstruction-marked and lighted to the extent required by,
and in accordance with, the rules and regulations of the FAA and
appropriate notification to the FAA has been filed for each such tower
where required by the Rules and policies of the FCC, and all other
required certificates, permits and clearances from Governmental
Authorities, including the FAA, with respect to all towers, earth
stations, business radios and frequencies utilized and carried by the
Systems have been obtained; and
(x) all notices to subscribers of the Systems required by the
rules and policies of the FCC have been provided.
(b) All notices, statements of account, supplements and other documents
required under Section 111 of the Copyright Act of 1976 and under the rules of
the Copyright Office with respect to the carriage of off-air signals by the
Systems have been duly filed, and the proper amount of copyright fees have been
paid on a timely basis, and each System qualifies for the compulsory license
under Section 111 of the Copyright Act of 1976, except to the extent that the
failure to so file or pay could not (either individually or in the aggregate)
reasonably be expected to have a Material Adverse Effect.
(c) The carriage of all off-air signals by the Systems to be owned by
the Companies is permitted by valid transmission consent agreements or by
must-carry elections by broadcasters, except to the extent the failure to obtain
any of the foregoing could not (either individually or in the aggregate)
reasonably by expected to have a Material Adverse Effect.
(d) Each of the Companies has complied with its respective obligations
with regard to protecting the privacy rights of any past or present customers of
the Systems, except to the extent that the failure to so comply could not
(either individually or in the aggregate) reasonably be expected to have a
Material Adverse Effect.
(e) None of the Companies which owns the Systems has been denied EEO
certification by the FCC, and no FCC proceedings against any such Company in
respect of EEO violation are pending or, to the Borrower's best knowledge,
threatened, which, if resolved adversely to the Companies, could reasonably be
expected (either individually or in the aggregate) to have a Material Adverse
Effect.
(f) The assets of the Systems are adequate and sufficient in all
material respects for all of the current operations of the Systems.
<PAGE>
Section 4.10. Rate Regulation. Each of the Companies has reviewed and
evaluated in detail the FCC rules currently in effect (the "Rate Regulation
Rules") implementing the rate regulation provisions of the Cable Television
Consumer Protection and Competition Act of 1992 as amended by the
Telecommunications Act of 1996 (as so amended, the "Rate Regulation Act"). Based
upon such review and completion by the Companies of all applicable worksheets
contemplated by the Rate Regulation Rules for each System, and except as set
forth in Schedule 4.10:
(a) The Systems are in material compliance with the Rate Regulation Act
and the Rate Regulation Rules applicable to them; and
(b) The Systems are owned by Companies which are "small cable
operators" as defined by the Telecommunications Act of 1996. As such, the Cable
Programming Services Tier rates of the Systems have been deregulated and the
Basic Service Tier rates of the Systems with Basic-only rates have likewise been
deregulated. Schedule 4.10 lists all pending rate proceedings before the FCC and
any local franchising authorities that have jurisdiction over the Company.
Schedule 4.10 also sets forth FCC and local franchising authority orders
approving the Companies' rates.
Section 4.11. The Stations.
(a) Each of the Companies and the Stations is in compliance with all
applicable federal, state and local laws, rules and regulations, including
without limitation, the Telecommunications Act of 1996, the Communications Act
of 1934, as amended, and the rules and policies of the FCC and all rules and
laws governing equal employment opportunity, except to the extent that the
failure to so comply could not (either individually or in the aggregate)
reasonably be expected to have a Material Adverse Effect. Without limiting the
generality of the foregoing (except to the extent that the failure to comply
with any of the following could not, either individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect):
(i) the Companies have filed all material reports and other
submissions required to be filed with the FCC by the Companies or any
of them with respect to the Stations and their operations;
(ii) the operation of the Stations is in compliance in all
material respects with ANSI Standards C95.1-1982 to the extent required
under applicable rules and regulations;
(iii) all of the existing towers used in the operation of the
Stations are obstruction-marked and lighted to the extent required by,
and in accordance with, the rules and regulations of the FAA and
appropriate notification to the FAA has been filed for each such tower
where required by the rules and policies of the FCC;
(iv) the Stations are in compliance with Part V of Title VI of
the Communications Act of 1934, as amended, as well as any and all
rules and policies adopted by the FCC to implement said Part V;
(v) the Stations are being operated in compliance with the
applicable Licenses; and
<PAGE>
(vi) the Stations are in compliance with the provisions of the
Communications Decency Act of 1996 in effect, as well as any and all
FCC rules and policies in effect to implement such Act.
(b) No FCC proceedings against any of the Companies in respect of EEO
violations are pending or, to the Borrower's best knowledge, threatened.
(c) The assets of the Stations are adequate and sufficient for all of
the current operations of the Stations as contemplated as of the date hereof.
Section 4.12. DBS Rights. Schedule 4.12 accurately and completely lists
all DBS Agreements, including without limitation all NRTC Member Agreements, to
which any Company is a party as of the date hereof, and all areas in which any
Company distributes DIRECTV and other DBS services thereunder. The DBS
Subsidiaries possess all such DBS Agreements, all exclusive DBS Rights and all
copyrights, licenses, trademarks, service marks, trade names and other contract
rights necessary for the operation of the Companies' DBS businesses, including
the distribution of DBS services, free and clear of any Liens other than
Permitted Liens, except to the extent the absence of such rights could not
reasonably be expected to have a Material Adverse Effect. Each of such DBS
Agreements, copyrights, licenses, trademarks, service marks, trade names and
other contract rights is in full force and effect and no material default has
occurred and is continuing thereunder.
Section 4.13. Title to Properties; Condition of Properties.
(a) Except as set forth on Schedule 4.13, the Companies have good title
to all of their properties and assets free and clear of all mortgages, security
interests, restrictions (other than FCC restrictions on the transfer of equity
interests or FCC Licenses), liens and encumbrances of any kind, including
without limitation liens or encumbrances in respect of unpaid taxes
(collectively, "Liens"), except liens and encumbrances permitted under Section
7.02 of this Agreement ("Permitted Liens"). Such Schedule 4.13 also sets forth a
description of all real properties owned or leased by the Companies.
(b) Schedule 4.13 accurately and completely lists, and sets forth a
description of, all agreements between any Company and any Person relating to
the location of (i) headend sites used in the operation of the Systems (the
"Headend Site Leases"), (ii) tower and transmitter sites used in the operation
of the Stations (the "Tower Site Leases") and (iii) offices, studios and other
facilities, and the same constitute the only Headend Site Leases, Tower Site
Leases and other leases necessary in connection with the conduct by the
Companies of their businesses as presently conducted. Each of the Companies
enjoys quiet possession under all leases (including without limitation the
Headend Site Leases and the Tower Site Leases) to which it is a party as lessee,
and all of such leases are valid, subsisting and in full force and effect. None
of such leases contains any provision restricting the incurrence of indebtedness
by the lessee.
<PAGE>
(c) Except as specified in such Schedule 4.13, none of the improved real
property owned or leased by any Company that is required to be mortgaged under
Section 2.01(a) is situated in a flood zone designated as type "A", "B" or "V"
by the U.S. Department of Housing and Urban Development.
Section 4.14. Interests in Other Businesses. Except as reflected in
Schedule 4.14 or Schedule 4.23 hereto, none of the Companies holds or owns any
of the issued and outstanding capital stock, partnership interests or similar
equity interests, or any rights to acquire the same, of any corporation,
partnership, firm or entity other than as specified or permitted in this
Agreement.
Section 4.15. Solvency.
(a) The aggregate amount of the full saleable value of the assets and
properties of each Company exceeds the amount that will be required to be paid
on or in respect of such Company's existing debts and other liabilities
(including contingent liabilities) as they mature.
(b) No Company's assets and properties constitute unreasonably small
capital for such Company to carry out its business as now conducted and as
proposed to be conducted, including such Company's capital needs, taking into
the account the particular capital requirements of such Company's business and
the projected capital requirements and capital availability thereof.
(c) The Companies do not intend to, nor will the Companies, incur debts
beyond their ability to pay such debts as they mature, taking into account the
timing and amounts of cash reasonably anticipated to be received by each Company
and the amounts of cash reasonably anticipated to be payable on or in respect of
each Company's obligations. The Companies' aggregate cash flow, after taking
into account all anticipated sources and uses of cash, will at all times be
sufficient to pay all such amounts on or in respect of their indebtedness when
such amounts are required to be paid.
(d) The Borrower believes that no reasonably anticipated final judgment
in a pending action or, to its knowledge, any threatened actions for money
damages will be rendered at a time when, or in an amount such that, any Company
will be unable to satisfy such judgments promptly in accordance with their terms
(taking into account the maximum reasonable amount thereof and the earliest
reasonable time at which such judgments might be rendered). The cash available
to each Company, after taking into account all other anticipated uses of cash
(including the payment of all such Company's indebtedness) is anticipated to be
sufficient to pay any such judgments promptly in accordance with their terms.
(e) No Company is contemplating either the filing of a petition by it
under any state or federal bankruptcy or insolvency laws or the liquidating of
all or a substantial portion of its property, and the Borrower has no knowledge
of any Person contemplating the filing of any such petition against any Company.
Section 4.16. Full Disclosure. No statement of fact made by or on behalf
of any Person other than the Lenders in this Agreement, the Security Documents
or in any certificate or schedule furnished to the Lenders pursuant hereto or
thereto contains any untrue statement of a material fact or omits to state any
material fact necessary to make statements contained therein or herein not
misleading. There is no fact presently known to the Borrower which has not been
disclosed to the Lenders in writing which materially affects adversely, or, as
far as the Borrower can reasonably foresee, could have a Material Adverse
Effect, other than facts and circumstances generally known within the cable
television, broadcast television and DBS industries.
<PAGE>
Section 4.17. Margin Stock. The Companies do not own or have any present
intention of acquiring any "margin stock" within the meaning of Regulation U (12
CFR Part 221), of the Board of Governors of the Federal Reserve System (herein
called "Margin Stock").
Section 4.18. Tax Returns. Each of the Companies has filed all federal,
state and local tax and information returns required to be filed, and has paid
or made adequate provision for the payment of all material federal, state and
local taxes, franchise fees, charges and assessments shown thereon.
Section 4.19. Pension Plans, Etc.
(a) Except as described in Schedule 4.19, neither the Borrower nor any
member of the Controlled Group has any pension, profit sharing or other similar
plan providing for a program of deferred compensation to any employee.
(b) Neither the Borrower nor any member of the Controlled Group has any
material liability (i) under Section 412 of the Code for failure to satisfy the
minimum funding requirements for pension plans, (ii) as the result of the
termination of a defined benefit plan under Title IV of ERISA, (iii) under
Section 4201 of ERISA for withdrawal or partial withdrawal from a multiemployer
plan, or (iv) for participation in a prohibited transaction with an employee
benefit plan as described in Section 406 of ERISA and Section 4975 of the Code.
Section 4.20. Material Agreements. Except for matters disclosed in
Schedule 4.07, 4.08, 4.12, 4.13 and 4.23, Schedule 4.20 hereto accurately and
completely lists all agreements, if any, among the stockholders or partners of
the Borrower or any of the Subsidiaries and all material construction,
engineering, management, consulting and other agreements, if any, which are in
effect on the date hereof in connection with the conduct of the business of the
Borrower and the Subsidiaries, including without limitation the acquisition,
construction, extension and/or operation of the Systems and the Stations and the
distribution of DBS services.
Section 4.21. Projections. Attached as Schedule 4.21 are projections of
the operation of the Companies' businesses through December 31, 2004 (the
"Projections").
Section 4.22. Brokers, Etc. None of the Companies has dealt with any
broker, finder, commission agent or other similar Person in connection with the
Loans or the transactions contemplated by this Agreement or is under any
obligation to pay any broker's fee, finder's fee or commission in connection
with such transactions.
<PAGE>
Section 4.23. Capitalization. Attached as Schedule 4.23 is a schematic
diagram of the ownership relationships among the Companies, the Parent and the
other Parent Affiliates, showing, as to the Companies, accurate ownership
percentages of the equityholders of record and accompanied by a statement of
authorized and issued equity securities for each such entity as of the date
hereof. Such Schedule 4.23 also includes a narrative indicating, as of the date
hereof (a) which securities, if any, carry preemptive rights; (b) to the best of
the Borrower's knowledge whether there are any outstanding subscriptions,
warrants or options to purchase any securities; (c) whether any Company is
obligated to redeem or repurchase any of its securities, and the details of any
such committed redemption or repurchase; and (d) any other agreement,
arrangement or plan to which any Company is a party or participant or of which
any Company has knowledge which will directly or indirectly affect the capital
structure of the Companies. All such equity securities of the Companies are
validly issued and fully paid and non-assessable, and owned as set forth on such
Schedule 4.23. All such equity securities of the Companies are owned, legally
and beneficially, free of any assignment, pledge, lien, security interest,
charge, option or other encumbrance, except for Permitted Liens and restrictions
on transfer imposed by applicable securities laws, indicated on the certificates
evidencing such shares or as may be imposed by the FCC or local franchising
authorities.
Section 4.24. Environmental Compliance.
(a) To the best of the Borrower's knowledge, all real property leased,
owned, controlled or operated by the Companies (the "Properties") and their
existing and, to the best of the Borrower's knowledge, prior uses and activities
thereon, including, but not limited to, the use, maintenance and operation of
each of the Properties and all activities in conduct of business related thereto
comply and have at all times complied in all material respects with all
Environmental Laws.
(b) None of the Companies, and to the best of the Borrower's knowledge,
no previous owner, tenant, occupant or user of any of the Properties or any
other Person, has engaged in or permitted any operations or activities upon any
of the Properties for the purpose of or in any way involving the handling,
manufacture, treatment, storage, use, generation, release, discharge, refining,
dumping or disposal of a material amount of any Hazardous Materials the removal
of which is required or the maintenance of which is prohibited or penalized.
(c) To the best of the Borrower's knowledge, no Hazardous Material has
been or is currently located in, on, under or about any of the Properties in a
manner which materially violates any Environmental Law or which requires cleanup
or corrective action of any kind under any Environmental Law.
(d) No notice of violation, lien, complaint, suit, order or other
notice or communication concerning any alleged violation of any Environmental
Law in, on, under or about any of the Properties has been received by any
Company or, to the best of the Borrower's knowledge, any prior owner or occupant
of any of the Properties which has not been fully satisfied and complied with in
a timely fashion so as to bring such Property into full compliance with all
Environmental Laws.
<PAGE>
(e) The Companies have all permits and licenses required under any
Environmental Law to be issued to them by any Governmental Authority on account
of any or all of its activities on any of the Properties, except to the extent
that the absence of any such permit or license could have a Material Adverse
Effect, and are in material compliance with the terms and conditions of such
permits and licenses. To the best of the Borrower's knowledge, no change in the
facts or circumstances reported or assumed in the application for or granting of
such permits or licenses exist, and such permits and licenses are in full force
and effect.
(f) No portion of any of the Properties has been listed, designated or
identified in the National Priorities List (NPL) or the CERCLA information
system (CERCLIS), both as published by the United States Environmental
Protection Agency, or any similar list of sites published by any Federal, state
or local authority proposed for or requiring cleanup, or remedial or corrective
action under any Environmental Law.
(g) The Borrower, at its expense, has provided to the Agent and the
Lenders a "Phase One" site assessment for each of the Properties designated by
the Lenders (including those designated on Schedule 4.24 and required as a
condition to the execution of this Agreement under Section 3.01), including all
owned Properties (collectively the "Environmental Site Assessments"), prepared
by an environmental consulting firm of national reputation reasonably
satisfactory to the Lenders, together with a letter from such firm to the Agent
authorizing the Agent and the Lenders to rely thereon. Each of the Environmental
Site Assessments provided to the Agent and the Lenders is, to the best of the
Borrower's knowledge, true and accurate in all material respects. In addition,
the Borrower has provided to the Agent and the Lenders true and accurate
responses to the Agent's Environmental Questionnaire (each an "Environmental
Questionnaire") as to each of the other Properties.
Section 4.25. Investment Company Act. None of the Companies is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, or a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company," or of a "subsidiary company"
of a "holding company," within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
Section 4.26. Labor Matters. No Company is experiencing any strike, labor
dispute, slow down or work stoppage due to labor disagreements which could
reasonably be expected to have a Material Adverse Effect; there is no such
strike, dispute, slow down or work stoppage threatened against any Company; none
of the Companies is subject to any collective bargaining or similar
arrangements.
Section 4.27. Delaware Code Provisions. None of the charter documents,
partnership agreements, the operating agreements or other organizational
documents of the Borrower and its Companies contain any provision similar to
those set forth in Section 102(b)(2) of Title 8 of the Delaware Code.
<PAGE>
V. FINANCIAL COVENANTS. The Borrower covenants and agrees that, so long
as any Lender has any obligation to extend credit to the Borrower hereunder, and
for so long thereafter as there remains outstanding any portion of any
Obligation, whether now existing or arising hereafter, the Borrower and its
Subsidiaries will (on a consolidated basis):
Section 5.01. Leverage.
(a) At all times, maintain a PCC Consolidated Leverage Ratio not
exceeding 7.00:1.00.
(b) At all times during each period indicated below, maintain a ratio of
(i) Total Funded Debt to Annualized EBITDA for the most recently ended fiscal
quarter for which financial statements have been, or are required to have been,
delivered under Section 6.05(b) of not more than the following:
Maximum Ratio of Total
Funded Debt to Annualized EBITDA
Period for Most Recently Ended Fiscal Quarter
------ --------------------------------------
The date hereof through June 29, 1999 6.00:1.00
June 30, 1999 through December 30, 1999 5.50:1.00
December 31, 1999 through June 29, 2000 5.00:1.00
June 30, 2000 through December 30, 2000 4.50:1.00
December 31, 2000 through June 29, 2001 4.00:1.00
June 30, 2001 through December 30, 2001 3.50:1.00
December 31, 2001 through June 29, 2002 3.00:1.00
June 30, 2002 through December 30, 2002 2.75:1.00
December 31, 2002 and thereafter 2.50:1.00
For purposes of this covenant, Annualized EBITDA shall be determined on a pro
forma basis after giving effect to all Acquisitions and Dispositions made by the
Companies at any time during the applicable fiscal periods, in each case as if
such Acquisitions and Dispositions had occurred at the beginning of such fiscal
period.
Section 5.02. Interest Coverage. For each fiscal quarter ending on the
dates indicated below, maintain a ratio of EBITDA to Total Interest Expense of
at least the following:
Quarter End Minimum Ratio
----------- -------------
December 31, 1997 through September 30, 1998 1.50:1.00
December 31, 1998 through September 30, 1999 1.75:1.00
December 31, 1999 through September 30, 2000 2.25:1.00
December 31, 2000 through September 30, 2001 3.00:1.00
December 31, 2001 and each Quarterly Date 5.00:1.00
thereafter
<PAGE>
Section 5.03. Fixed Charge Coverage. For each period of four (4) fiscal
quarters ended on the dates indicated below, maintain a ratio of Adjusted EBITDA
to Adjusted Fixed Charges of at least the following:
Quarter End Minimum Ratio
----------- -------------
December 31, 1998 and March 31, 1999 1.00:1.00
June 30, 1999 through September 30, 1999 1.05:1.00
December 31, 1999 through March 31, 2000 1.15:1.00
June 30, 2000 through September 30, 2000 1.20:1.00
December 31, 2000 and each quarter end 1.25:1.00
thereafter
Section 5.04. Maximum Average Subscriber Acquisition Cost. For the period
of four (4) consecutive fiscal quarters ended December 31, 1997, not permit the
Average Subscriber Acquisition Cost to exceed $500; and for each period of four
(4) consecutive fiscal quarters ended on March 31, June 30, and September 30,
1998, not permit the Average Subscriber Acquisition Cost to exceed $535.
Section 5.05. Restricted Payments. Not directly or indirectly declare,
order, pay or make any Restricted Payment or set aside any sum or property
therefor except as follows:
(a) The Companies may pay monthly Management Fees to the Manager;
provided that (i) such payments shall be subject to the applicable Affiliate
Subordination Agreement and (ii) such payments shall not exceed, during any
period of twelve (12) consecutive months, the actual cost of providing
management and administrative support services to the Companies for such period.
(b) Subject to the provisions of the Affiliate Subordination Agreements:
(i) The Subsidiaries may (A) pay dividends and make
distributions to the Borrower or other Subsidiaries holding equity
interests in the payor, (B) repay indebtedness owed to the Borrower or
to Subsidiaries other than PCT-CONN, MCT and MCT Cablevision, Ltd. and
(C) make intercompany loans to one another subject to the limitations
set forth in Section 7.01.
(ii) The Subsidiaries may repay indebtedness owed to the
Borrower or to Subsidiaries.
<PAGE>
(iii) The Subsidiaries may pay lease payments to Pegasus Towers,
Inc. in respect of the tower leases in effect on the date hereof, and
any renewals thereof, provided that such payments shall be subject to
the applicable Affiliate Subordination Agreement.
(iv) The Borrower may make regularly scheduled payments (but not
prepayments) of interest under the Subordinated Notes unless an Event of
Default shall have occurred and be continuing.
(v) From and after the date audited financial statements are
delivered pursuant to Section 6.05(a) for the year ended December 31,
2001 and each year thereafter, the Borrower may pay annual or
semi-annual dividends or distributions to the Parent solely for the
purpose of financing dividends due or interest due and payable under the
PCC Preferred Stock Designation in respect of the PCC Preferred Stock or
the PCC Subordinated Notes, respectively (collectively, the "PCC
Preferred Stock Dividends"), provided that (A) no Default shall exist as
of the date of the proposed payment or after giving effect thereto, (B)
the Excess Cash Flow prepayment, if any, due on the May 1 preceding such
payment pursuant to Section 1.06(c) shall have been paid, and (C) the
aggregate amount of such dividends paid in any fiscal year shall not
exceed the lesser of (1) fifty percent (50%) of Excess Cash Flow for the
prior fiscal year or (2) the aggregate PCC Preferred Stock Dividends due
and payable in such fiscal year. For purposes of the preceding sentence,
a dividend or distribution paid to the Parent in respect of the PCC
Preferred Stock Dividend Payment due January 1 of any fiscal year shall
be treated as having been paid in the preceding fiscal year.
(vi) The Borrower may pay annual or semi-annual dividends or
distributions to the Parent solely for the purpose of financing interest
due and payable under the PCC Senior Notes, provided that no Default
shall exist as of the date of the proposed payment or after giving
effect thereto.
(vii) The Borrower may pay dividends or distributions to the
Parent to reimburse the Parent for cash capital contributions previously
made to the Borrower and its Subsidiaries by the Parent from and after
the date hereof in connection with Acquisitions (including for purposes
hereof the cash portion of the purchase price paid for any assets
contributed by the Parent to any of the Companies after such date, free
and clear of Liens other than Permitted Liens), provided that (i) no
Default shall exist as of the date of the proposed payment or after
giving effect thereto and (ii) the aggregate amount of all such
dividends paid during the term of this Agreement shall not exceed
$50,000,000.
(viii) The Borrower may repay the Parent Loans, as required
under Section 3.01(e).
<PAGE>
VI. AFFIRMATIVE COVENANTS. The Borrower hereby covenants and agrees to
and with each of the Lenders that, so long as any Lender has any obligation to
extend credit to the Borrower hereunder, and for so long thereafter as there
remains outstanding any portion of any Obligation, whether now existing or
hereafter arising, the Borrower and each of the Subsidiaries shall:
Section 6.01. Preservation of Assets; Compliance with Laws, Etc.
(a) Do or cause to be done all things necessary to preserve, renew and
keep in full force and effect its corporate or partnership existence, as the
case may be, all material rights, licenses, permits and franchises (including
all material CATV Franchises, FCC Licenses and DBS Agreements) and comply in
every material respect with all laws and regulations applicable to it (including
without limitation the Communications Act of 1934, as amended, the Copyright
Revisions Act of 1976, as amended, the Rate Regulation Act, the Rate Regulation
Rules and all other rules, regulations, administrative orders and policies of
the FCC, the FAA and the Copyright Office) and all material agreements to which
it is a party, including without limitation all material CATV Franchises and DBS
Agreements, and all agreements with its stockholders or partners, as the case
may be, the violation of which could have a Material Adverse Effect;
(b) at all times maintain, preserve and protect all material trade names
and proprietary rights;
(c) at all times maintain in full force and effect a License Agreement
between each Subsidiary holding Station assets and the related License
Subsidiary, and provide a true and complete copy thereof to the Agent; and
(d) preserve all the remainder of its material property used or useful in
the conduct of its business and keep the same in good repair, working order and
condition (reasonable wear and tear and damage by fire or other casualty
excepted), and from time to time, make or cause to be made all needful and
proper repairs, renewals, replacements, betterments and improvements thereto, so
that the business carried on in connection therewith may be conducted at all
times in the ordinary course in a manner substantially consistent with past
practices.
<PAGE>
Section 6.02. Insurance.
(a) Keep all of its insurable properties now or hereafter owned
adequately insured at all times against loss or damage by fire or other casualty
to the extent customary with respect to like properties of companies conducting
similar businesses; maintain public liability, business interruption,
broadcasters' liability and workers' compensation insurance insuring such
Company to the extent customary with respect to companies conducting similar
businesses, all by financially sound and reputable insurers and furnish to the
Lenders satisfactory evidence of the same (including certification by the chief
executive officer or chief financial officer of the Borrower of timely renewal
of, and timely payment of all insurance premiums payable under, all such
policies, which certification shall be included in the next succeeding
Compliance Report delivered pursuant to Section 6.05(d)); notify each of the
Lenders of any material change in the insurance maintained on its properties
after the date hereof and furnish each of the Lenders satisfactory evidence of
any such change; maintain insurance with respect to its headend, tower,
transmission and/or studio facilities and related equipment in an amount equal
to the full replacement cost thereof; provide that each insurance policy
pertaining to any of its insurable properties shall:
(i) name the Agent, on behalf of the Lenders, (A) as loss
payee pursuant to a so-called "standard mortgagee clause" or "Lender's
loss payable endorsement", with respect to property coverage, or (B) as
additional insured, with respect to general liability coverage;
(ii) provide that no action of any Company shall void any such
policy as to the Agent or the Lenders, and
(iii) provide that the insurer(s) shall notify the Agent of
any proposed cancellation of such policy at least thirty (30) days in
advance thereof (unless such proposed cancellation arises by reason of
non-payment of insurance premiums in which case such notice shall be
given at least ten (10) days in advance thereof) and that the Agent or
the Lenders will have the opportunity to correct any deficiencies
justifying such proposed cancellation.
(b) Promptly following the occurrence of any Casualty Event affecting any
asset or property of any Company (whether or not such property constitutes
Collateral) (the "Damaged Property") resulting in Insurance Proceeds aggregating
$500,000 or more, give prompt notice thereof to the Agent and cause such
Insurance Proceeds to be paid to the Agent for deposit into the Collateral
Account, as additional collateral security for the payment of the Obligations,
pending disbursement thereof as hereinafter provided. If, on or before the last
day of the applicable Restoration Period, the Borrower or any Subsidiary shall
not have restored, repaired or replaced the Damaged Property (or, if earlier, on
the date such Company shall have determined not to restore, repair or replace
the Damaged Property) the Insurance Proceeds so deposited in the Collateral
Account shall be applied to repay the Notes, to the extent required in Section
1.06(b).
<PAGE>
(c) In the event of a Casualty Event affecting any Damaged Property,
whether or not subject to Section 6.02(b), and provided that no Event of Default
shall have occurred and be
continuing, the Agent or the Lenders will deliver to the Borrower (for the
benefit of such Company) any Insurance Proceeds therefrom, if the Borrower so
elects following notice thereof provided by the Agent, provided that (i) such
Company shall use such proceeds for the restoration or replacement of the
Damaged Property within the applicable Restoration Period, (ii) the Borrower
shall have demonstrated to the reasonable satisfaction of the Lenders that the
Damaged Property will be restored to substantially its previous condition or
will be replaced by substantially identical property or assets and (iii) if the
Agent, on behalf of the Lenders, had a security interest in and lien upon the
Damaged Property, the Lenders shall have received, at their request, a favorable
opinion from the Borrower's counsel, in form and substance satisfactory to the
Agent, as to the perfection of the Agent's security interest in and lien upon
such restored or replaced property or asset and such evidence satisfactory to
the Agent as to the priority of such security interest and liens. If the
Borrower fails to elect the disbursement of such Insurance Proceeds as provided
in the foregoing sentence within thirty (30) days following receipt of the
Agent's notice, the Borrower shall be deemed to have elected that such Insurance
Proceeds be applied to the prepayment of the Loans and, if the related Casualty
Event was subject to Section 6.02(b), the permanent reduction of the Commitments
provided in such Section and in Section 1.06.
(d) If the Borrower receives any disbursements of Insurance Proceeds as
contemplated by Section 6.02(c), but fails to restore or replace the Damaged
Property within the applicable Restoration Period, as required under Section
6.02(c), then the Borrower shall return all such disbursements to the Agent for
application, together with the balance of any related Insurance Proceeds not so
disbursed, to the prepayment of the Loans and, if the related Casualty Event was
subject to Section 6.02(b), the permanent reduction of the Commitments provided
in such Section and in Section 1.06.
(e) The Agent may, if directed by the Required Lenders upon the
occurrence and during the existence of any Default, elect to apply any Insurance
Proceeds paid into the Collateral Account or otherwise received by the Agent
pursuant to this Section 6.02 to the replacement, restoration and/or repair of
the Damaged Property, in lieu of effecting the prepayment of the Loans required
under Section 1.06(b) or 6.02(d).
(f) If the Borrower or the Agent elects to replace, restore and/or repair
the Damaged Property as provided in Section 6.02(c) or (e), the related
Insurance Proceeds (and any earnings thereon) held in the Collateral Account
shall be applied to the replacement, restoration and repair of the Damaged
Property and advanced by the Agent in periodic installments upon compliance by
the Borrower with such reasonable conditions to disbursement as may be imposed
by the Agent, including, but not limited to, reasonable retention amounts and
receipt of lien releases and, if a Casualty Event results in the Agent's receipt
of Insurance Proceeds aggregating $500,000 or more, disbursement of such
Insurance Proceeds jointly to the Borrower and any contractors, subcontractors
and materialmen to whom payment is owed in connection with such repair,
replacement and/or restoration.
<PAGE>
(g) Following the occurrence and the continuance of any Default, the
Agent shall have no obligation to release any proceeds from the Collateral
Account to the Borrower as provided above and all such proceeds shall be subject
to the provisions of the Security Agreements. All Insurance Proceeds remaining
in the Collateral Account after application to the repair, replacement and/or
restoration of Damaged Property pursuant to this Section may, at the option of
the Agent, be applied to the prepayment of the Loans or (if consented to by the
Required Lenders) released to the Borrower.
(h) With respect to any Casualty Event resulting in Insurance Proceeds
aggregating $500,000 or more, the Agent shall be entitled at its option to
participate in any compromise, adjustment or settlement in connection with any
claims for damage or destruction under any policy or policies of insurance, and
the Borrower shall, within five (5) Business Days after request therefor,
reimburse the Agent for all reasonable out-of-pocket expenses (including
reasonable attorneys' fees and disbursements) incurred by the Agent in
connection with such participation. None of the Companies shall make any
compromise, adjustment or settlement in connection with any such claim without
the approval of the Agent.
(i) To the extent, if any, that any improved real property (whether owned
or leased) of the Companies that is mortgaged as required under Section 2.01(a)
is situated in a flood zone designated as type "A", "B" or "V" by the U.S.
Department of Housing and Urban Development, obtain and maintain flood insurance
in coverage and amount satisfactory to the Agent.
Section 6.03. Taxes, Etc. Pay and discharge or cause to be paid and
discharged all taxes, assessments and governmental charges or levies imposed
upon it or upon its income and profits or upon any of its property, real,
personal or mixed, or upon any part thereof, before the same shall become in
default, as well as all lawful claims for labor, materials and supplies or
otherwise, which, if unpaid, might become a lien or charge upon such properties
or any part thereof; provided that no Company shall be required to pay and
discharge or cause to be paid and discharged any such tax, assessment, charge,
levy or claim so long as the validity thereof shall be contested in good faith
by appropriate proceedings and it shall have set aside on its books adequate
reserves with respect to any such tax, assessment, charge, levy or claim, so
contested; and provided, further that, in any event, payment of any such tax,
assessment, charge, levy or claim shall be made before any of its property shall
be seized or sold in satisfaction thereof.
<PAGE>
Section 6.04. Notice of Proceedings, Defaults, Adverse Change, Etc.
Promptly (and in any event within five (5) days after the discovery by the
Borrower thereof) give written notice to each of the Lenders of (a) any
proceedings instituted or threatened against it by or in any federal, state or
local court or before any commission or other regulatory body, whether federal,
state or local (including without limitation any Specified Authority), which, if
adversely determined, could have a Material Adverse Effect; (b) any notices of
default received by any Company (together with copies thereof, if requested by
any Lender) with respect to (i) any alleged default under or violation of any of
its material licenses, permits or franchises, including any FCC License or CATV
Franchise, or under any DBS Agreement or other material agreement to which it is
a party, or (ii) any alleged default with respect to, or redemption or
acceleration or other action under, the PCC Preferred Stock Designation, the
Subordinated Debt Documents, any Permitted Seller Debt or Permitted Seller
Subordinated Debt, any material Acquisition Agreement or any evidence of
material Indebtedness of any Company or any mortgage, indenture or other
agreement relating thereto; (c) (i) any notice of any material violation or
administrative or judicial complaint or order filed or to be filed against any
Company and/or any real property owned or leased by it alleging any violations
of any law, ordinance and/or regulation or requiring it to take any action in
connection with the release and/or clean-up of any Hazardous Materials, or (ii)
any notice from any governmental body or other Person alleging that any Company
is or may be liable for costs associated with a release or clean-up of any
Hazardous Materials or any damages resulting from such release; (d) any change
in the condition, financial or otherwise, of any Company or any Parent Affiliate
which could have a Material Adverse Effect; or (e) the occurrence of any Default
or the occurrence of any event which, upon notice or lapse of time or both,
would constitute such a Default.
Section 6.05. Financial Statements and Reports. Furnish to the Agent
(with multiple copies for each of the Lenders, which the Agent shall promptly
provide to the respective Lenders):
(a) Within one hundred twenty (120) days after the end of each fiscal
year, the consolidated and consolidating balance sheets and statements of
income, stockholders' or partners' equity (as applicable) and cash flows of (i)
PCC and (ii) the Borrower and its Subsidiaries, together with supporting
schedules in form and substance satisfactory to the Lenders (and accompanied by
an unaudited breakdown of revenues, expenses and EBITDA for each Company),
audited by, and delivered with the opinion of, independent certified public
accountants selected by the Borrower and reasonably acceptable to the Required
Lenders (the "Accountants"), which opinion (A) shall not be qualified as to
going concern or scope of audit, (B) shall be to the effect that such financial
statements present fairly the consolidated financial condition and results of
operation of PCC or the Companies, as the case may be, as of the dates and for
the periods indicated, in accordance with GAAP applied on a basis consistent
with that of the preceding year, and shall otherwise be in form reasonably
satisfactory to the Required Lenders, and (C) shall be accompanied by a report
by the Accountants to the effect that the Accountants have examined the
provisions of this Agreement and that, to the best of their knowledge, no Event
of Default has occurred under Article V (or, if such an event has occurred, a
statement explaining its nature and extent); provided, however, that in issuing
such statement, the Accountants shall not be required to exceed the scope of
normal auditing procedures conducted in connection with their opinion referred
to above;
<PAGE>
(b) Within forty-five (45) days after the end of each quarter in each
fiscal year, the consolidated balance sheets and statements of income, equity
and cash flows (i) PCC and (ii) of the Borrower and its Subsidiaries, together
with supporting schedules, setting forth in each case in comparative form the
corresponding figures from the preceding fiscal period of the same duration,
prepared by PCC or the Borrower, as the case may be, in accordance with GAAP
(except for the absence of notes) and certified by the chief financial officer
of PCC or the Borrower, as the case may be, such balance sheets to be as of the
close of such quarter, and such statements of income, stockholders' equity and
cash flow to be for the quarter then ended and the period from the beginning of
the then current fiscal year to the end of such quarter (in each case subject to
normal audit and year-end adjustments) and to include, in the case of the
Companies' financial statements, (i) a comparison of actual results to results
for the comparable period of the preceding fiscal year (if available) and
projected results set forth in the Budget for such period, (ii) a breakdown of
Location Cash Flow for the DBS Subsidiaries and for the Borrower's other
Subsidiaries and (iii) if and to the extent prepared by the Borrower, a
breakdown of revenues, expenses and EBITDA for each Company;
(c) Within forty-five (45) days after the end of each month, the
consolidated balance sheets and statements of income of the Borrower and its
Subsidiaries, together with supporting schedules, prepared by the Borrower in
accordance with GAAP (except for the absence of notes) and certified by an
authorized representative of the Borrower, such balance sheets to be as of the
end of such month and such income statements to be for the period from the
beginning of the then current fiscal year to the end of such month (subject to
normal audit and year-end adjustments);
(d) Concurrently with the delivery of any annual financial statements
required by Section 6.05(a) and any quarterly financial statements required by
Section 6.05(b), a certified report (hereafter, a "Compliance Report") in the
form of Schedule 6.05 attached hereto (or otherwise in a form otherwise
satisfactory to the Agent), with appropriate calculations, including a detailed
breakout of Subscriber Acquisition Costs, signed on behalf of the Borrower by
the chief financial officer or chief executive officer of the Borrower, setting
forth the calculations contemplated in Article V of this Agreement and
certifying as to the fact that such Person has examined the provisions of this
Agreement and that no Default has occurred and is continuing (or if a Default
exists, a statement explaining its nature and extent);
(e) (i) On or before February 15 of each fiscal year, an updated
quarterly budget approved by the Board of Directors of the Parent, including
planned Capital Expenditures and projected borrowings for such fiscal year, with
updated Projections showing financial covenant compliance (collectively, the
"Budget"), for the operation of the Companies' businesses during the current
fiscal year, setting forth in detail reasonably satisfactory to the Lenders the
projected results of operations of the Companies and stating underlying
assumptions, and (ii) within five (5) days after the effective date thereof,
notice of any material changes or modifications in the Budget (which shall not
include changes resulting from non-material adjustments to the timing of any
proposed borrowings);
<PAGE>
(f) As soon as reasonably possible and in any event within forty-five
(45) days after the end of each fiscal quarter and each month, one or more
certificates of a responsible officer of the Borrower (collectively, the
"Subscriber Reports"), setting forth in reasonable detail, the following:
(i) as to each of the Systems, (A) the numbers of basic
subscribers, as at the end of such month, (B) net changes in numbers of
each such category of basic subscribers (including numbers of disconnects
and connects within each such category), (C) the average monthly revenues
per subscriber as at the end of such month, (D) rate changes, if any, and
(E) the numbers of subscribers more than forty-five (45) days delinquent
measured from the date of original billing; and
(ii) as to the operations of the DBS Subsidiaries, (A) each
of the DBS Subscriber Areas and the number of homes, subscribers and
Paying Subscribers in each, as of the most recent month end, (B) the
penetration percentage and Churn for the most recently ended month and
the most recently ended period of six (6) consecutive months for which
such information is available, (C) the average monthly aggregate revenues
per subscriber as at the end of such month, (D) rate changes, if any, on
core programming packages and (E) the number of subscribers more than
forty-five (45) days delinquent measured from the date of original
billing;
(g) Promptly upon their becoming available, and in any event within ten
(10) Business Days after receipt thereof, all Nielsen and other rating reports,
if any, received by any Company;
(h) Within ten (10) days after the receipt or filing thereof by any
Company, as applicable, copies of any periodic or special reports filed by any
Company with the FCC or any state or local governmental body having jurisdiction
over any System, Station, CATV Franchise or FCC License, and copies of any
material notices and other material communications from the FCC or any such
state or local governmental body which specifically relate to any Company, any
System or Station or any CATV Franchise or FCC License, but in each case only if
such reports or communications indicate any material adverse change in such
Company's standing before the FCC, in the Franchise Areas or in respect of any
CATV Franchise or FCC License or if copies thereof are requested by the Agent;
(i) Promptly, and in any event within five (5) days, after the Borrower
or any member of the Controlled Group (i) is notified by the Internal Revenue
Service of its liability for the tax imposed by Section 4971 of the Code, for
failure to make required contributions to a pension, or Section 4975 of the
Code, for engaging in a prohibited transaction, (ii) notifies the PBGC of the
termination of a defined benefit pension plan, if there are or may not be
sufficient assets to convert the plan's benefit liabilities as required by
Section 4041 of ERISA, (iii) is notified by the PBGC of the institution of
pension plan termination proceedings under Section 4042 of ERISA or that it has
a material liability under Section 4063 of ERISA, or (iv) withdraws from a
multiemployer pension plan and is notified that it has withdrawal liability
under Section 4202 of ERISA which is material, copies of the notice or other
communication given or sent;
(j) Promptly upon receipt or issuance thereof, and in any event within
five (5) Business Days after such receipt, copies of all audit reports submitted
to any Company by its accountants in connection with each yearly, interim or
special audit of the books of any Company made by such accountants, including
any material related correspondence between such accountants and the Borrower's
management;
<PAGE>
(k) Promptly upon circulation thereof, and in any event within five (5)
Business Days after such circulation, copies of any material written reports
issued by the Borrower or any Subsidiary to any of its stockholders, partners or
material creditors relating to the Notes or any material change in any Company's
financial condition;
(l) Within ten (10) days after the receipt or filing thereof by any
Company, the Parent or any other Affiliate of the Borrower, copies of (i) any
registration statements, prospectuses and any amendments and supplements
thereto, and any regular and periodic reports (including without limitation
reports on Form 10-K, Form 10-Q or Form 8-K), if any, filed by any Company, the
Parent or such Affiliate with any securities exchange or with the United States
Securities and Exchange Commission (the "SEC"); and (ii) any letters of comment
or correspondence with respect to filings or compliance matters sent to any
Company, the Parent or such Affiliate by any such securities commission or the
SEC in relation to any Company, the Parent or such Affiliate and its respective
affairs; and
(m) As soon as reasonably possible after request therefor, such other
information regarding its operations, assets, business, affairs and financial
condition or regarding any of the Companies or (to the extent available to the
Borrower without undue effort and expense) their stockholders, partners or other
Affiliates (including without limitation the Parent Affiliates) as any Lender
may reasonably request, including without limitation copies of any and all
material agreements to which any Company is a party from time to time.
Section 6.06. Inspection. Permit employees, agents and representatives of
the Lenders to inspect, during normal business hours, its premises and its books
and records and to make abstracts or reproductions thereof. In connection with
any such inspections, the Lenders will use reasonable efforts to avoid an
unreasonable disruption of the Companies' businesses and, to the extent possible
or appropriate absent any Default, will give reasonable notice thereof.
<PAGE>
Section 6.07. Accounting System. Maintain a system of accounting in
accordance with generally accepted accounting principles and maintain a fiscal
year ending December 31 for each of the Companies.
Section 6.08. Additional Assurances. From time to time hereafter:
(a) without limiting the generality of Section 2.01(a), execute and
deliver or cause to be executed and delivered, such additional instruments,
certificates and documents, and take all such actions, as the Agent or the
Lenders shall reasonably request for the purpose of implementing or effectuating
the provisions of this Agreement and the other Loan Documents, including without
limitation (i) the items set forth in Schedule 2.01(a) which require action
after the date hereof, as stated in such Schedule, and (ii) only if reasonably
requested by the Agent, the execution and delivery to the Agent of a mortgage or
deed of trust or collateral assignment of lease or leasehold mortgage in form
and substance satisfactory to the Agent (in a recordable form and in such number
of copies as the Agent shall have requested) covering any real properties
acquired by the Companies, together with any necessary consents relating
thereto;
(b) without limiting the generality of Section 2.01, at the request and
direction of the Agent, cooperate with the Agent and the Lenders from time to
time in preparing, executing and/or filing and recording such (i) timely
continuation statements under the Uniform Commercial Code with respect to
financing statements filed under Section 2.01(a), (ii) new financing statements
and (iii) conforming amendments to the Security Documents as shall be necessary
from time to time to reflect the passage of time and other changed circumstances
and to assure continued compliance with the Loan Documents and with Section
2.01; and
(c) upon the exercise by the Agent or the Lenders of any power, right,
privilege or remedy pursuant to this Agreement or any other Loan Document which
requires any consent, approval, registration, qualification or authorization of
any Governmental Authority (including any Specified Authority), execute and
deliver all applications, certifications, instruments and other documents and
papers that the Agent or Lenders may be so required to obtain; and
(d) use reasonable efforts to obtain any consents from any Governmental
Authorities (including any Specified Authority), the NRTC and other Persons
necessary to create and perfect a valid and enforceable first priority lien on
the CATV Franchises, NRTC Member Agreements and other applicable contracts and
agreements not so encumbered as of the Closing Date as specified in Schedule
4.04, so that, to the maximum extent practicable, the lien of the Agent and the
Lenders created therein pursuant to the Security Documents will be a valid and
enforceable first priority lien on all CATV Franchises, NRTC Member Agreements
and other DBS Agreements of the Companies.
<PAGE>
Nothing contained in this Section 6.08 shall constitute a waiver of any Event of
Default arising from the Borrower's failure to locate, deliver and/or file or
record any Security Document, any consent of any Governmental Authority or other
Person or any other document required under Section 2.01, Article III or
otherwise under this Agreement.
Section 6.09. Renewal of DBS Agreements, FCC Licenses, and CATV
Franchises.
(a) Renew the DBS Agreements and the FCC Licenses in a timely manner and
in accordance with all applicable provisions thereof.
(b) Comply with the provisions of all applicable federal and local laws
relating to the renewal of Significant Franchises, including without limitation
pursuing proceedings for the renewal of such Significant Franchises in
accordance with those procedures customarily followed by holders of similar
franchises. Without limiting the foregoing, the Companies will seek renewal of
all Significant Franchises within the time periods prescribed by, and otherwise
in compliance with, Section 546 of the Cable Communications Policy Act of 1984
(47 U.S.C. Section 546).
Section 6.10. Compliance with Environmental Laws.
(a) Comply, and cause all tenants or other occupants of any of the
Properties to comply in all material respects with all Environmental Laws and
not generate, store, handle, process, dispose of or otherwise use and not permit
any tenant or other occupant of any of the Properties to generate, store,
handle, process, dispose of or otherwise use Hazardous Materials in, on, under
or about the Property in a manner that could lead or potentially lead to
imposition on any Company or the Agent or any Lender or any of the Properties of
any liability or lien of any nature whatsoever under any Environmental Law.
(b) Notify the Agent promptly in the event of any spill or other release
of any Hazardous Material in, on, under or about any of the Properties which is
required to be reported to a Governmental Authority under any Environmental Law,
promptly forward to the Agent copies of any notices received by any Company
relating to any alleged violation of any Environmental Law and promptly pay when
due any fine or assessment against the Lenders, any Company or any of the
Properties relating to any Environmental Law.
<PAGE>
(c) If at any time it is determined that the operation or use of any of
the Properties violates any applicable Environmental Law or that there is any
Hazardous Material located in, on, under or about the Properties which under any
Environmental Law requires special handling in collection, treatment, storage or
disposal or any other form of cleanup or remedial or corrective action, then,
within thirty (30) days after receipt of notice thereof from a Governmental
Authority (or such other time period as may be specified in the notice sent by
such Governmental Authority) or from the Lenders, take, at its sole cost and
expense, such actions as may be necessary to fully comply in all respects with
all Environmental Laws, provided, however, that if such compliance cannot
reasonably be completed within such thirty (30) day period, the Borrower shall
commence such necessary action within such thirty (30) day period and shall
thereafter diligently and expeditiously proceed to fully comply in all respects
and in a timely fashion with all Environmental Laws. Nothing herein shall
prohibit the Borrower from asserting any good faith defenses against the
government in any governmental demands.
(d) If a lien is filed against any of the Properties by any Governmental
Authority resulting from the need to expend or the actual expending of monies
arising from an action or omission, whether intentional or unintentional, of any
Company or for which any Company is responsible, resulting in the releasing,
spilling, leaking, leaching, pumping, emitting, pouring, emptying or dumping of
any Hazardous Material, then, within thirty (30) days from the date that such
Company is first given notice such lien has been placed against the Properties,
either (i) pay the claim and remove the lien or (ii) furnish a cash deposit,
bond or such other security with respect thereto as is satisfactory in all
respects to the Lenders and is sufficient to effect a complete discharge of such
lien on the Properties.
(e) At the Borrower's expense, if reasonably requested by the Agent in
connection with any Property acquired or leased by any Company after the date
hereof (whether pursuant to a Permitted Acquisition or otherwise), (i) conduct
and deliver to the Agent and the Lenders, an Environmental Site Assessment
prepared by an environmental consulting firm of national reputation reasonably
satisfactory to the Agent, together with a letter from such firm to the Agent
authorizing the Agent and the Lenders to rely thereon, or (ii) prepare and
deliver to the Agent and the Lenders true and accurate responses to the Agent's
Environmental Questionnaire as to such Property. Each Environmental Site
Assessment and completed Environmental Questionnaire shall be, to the best of
the Borrower's knowledge, true and accurate in all material respects.
(f) Conduct any further diligence recommended under any Environmental
Site Assessment and perform any and all Remedial Work necessary under all
Environmental Laws applicable (now or in the future) to the Companies or their
businesses, whether as recommended under any Environmental Site Assessment or
otherwise.
<PAGE>
Section 6.11. Interest Rate Protection.
(a) Within thirty (30) days after the date outstanding Loans first equal
or exceed $25,000,000 in aggregate principal amount, enter into, and,
thereafter, maintain in full force and effect, one or more Rate Hedging
Agreements sufficient to ensure that at least fifty percent (50%) of the
aggregate principal amount of the Loans then outstanding is protected at all
times against increases in the applicable Base Rate or LIBOR Rate for a term
extending for at least three (3) years.
(b) Thereafter, within thirty (30) days after each date as of which the
outstanding principal amount of the Loans shall have increased by an incremental
amount of $25,000,000, but only if the ratio of Total Funded Debt on any day
during such thirty (30) day period to Annualized EBITDA for the most recently
ended fiscal quarter shall equal or exceed 3.00:1.00, increase the Borrower's
interest protection in amounts sufficient to ensure that at least fifty percent
(50%) thereof remains protected at all times against increases in the applicable
Base Rate or LIBOR Rate for a term extending for at least three (3) years or, if
shorter, through December 31, 2003.
(c) Each Rate Hedging Agreement entered into as required under Section
6.11(a) or (b) shall contain terms and conditions reasonably satisfactory to the
Agent.
(d) Deliver to the Agent copies of each such Rate Hedging Agreement,
including any and all amendments thereto and substitutions thereof, and such
other documentation relating thereto as the Agent or the Lenders may from time
to time request.
VII. NEGATIVE COVENANTS. The Borrower covenants and agrees that, so long
as any Lender has any obligation to extend credit to the Borrower hereunder, and
for so long thereafter as there remains outstanding any portion of any
Obligation, whether now existing or arising hereafter, unless the Required
Lenders shall otherwise consent in writing in accordance with the terms of
Article XII, none of the Companies will, directly or indirectly:
Section 7.01. Indebtedness. Incur, create, assume, become or be liable,
directly, indirectly or contingently, in any manner with respect to, or permit
to exist, any Indebtedness or liability, except:
(a) Indebtedness of the Borrower to the Lenders hereunder, under the
Notes and under the Letters of
Credit;
(b) the guaranties of the Subsidiaries required under Section 2.01;
<PAGE>
(c) any Rate Hedging Obligation with terms and conditions reasonably
acceptable to the Agent;
(d) Indebtedness existing on the date hereof and described in Part A of
Schedule 7.01, provided however, that the terms of such indebtedness shall not
be modified or amended in any material respect, nor shall payment thereof be
modified, without the prior written consent of the Required Lenders;
(e) Indebtedness in respect of endorsements of negotiable instruments
for collection in the ordinary course of business;
(f) Indebtedness under Capital Leases and purchase money Indebtedness
relating to the purchase price of real estate and equipment to be used in the
Companies' businesses (i) which is specified in Part B of Schedule 7.01 hereto
or (ii) if not so specified, does not exceed $2,000,000 in the aggregate
outstanding at any time;
(g) Permitted Seller Debt not exceeding $25,000,000 in the aggregate
outstanding at any time, including without limitation all such Indebtedness
specified in Part C of Schedule 7.01;
(h) Permitted Seller Subordinated Debt, not exceeding $10,000,000 in
the aggregate outstanding at any time;
(i) solely from the date hereof until the date as of which the first
Loans are made hereunder, the Parent Loans;
(j) Indebtedness to the Subordinated Noteholders under the Subordinated
Debt Documents;
(k) Indebtedness among the Borrower and its Subsidiaries (including
Indebtedness under the PCT-CONN Note Documents and the MCT Note Documents),
provided that (i) not more than $400,000 in the aggregate in additional loans to
PCT-CONN, (ii) not more than $1,000,000 in the aggregate of additional loans to
Pegasus San German and MCT and (iii) no additional loans to any Specified
Subsidiary shall be permitted under this Section 7.01; and
(l) Unsecured Indebtedness of the Borrower and the Subsidiaries of a
type not covered by any of the other provisions of this Section 7.01 and which
does not exceed $1,000,000 in the aggregate outstanding at any time.
Section 7.02. Liens. Create, incur, assume, suffer or permit to exist any
mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on
any of its assets or ownership interests, now or hereafter owned, other than:
<PAGE>
(a) liens securing the payment of taxes, assessments or government
charges or levies either not yet due or the validity of which is being contested
in good faith by appropriate proceedings, and as to which it shall have set
aside on its books adequate reserves;
(b) deposits under workers' compensation, unemployment insurance and
social security laws, or to secure the performance of bids, tenders, contracts
(other than for the repayment of borrowed money) or leases, or to secure
statutory obligations or surety or appeal bonds, or to secure indemnity,
performance or other similar bonds arising in the ordinary course of business;
(c) liens existing on the date hereof and described on Schedule 7.02
attached hereto;
(d) liens against the Companies imposed by law, such as vendors',
carriers', lessors', warehouser's or mechanics' liens, incurred by it in good
faith in the ordinary course of business;
(e) liens arising out of a prejudgment attachment, a judgment or award
against it with respect to which it shall currently be prosecuting an appeal, a
stay of execution pending such appeal having been secured, except any such lien
arising in connection with a judgment, attachment or proceeding which gives rise
to an Event of Default under paragraph (m) or (n) of Article VIII;
(f) liens in favor of the Agent or the Lenders (and any Hedging Lenders)
securing the Notes or the other obligations of the Companies to the Lenders
hereunder or under Rate Hedging Obligations entered into with any Lender or any
Lender's Affiliate;
(g) liens against the Companies arising under or securing Capital Leases
and liens or mortgages securing purchase money Indebtedness described in Section
7.01(f), provided that the obligation secured by any such lien shall not exceed
one hundred percent (100%) of the lesser of cost or fair market value as of the
time of the acquisition of the property covered thereby and that each such lien
or mortgage shall at all times be limited solely to the item or items of
property so acquired; and
(h) restrictions, easements and minor irregularities in title which do
not and will not interfere with the occupation, use and enjoyment by any Company
of such properties and assets in the normal course of its business as presently
conducted or materially impair the value of such properties and assets for the
purpose of such business.
<PAGE>
Section 7.03. Disposition of Assets; etc. Sell, lease, transfer or
otherwise dispose of its properties, assets, rights, licenses and franchises to
any Person (including without limitation dispositions in exchange for similar
assets and properties and commonly referred to as "asset swaps") (all of the
foregoing being referred to herein as a "Disposition"), except as follows:
(a) Dispositions made in the ordinary course of business (including the
Disposition, without replacement, of equipment which is obsolete or no longer
needed by the Companies in the conduct of their businesses and the replacement
of equipment with other equipment of at least equal utility and value (provided
that the Agent's or the Lenders' lien upon such newly acquired equipment shall
have the same priority as the Agent's or the Lenders' lien upon the replaced
equipment subject to any prior liens permitted by Sections 7.01(f) and 7.02(g));
(b) the Disposition of the New England Systems and the Disposition of
other assets having a fair market value of not more than $25,000,000 in the
aggregate (all of which Dispositions may be made free from the liens of the
Security Documents); provided, however, that (i) the selling Subsidiaries shall
have received payment in cash or cash equivalents of at least eighty-five
percent (85%) of gross proceeds from any such disposition of assets (other than
like-kind exchanges under Section 1031 of the Code), (ii) all rights of the
Companies under any escrow or similar agreements entered into in connection with
like-kind exchanges under Section 1031 of the Code shall have been collaterally
assigned to the Agent and (iii) the Borrower shall have complied with the
provisions of Section 1.06(e), if applicable; and
(c) The Companies may dispose of additional properties made outside the
ordinary course of business (free and clear of the liens of the Security
Documents) with the prior written consent of the Required Lenders, in their sole
and absolute discretion, which consent, if given, shall in any event be
contingent upon satisfaction of the threshold conditions set forth in clauses
(i) and (ii) above unless the Required Lenders shall otherwise agree.
Section 7.04. Fundamental Changes; Acquisitions.
(a) Form any subsidiary or otherwise change the corporate structure or
organization of the Borrower or the Subsidiaries from that set forth in Schedule
4.23, except in connection with, and in accordance with the conditions to, any
Permitted Acquisition;
(b) Permit or suffer any amendment of its charter or partnership
documents which could have a Material Adverse Effect (it being expressly agreed
that the inclusion in any such charter documents of any provision similar to
those set forth in Section 102(b)(2) of Title 8 of the Delaware Code is
prohibited under this Section);
(c) Dissolve, liquidate, consolidate with or merge with, or otherwise
acquire any Systems, Stations, DBS Rights or all or any substantial portion of
the ownership interests or assets or properties of any corporation, partnership
or other entity or any other material assets, other than pursuant to (i)
Permitted Acquisitions and Capital Expenditures by the Companies (other than
Specified Subsidiaries) permitted hereunder and (ii) purchases of inventory and
supplies in the ordinary course of business;
<PAGE>
(d) Transfer any assets or properties to any Specified Subsidiary;
(e) Repurchase or redeem any shares of capital stock, partnership
interests or other ownership interests, except as permitted by Section 5.05; or
(f) Issue any additional shares of capital stock, partnership interests
or other ownership interests, except for Permitted Preferred Stock with an
aggregate liquidation value not exceeding $10,000,000, and securities (i) in
respect of which the issuing Company has no obligation to redeem or to pay cash
distributions or dividends, (ii) the issuance of which does not result in an
Event of Default and (iii) which shall have been collaterally assigned or
pledged and delivered to the Agent as required hereunder.
Notwithstanding the foregoing, the Borrower and one or more Subsidiaries may
merge or consolidate with each other if the surviving or resulting corporation
is either the Borrower or a Subsidiary and if all actions required by Section
2.01 shall have been taken.
Section 7.05. Local Marketing Agreements, Etc. Enter into any LMA or
other similar arrangement, other than Permitted LMAs.
Section 7.06. Management. Turn over the management of its properties,
assets, rights, licenses and franchises to any Person other than the Manager or
a full-time employee of the Companies.
Section 7.07. Sale and Leaseback. Enter into any arrangements, directly
or indirectly, with any Person whereby it shall sell or transfer any property,
real, personal or mixed, used or useful in its business, whether now owned or
hereafter acquired, and thereafter rent or lease such property; provided,
however, that the Borrower and the Subsidiaries may engage in such transactions
to the extent structured as Capital Leases and subject to the limitations in
Section 7.01(f).
Section 7.08. Investments. Except for Permitted Investments, purchase,
invest in or otherwise acquire or hold securities, including without limitation
capital stock, partnership interests, membership interests and other equity
interests and evidences of indebtedness of, or make loans or advances to, or
enter into any arrangement for the purpose of providing funds or credit to, any
other Person.
Section 7.09. Change in Business. Engage, directly or indirectly, in any
business other than the businesses in which it is currently engaged. Without
limiting the generality of the foregoing, no Specified Subsidiary shall
undertake any transactions or hold any assets or properties in addition to its
existing assets, if any, until it shall have executed and delivered to the Agent
all Security Documents required under Section 2.01 (without giving effect to any
exceptions to such requirements set forth in Schedule 2.01(a)).
<PAGE>
Section 7.10. Accounts Receivable. Sell, assign, discount or dispose in
any way of any accounts receivable, promissory notes or trade acceptances held
by any Company, with or without recourse, except for collection (including
endorsements) in the ordinary course of business.
Section 7.11. Transactions with Affiliates. Except for the payment of
permitted Management Fees and the License Agreements, enter into any
transaction, including, without limitation, the purchase, sale or exchange of
property or assets or the rendering or accepting of any service with or to any
Affiliate of any Company, except in the ordinary course of business and pursuant
to the reasonable requirements of its business and upon terms not less favorable
to such Company than it could obtain in a comparable arm's-length transaction
with a third party other than such Affiliate.
Section 7.12. Amendment of Certain Agreements, Etc.
(a) Amend, modify or terminate any CATV Franchise or FCC License, the
PCT-CONN Note Documents, the MCT Note Documents, any DBS Agreement, the
Subordinated Debt Documents, any agreement or instrument evidencing Permitted
Seller Debt, Permitted Seller Subordinated Debt or other Subordinated Debt or
any material agreement to which any Company is a party, or enter into any
material agreement, in each case, if the effect thereof would be (i) to confer
additional rights upon the other parties thereto which could have a Material
Adverse Effect, (ii) to increase materially the obligations of any Company
thereunder or (iii) with respect to Subordinated Debt, to effect any material
change to the terms or conditions thereof which is adverse to the obligor
thereunder or to the Lenders or the Agent; or
(b) in any event, subject to applicable law, elect to terminate or amend
any License Agreement.
Section 7.13. ERISA. (a) Fail to make contributions to pension plans
required by Section 412 of the Code, (b) fail to make payments required by Title
IV of ERISA as the result of the termination of a single employer pension plan
or withdrawal or partial withdrawal from a multiemployer pension plan, or (c)
fail to correct a prohibited transaction with an employee benefit plan with
respect to which it is liable for the tax imposed by Section 4975 of the Code.
Section 7.14. Margin Stock. Use or permit the use of any of the proceeds
of the Loans, directly or indirectly, for the purpose of purchasing or carrying,
or for the purpose of reducing or retiring any indebtedness which was originally
incurred to purchase or carry, any Margin Stock or for any other purpose which
might constitute the transactions contemplated hereby a "purpose credit" within
the meaning of Regulation U (12 CFR Part 221) of the Board of Governors of the
Federal Reserve System, or cause any Loan, the application of proceeds thereof
or this Agreement to violate Regulation G, Regulation U, Regulation T or
Regulation X of the Board of Governors of the Federal Reserve System or any
other regulation of such Board or the Securities Exchange Act of 1934, as
amended, or any rules or regulations promulgated under such statutes.
<PAGE>
Section 7.15. Negative Pledges, etc. Enter into any agreement (excluding
this Agreement or any other Transaction Document) prohibiting (a) any Company
from amending or otherwise modifying this Agreement or any other Transaction
Document, or (b) the creation or assumption of any Lien upon the properties,
revenues or assets of any Company, whether now owned or hereafter acquired.
VIII. DEFAULTS. In each case of happening of any of the following events
(each of which is herein sometimes called an "Event of Default"):
(a) any representation or warranty made by or on behalf of any Company or
any of its Affiliates (including without limitation the Parent Affiliates) in
this Agreement or any other Loan Documents, or in any report, certificate,
financial statement or other instrument furnished in connection with this
Agreement or the borrowings hereunder, shall prove to be false or misleading in
any material respect when made or reconfirmed;
(b) default in the payment or mandatory prepayment of any installment of
the principal of any Note or any payment of any installment of the principal of
any other indebtedness of any Company to the Agent or any Lender, or any payment
in respect of any Reimbursement Obligation, or any payment in respect of any
Rate Hedging Obligations entered into with the Agent or any Lender, when the
same shall become due and payable, whether at the due date thereof or at a date
fixed for prepayment or by acceleration or otherwise;
(c) default in the payment of any interest on any Note, or any premium,
fee or other indebtedness of any Company to the Agent or any Lender for more
than five (5) calendar days after the date when the same shall become due and
payable, whether at the due date thereof or at a date fixed for prepayment or by
acceleration or otherwise;
(d) default by any Person other than the Agent or any Lender in the due
observance or performance of, or compliance with, any covenant or agreement
contained in Article III or V, Sections 6.02, 6.03 (but only if the same
involves any seizure or property), 6.04, 6.05, 6.06, 6.07, 6.09 and 6.11 or
Article VII of this Agreement; provided, however, that a default in the delivery
of financial or other information under paragraphs (b) through (e) of Section
6.05 shall not constitute an Event of Default unless and until the same
continues unremedied for thirty (30) days after the earlier to occur of (i) the
occurrence thereof or (ii) written notice thereof from the Agent or any Lender
to the Borrower (provided that such thirty (30) day period shall be available
for the remedy of any such default only once in any period of twelve (12)
consecutive months and three (3) times during the term of this Agreement);
(e) default by any Person other than the Agent or any Lender in the due
observance or performance of, or compliance with, any other covenant, condition
or agreement to be observed or performed pursuant to the terms of this Agreement
or pursuant to the terms of any Security Document or any Rate Hedging Obligation
entered into with the Agent or any Hedging Lender, which default is not referred
to in paragraphs (a) through (d), inclusive, of this Article VIII and which
default shall continue unremedied for thirty (30) days after the earlier to
occur of (i) the Borrower's discovery of such default, or (ii) written notice
thereof from the Agent or any Lender to the Borrower, provided, however, that if
any such default cannot be remedied, then such default shall be deemed to be an
Event of Default as of the date of the occurrence thereof;
<PAGE>
(f) (i) any Subordinated Indenture Default or (ii) any default with
respect to any Indebtedness of any Company (other than to the Lenders hereunder)
for borrowed money, or default under any agreement giving rise to monetary
remedies, in each case which, when aggregated with all other such defaults of
the Companies, exceeds $2,000,000, if the effect of such default is to permit
the holder of such Indebtedness to accelerate the maturity of such Indebtedness,
unless such holder shall have permanently waived the right to accelerate the
maturity of such Indebtedness on account of such default;
(g) (i) any Company shall lose, fail to keep in force, suffer the
termination, suspension or revocation of or terminate, forfeit or suffer a
material adverse amendment to any CATV Franchise at any time held by it, the
loss, termination, suspension, revocation or amendment of which could adversely
affect the Borrower's ability to perform its obligations under this Agreement or
the Notes, including without limitation the obligations set forth in Section
5.01 (a "Significant Franchise") or any material FCC License; (ii) any
governmental regulatory authority shall conduct a hearing on the renewal of any
Significant Franchise or any material FCC License and the result thereof is
reasonably likely to be the termination, revocation, suspension or material
adverse amendment of such Significant Franchise or FCC License; or (iii) any
governmental regulatory authority shall commence an action or proceeding seeking
the termination, suspension, revocation or material adverse amendment of any
Significant Franchise or any material FCC License and the result thereof is
likely to be the termination, suspension, revocation or material adverse
amendment of such Significant Franchise or FCC License;
(h) the cable television operations of any System(s) served pursuant to
one or more Significant Franchises or the on-the-air television operation of any
Stations(s) shall be interrupted at any time for more than (x) seventy-two (72)
consecutive hours, unless such interruption occurs by reasons of force majeure,
or (y) in the event of force majeure, fourteen (14) days, in each case, unless
(and only so long as) all damages, liabilities and other effects of such
interruption of service (including any adverse effect on the Borrower's ability
to perform its obligations under this Agreement and the Notes) are fully covered
by business interruption insurance;
(i) (i) any NRTC Member Agreement or other DBS Agreement shall be
terminated, shall expire or shall be amended in a manner reasonably likely to
have a Material Adverse Effect, (ii) any DirecTv Agreement (including the HCG
Agreement) shall terminate, shall expire or shall be amended in a manner
reasonably likely to have a Material Adverse Effect or (iii) any default shall
occur under the HCG Agreement, and NRTC shall take action to terminate the HCG
Agreement;
(j) the loss, termination, suspension, revocation or amendment (in a
manner reasonably likely to have a Material Adverse Effect) of any license
issued to HCG, any Company or DirecTv or any other party by the FCC in
connection with the delivery of DIRECTV or other DBS Rights under any DirecTv
Agreement or any NRTC Member Agreement;
<PAGE>
(k) DBS services provided to any of the Subscribers shall be interrupted
or terminated, whether due to satellite damage or destruction or other
circumstances, if the same has or could have a Material Adverse Effect;
(l) any default with respect to any Funded Debt of the Parent which, when
aggregated with all other such defaults of the Parent, exceeds $15,000,000, if
the effect of such default is to permit the holder of such Indebtedness to
accelerate the maturity of such Indebtedness, unless such holder shall have
permanently waived the right to accelerate the maturity of such Indebtedness on
account of such default;
(m) any Company or group of Companies generating in the aggregate more
than five percent (5%) of EBITDA for any period shall discontinue its or their
respective business(es) or the Parent, any Company or the Manager shall (i)
apply for or consent to the appointment of a receiver, trustee, custodian or
liquidator of it or any of its property, (ii) be unable, or admit in writing its
inability, to pay its debts as they mature, (iii) make a general assignment for
the benefit of creditors, (iv) be adjudicated a bankrupt or insolvent or be the
subject of an order for relief under Title 11 of the United States Code or (v)
file a voluntary petition in bankruptcy, or a petition or an answer seeking
reorganization or an arrangement with creditors or to take advantage of any
bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or
liquidation law or statute, or an answer admitting the material allegations of a
petition filed against it in any proceeding under any such law or corporate
action shall be taken for the purpose of effecting any of the foregoing;
(n) there shall be filed against any Company, the Parent or the Manager
an involuntary petition seeking reorganization of such company or the
appointment of a receiver, trustee, custodian or liquidator of such company or a
substantial part of its assets, or an involuntary petition under any bankruptcy,
reorganization or insolvency law of any jurisdiction, whether now or hereafter
in effect and such involuntary petition shall not have been dismissed within
sixty (60) days thereof;
(o) final judgment for the payment of money which, when aggregated with
all other outstanding judgments against any of the Companies, exceeds $2,000,000
(exclusive of amounts covered by insurance or actually contributed in cash by
third party obligors with respect to such judgments) shall be rendered against
any Company, and the same shall remain undischarged (unless fully bonded upon
terms satisfactory to the Required Lenders) for a period of thirty (30)
consecutive days, during which execution shall not be effectively stayed;
(p) the occurrence of any attachment of any deposits or other property of
any Company in the hands or possession of the Agent or any of the Lenders, or
the occurrence of any attachment of any other property of any Company in an
amount which, when aggregated with all other attachments against the Companies,
exceeds $1,000,000 and which shall not be discharged within sixty (60) days of
the date of such attachment;
(r) for any reason, (i) the Borrower shall cease to own directly or
indirectly all of the issued and outstanding capital stock of each of its
Subsidiaries (other than the Permitted Preferred Stock); (ii) the Parent shall
cease to own at least fifty-one percent (51%) of the aggregate economic value of
the Borrower's issued and outstanding capital stock; (iii) the Parent shall
cease to own at least eighty percent (80%) of the combined voting power of all
issued and outstanding shares of capital stock of the Borrower; or (iv) a
"Change of Control" (as defined in the Subordinated Indenture, the PCC Preferred
Stock Designation or the PCC Indenture) shall occur;
<PAGE>
(s) for any reason, PCT-CONN shall retain more than $500,000 in cash
balances, after the payment of all operating expenses and the distribution of
excess cash to PCT; or
(t) for any reason (other than the gross negligence of the Agent or the
Lenders, but without limiting in any way the Borrower's obligations under
Section 6.08(b), any material Security Document or other Loan Document shall not
be in full force and effect in all material respects or shall not be enforceable
in all material respects in accordance with its terms, or any security
interest(s) or lien(s) granted pursuant thereto which is, or are in the
aggregate, material shall fail to be perfected, or any party thereto other than
the Agent or the Lenders shall contest the validity of any material lien(s)
granted under, or shall disaffirm its obligations under, any material Security
Document or other Loan Document;
then and upon every such Event of Default and at any time thereafter during the
continuance of such Event of Default, at the election of the Required Lenders as
provided in Article XII, the Commitments shall terminate and the Notes and any
and all other Indebtedness of the Borrower to the Lenders shall immediately
become due and payable, both as to principal and interest, without presentment,
demand, prior notice, or protest, all of which are hereby expressly waived,
anything contained herein or in the Notes or other evidence of such indebtedness
to the contrary notwithstanding (except in the case of an Event of Default under
paragraph (m) or (n) of this Article VIII which, under applicable law, would
result in the automatic acceleration of the Borrower's Indebtedness, in which
event the Commitments shall automatically terminate and such Indebtedness shall
automatically become due and payable).
IX. REMEDIES ON DEFAULT, ETC. In case any one or more Events of Default
shall occur and be continuing, the Agent and the Lenders may proceed to protect
and enforce their rights by an action at law, suit in equity or other
appropriate proceeding, whether for the specific performance of any agreement
contained in this Agreement, any Security Document or the Notes, or for an
injunction against a violation of any of the terms hereof or thereof or in and
of the exercise of any power granted hereby or thereby or by law, all subject to
the provisions of Article XII. IN THE EVENT THAT THE AGENT SHALL APPLY FOR THE
APPOINTMENT OF, OR TAKING POSSESSION BY, A TRUSTEE, RECEIVER OR LIQUIDATOR OF
THE BORROWER OR ANY OF ITS SUBSIDIARIES OR OF ANY OTHER SIMILAR OFFICIAL, TO
HOLD OR LIQUIDATE ALL OR ANY SUBSTANTIAL PART OF THE PROPERTIES OR ASSETS OF THE
BORROWER OR SUCH SUBSIDIARY FOLLOWING THE OCCURRENCE OF A DEFAULT IN PAYMENT OF
ANY AMOUNT OWED TO THE AGENT OR ANY LENDER HEREUNDER, THE BORROWER, FOR ITSELF
AND ON BEHALF OF ITS SUBSIDIARIES (WITH ALL DUE AND PROPER AUTHORIZATION OF THE
BOARDS OF DIRECTORS OR PARTNERS, AS THE CASE MAY BE, OF EACH OF THE
SUBSIDIARIES), HEREBY JOINTLY AND SEVERALLY CONSENT TO SUCH APPOINTMENT AND
TAKING OF POSSESSION AND AGREE TO EXECUTE AND DELIVER ANY AND ALL DOCUMENTS
REQUESTED BY THE AGENT RELATING THERETO (WHETHER BY JOINING IN A PETITION FOR
THE VOLUNTARY APPOINTMENT OF, OR ENTERING NO CONTEST TO A PETITION FOR THE
APPOINTMENT OF, SUCH AN OFFICIAL OR OTHERWISE, AS APPROPRIATE UNDER APPLICABLE
LAW). No right conferred upon the Agent or the Lenders hereby or by any Security
Document or the Notes shall be exclusive of any other right referred to herein
or therein or now or hereafter available at law, in equity, by statute or
otherwise.
<PAGE>
X. THE AGENT.
Section 10.01. Appointment, Powers and Immunities.
(a) Each Lender hereby irrevocably (subject to Section 10.08)
designates and appoints Bankers Trust Company, which designation and appointment
is coupled with an interest, as the Agent of such Lender under this Agreement
and the other Loan Documents, and each such Lender irrevocably authorizes
Bankers Trust Company as the Agent of such Lender, to take such action on its
behalf under the provisions of this Agreement and the other Loan Documents and
to exercise such powers and perform such duties as are expressly delegated to
the Agent by the terms of this Agreement and the other Loan Documents, together
with such other powers as are reasonably incidental thereto.
(b) The Agent (which term as used in this sentence and in Section 10.05
and the first sentence of Section 10.06 shall include reference to its
affiliates and its own and such affiliates' officers, directors, employees and
agents) shall not: (i) have any duties or responsibilities to be a trustee for
any Lender; (ii) be responsible to the Lenders for any recitals, statements,
representations or warranties contained in this Agreement, or in any certificate
or other document referred to or provided for in, or received by either of them
under, this Agreement, or for the value, validity, effectiveness, genuineness,
enforceability, perfection or sufficiency of this Agreement, any Note, any
Security Document or any other document referred to or provided for herein or
for any failure by any Company or any other Person to perform any of its
obligations hereunder or thereunder; (iii) be required to initiate or conduct
any litigation or collection proceedings hereunder except to the extent
requested by the Required Lenders; and (iv) be responsible for any action taken
or omitted to be taken by it hereunder or under any other document or instrument
referred to or provided for herein or in connection herewith, except for its own
gross negligence or willful misconduct.
(c) The Agent may employ agents and attorneys-in-fact and shall not be
responsible for the negligence or misconduct of any such agents or
attorneys-in-fact it selects with reasonable care.
(d) Subject to the foregoing, to Article XII and to the provisions of
any intercreditor agreement among the Lenders in effect from time to time, the
Agent shall, on behalf of the Lenders, (i) hold and apply any and all
Collateral, and the proceeds thereof, at any time received by it, in accordance
with the provisions of the Security Documents and this Agreement; (ii) exercise
any and all rights, powers and remedies of the Lenders under this Agreement, the
Security Documents and the other Loan Documents, including the giving of any
consent or waiver or the entering into of any amendment, subject to the
provisions of Article XII; (iii) execute, deliver and file UCC Financing
Statements, mortgages, deeds of trust, lease assignments and other such
agreements, and possess instruments on behalf of any or all of the Lenders; and
(iv) in the event of acceleration of the Borrower's Indebtedness hereunder, sell
or otherwise liquidate or dispose of any portion of the Collateral held by it
and otherwise exercise the rights of the Lenders hereunder and under the
Security Documents.
<PAGE>
(e) The Lenders hereby authorize the Agent, at its option and in its
discretion, to release any Lien granted to or held by the Agent upon any
Collateral (i) upon termination of the Commitments and payment in full of all of
the Obligations, (ii) constituting property sold or to be sold or disposed of as
part of or in connection with any Disposition expressly permitted hereunder or
under any other Loan Document or to which the Required Lenders have consented or
(iii) otherwise pursuant to and in accordance with the provisions of any
applicable Loan Document. Upon request by the Agent at any time, the Lenders
will confirm in writing the Agent's authority to release Collateral pursuant to
this Section.
Section 10.02. Reliance by Agent. The Agent shall be entitled to rely
upon any certification, notice or other communication (including any
communication by telephone, telex, telegram or cable) believed by it to be
genuine and correct and to have been signed or sent by or on behalf of the
proper Person or Persons, and upon advice and statements of legal counsel,
independent accountants and other experts selected by the Agent. As to any
matters not expressly provided for by this Agreement, the Agent shall in all
cases be fully protected in acting, or in refraining from acting, hereunder in
accordance with instructions signed by the Required Lenders or the Lenders, as
the case may be, and such instructions and any action taken or failure to act
pursuant thereto shall be binding on the Lenders.
Section 10.03. Events of Default. The Agent shall not be deemed to have
knowledge of the occurrence of an Event of Default (other than the non-payment
of principal of or interest on the Notes) unless it has received written notice
from any Lender or the Borrower specifying such Event of Default and stating
that such notice is a "Notice of Default". In the event that the Agent receives
such a notice of the occurrence of an Event of Default, the Agent shall give
prompt notice thereof to the Lenders (and shall give each Lender prompt notice
of each such non-payment). The Agent shall (subject to Section 10.07) take such
action with respect to such Event of Default as shall be directed by the
Required Lenders, as provided under Article XII, provided that, unless and until
the Agent shall have received such directions, the Agent may (but shall not be
obligated to) take such action on behalf of the Lenders, or refrain from taking
such action, with respect to such Event of Default as it shall deem advisable in
the best interest of the Lenders.
Section 10.04. Rights as a Lender. With respect to its Commitments and
the Loans made by Bankers Trust Company hereunder, Bankers Trust Company shall
have the same rights and powers hereunder as any other Lenders and may exercise
the same as though it were not acting as the Agent. The Agent and its affiliates
may, without having to account therefor to the Lenders and without giving rise
to any fiduciary or other similar duty to any Lender, accept deposits from, lend
money to and generally engage in any kind of banking, trust or other business
with the Borrower and any of its Affiliates as if it were not acting as an Agent
and as if it were not a Lender, and the Agent may accept fees and other
consideration from any Company, the Parent or any other Parent Affiliate for
services in connection with this Agreement or otherwise without having to
account for the same to the Lenders.
<PAGE>
Section 10.05. Indemnification. The Lenders agree to indemnify the Agent
(to the extent not reimbursed under Section l4.02, but without limiting the
obligations of the Borrower under such Section l4.02), ratably in accordance
with the aggregate principal amount of the Notes and Commitments held by the
Lenders (or, if no such principal or interest is outstanding, ratably in
accordance with their respective Commitments), for any and all liabilities,
obligations, losses, damages, penalties, action, judgments, suits, costs,
expenses or disbursements of any kind and nature whatsoever which may be imposed
on, incurred by or asserted against the Agent any way relating to or arising out
of this Agreement or any other Loan Document contemplated by or referred to
herein or the transactions contemplated by or referred to herein or therein
(including, without limitation, the costs and expenses which the Borrower is
obligated to pay under Section 14.02) or the enforcement of any of the terms of
this Agreement or of any other Loan Document or of any such other documents,
provided that no Lender shall be liable for any of the foregoing to the extent
they arise from the gross negligence or willful misconduct of the party to be
indemnified.
Section 10.06. Non-Reliance on Agent and other Lenders. Each Lender
agrees that it has, independently and without reliance on the Agent or any other
Lenders, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Companies and its own decision
to enter into this Agreement and that it will, independently and without
reliance upon the Agent or any other Lenders, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
analysis and decisions in taking or not taking action under this Agreement. The
Agent shall not be required to keep itself informed as to the performance or
observance by the Companies of this Agreement or any other Loan Document or to
inspect the properties or books of the Companies. Except for notices, reports
and other documents and information expressly required to be furnished to the
Lenders by the Agent hereunder, the Agent shall have no duty or responsibility
to provide any Lender with any credit or other information concerning the
affairs, financial condition or businesses of the Companies (or any of their
Affiliates) which may come into the possession of the Agent or any of its
affiliates. Notwithstanding the foregoing, the Agent will provide to the Lenders
any and all information reasonably requested by them and reasonably available to
the Agent promptly upon such request.
Section 10.07. Failure to Act. Except for action expressly required of
the Agent hereunder, the Agent shall in all cases be fully justified in failing
or refusing to act hereunder unless it shall be indemnified to its satisfaction
by the Lenders against any and all liability and expense which may be incurred
by it by reason of taking or continuing to take any such action.
Section 10.08. Resignation of Agent. Bankers Trust Company (or any other
Agent hereunder), may resign as the Agent at any time by giving ten (10) days'
prior written notice thereof to the Lenders and the Borrower. Any such
resignation shall take effect at the end of such ten (10) day period or upon the
earlier appointment of a successor Agent by the Required Lenders as provided
below. Upon any resignation of Bankers Trust Company (or any other Agent
hereunder), and subject to the Borrower's approval (which approval shall not be
unreasonably withheld or delayed and shall not be required with respect to any
such appointment made during the existence of any Event of Default) the Required
Lenders shall appoint a successor agent from among the Lenders or, if such
appointment is deemed inadvisable or impractical by the Required Lenders,
another financial institution with a combined capital and surplus of at least
$500,000,000. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent.
After the effective date of the resignation of an Agent hereunder, the retiring
Agent shall be discharged from its duties and obligations hereunder, provided
that the provisions of this Article X shall continue in effect for its benefit
in respect of any actions taken or omitted to be taken by it while it was acting
as the Agent. In the event that there shall not be a duly appointed and acting
Agent, the Borrower agrees to make each payment due to the Agent hereunder and
under the Notes, and the other Loan Documents if any, directly to each Lender
entitled thereto, pursuant to written instructions provided by the resigning
Agent or, after such resignation, the Lenders, and to provide copies of each
certificate or other document required to be furnished to the Agent hereunder,
if any, directly to each Lender.
<PAGE>
Section 10.09. Cooperation of Lenders. Each Lender shall (a) promptly
notify the other Lenders and the Agent of any Event of Default known to such
Lender under this Agreement and not reasonably believed to have been previously
disclosed to the other Lenders; (b) provide the other Lenders and the Agent with
such information and documentation as such other Lenders or the Agent shall
reasonably request in the performance of their respective duties hereunder,
including, without limitation, all information relative to the outstanding
balance of principal, interest and other sums owed to such Lender by the
Borrower; and (c) cooperate with the Agent with respect to any and all
collections and/or foreclosure procedures at any time commenced against the
Borrower or otherwise in respect of the Collateral by the Agent in the name and
on behalf of the Lenders.
XI. DEFINITIONS.
As used herein the following terms have the following respective
meanings:
Accountants. See Section 6.05.
Acquisition. The acquisition by the Borrower or any Subsidiary, whether by
way of the purchase of assets or stock, by merger or consolidation or otherwise,
of (i) exclusive DBS Rights for the delivery of DIRECTV, (ii) any broadcast
television business or (iii) any cable television business, including without
limitation a swap of any such existing DBS Rights or business for any other such
DBS Rights or any other such business or an equity contribution of any such DBS
Rights or business to a Subsidiary by any Affiliate of any Company.
<PAGE>
Acquisition Agreements. With respect to any Permitted Acquisition, the
respective acquisition, purchase or other agreement which sets forth the
terms and conditions of such acquisition.
Acquisition Loans. See Section 3.02.
Adjusted Available Commitments. As of any date, the aggregate amount of
the Commitments then in effect minus the Letter of Credit Exposure, minus that
portion of the Permitted Seller Debt Outstandings not secured by Letters of
Credit plus the amount by which the NRTC Letter of Credit Exposure as of such
date exceeds the actual amount then owed to the NRTC by the Companies under the
NRTC Member Agreements.
Adjusted EBITDA. For any period of four (4) fiscal quarters, (a) Location Cash
Flow derived from the DBS Subsidiaries for the last fiscal quarter in
such period, after restoring thereto amounts deducted for Subscriber
Acquisition Costs, multiplied by four (4), plus (b) Location Cash Flow
derived from the Borrower's other Subsidiaries for such four (4) quarter
period, minus (c) corporate overhead charges for the Borrower and all of
its Subsidiaries for such four (4) quarter period; all determined on a
consolidated basis, after eliminating intercompany items, in accordance
with GAAP.
Adjusted Fixed Charges. For any period of four (4) fiscal quarters, the
sum of (a) Subscriber Acquisition Costs for such period, (b) Total Debt
Service for such period; (c) Capital Expenditures made by the Companies
during such period; and (d) all other distributions and other payments
made to the Parent under Section 5.05 or otherwise.
Affiliate(s). Any Person that directly or indirectly controls, or is
under common control with, or is controlled by, the Borrower and, if such
Person is an individual, any member of the immediate family (including
parents, spouse, children and siblings) of such individual and any trust
whose principal beneficiary is such individual or one or more members of
such immediate family and any Person who is controlled by any such member
or trust. As used in this definition, "control", including, its
correlative meanings, "controlled by" and "under common control with",
shall mean possession, directly or indirectly, of power to direct or
cause the direction of management or policies (whether through ownership
or securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any Person that owns directly or
indirectly securities having ten percent (10%) or more of the voting
power for the election of directors or other governing body of a
corporation or ten percent (10%) or more of the partnership or other
ownership interests of any other Person (other than as a limited partner
of such other Person) will be deemed to control such corporation or other
Person. Notwithstanding the foregoing, no individual shall be an
Affiliate solely by reason of his or her being a director, officer or
employee of the Borrower or any Subsidiary.
Affiliate Subordination Agreements. See Section 2.01.
Agent. See the Preamble.
<PAGE>
Aggregate Exposure. See Section 1.01.
Annualized EBITDA. For any fiscal quarter, (a) Location Cash Flow derived
from the DBS Subsidiaries for such fiscal quarter, multiplied by four
(4), plus (b) Location Cash Flow derived from the other Subsidiaries for
such fiscal quarter and the immediately preceding three (3) fiscal
quarters minus (c) corporate overhead charges for all of the Borrower's
Subsidiaries for such fiscal quarter and the immediately preceding three
(3) fiscal quarters, all determined on a consolidated basis, after
eliminating intercompany items, in accordance with GAAP.
Applicable Margin. See Section 1.03.
Assignment and Acceptance. See Article XIII.
Audited Financial Statements. See Section 1.03.
Available Commitments. See Section 1.01.
Average Subscriber Acquisition Cost. For any period, Subscriber
Acquisition Costs divided by Net Subscriber Additions.
Bankers Trust Company. See the Preamble.
Base Rate. As of any date, the fluctuating interest rate per annum equal
to the greater of (a) the rate established by Bankers Trust Company from
time to time at its office in New York City as its "Base Rate" for
commercial loans in United States Dollars, and (b) the Federal Funds Rate
plus 1.00%; in each case, including any applicable adjustments for
reserves or Federal Deposit Insurance Corporation requirements. The Base
Rate is not necessarily intended to be the lowest rate of interest
determined by Bankers Trust Company in connection with extensions of
credit.
Base Rate Loans. Loans bearing interest at a rate determined on the basis
of the Base Rate.
Borrower. See the Preamble.
Borrowing Date. With respect to any Loans requested hereunder, the date
such Loans are to be made.
Budget. See Section 6.05.
<PAGE>
Business Day. (a) For all purposes other than as provided in clause (b)
below, any day other than a Saturday, Sunday or legal holiday on which
banks in New York, New York are open for the transaction of a substantial
part of their commercial banking business; and (b) with respect to all
notices and determinations in connection with, and payments of principal
and interest on, LIBOR Loans, any day that is a Business Day described in
clause (a) and that is also (i) a day when on which banks in London,
England are open for the transaction of a substantial part of their
commercial banking business and (ii) a day for trading by and between
banks in U.S. Dollar deposits in the London interbank market.
Capital Expenditures. For any period, expenditures, (including, without
duplication, the aggregate amount of Capital Lease Obligations incurred
during such period) made by any of the Companies to acquire or construct
fixed assets, plant or equipment (including renewals, improvements and
replacements, but excluding repairs and acquisitions permitted hereunder)
during such period, computed in accordance with GAAP.
Capital Lease. Any lease of property (real, personal or mixed) which, in
accordance with GAAP and Statement No. 13 of the Financial Accounting
Standards Board, would be permitted or required to be capitalized on the
lessee's balance sheet.
Capital Lease Obligations. All obligations of the Companies to pay rent
or other amounts under a lease of (or other agreement conveying the right
to use) property (real, personal or mixed) to the extent such obligations
are required to be classified and accounted for as a capital lease on any
such Company's balance sheet under GAAP, and, for purposes of this
Agreement, the amount of such obligations shall be the capitalized amount
thereof, determined in accordance with GAAP.
Casualty Event. Any loss of, or damages to, or any condemnation or other
taking of any assets or property of the Companies for which any Company
receives insurance proceeds, proceeds of a condemnation award or other
compensation.
CATV Franchise. All franchises, licenses, authorizations or rights by
contract or otherwise to construct, own, operate, promote, extend and/or
otherwise exploit any System operated or granted by any state, county,
city, town, village or other local or state government authority or by
the FCC. The term "Franchise" shall include each of the CATV Franchises
set forth on Schedule 4.07.
CATV Franchise Consents. In connection with any Acquisition of cable
television properties, all consents of the applicable franchising
authorities to the collateral assignment of the related CATV Franchises
to the Agent, on behalf of the Lenders, the grant of security interests
in such cable television properties and the execution and delivery of the
related Security Documents required hereunder.
CERCLA. The Comprehensive Environmental Response, Compensation and
Liability Act of 1989 (42 USC 9601,
et. seq.).
<PAGE>
Churn. For any period, subscribers to the DBS services offered by the DBS
Subsidiaries as of the first day of such period which cease to be
subscribers during such period (including any such subscribers whose
service has been discontinued for non-payment, but excluding any such
subscribers discontinued in connection with a Disposition) minus any
subscribers which resubscribe to such DBS services during such period.
Closing Date. The date on which the this Agreement becomes effective and
the first Loans are made or the first Letters of Credit are issued.
Code. The Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder.
Collateral. Collectively, any and all collateral referred to herein and
in the Security Documents.
Collateral Account. The "Collateral Account", as defined in the Security
Agreements.
Commitment Fee. See Section 1.07.
Commitment Fee Rate. See Section 1.07.
Commitment Reduction Notice. See Section 1.06.
Commitments. See Section 1.01.
Companies. Collectively, the Borrower and its Subsidiaries.
Compliance Report. See Section 6.05.
Compliance Report Delivery Date. See Section 1.03.
Controlled Group. All trades or businesses (whether or not incorporated)
under common control that, together with the Borrower, are treated as a
single employer under Section 414(b) or 414(c) of the Code or Section
40001 of ERISA.
Copyright Office. The United States Copyright and Trademark Office or any
other federal government agency which may hereafter perform its
functions.
Current Assets. On any date, all assets of the Companies on such date
which, in accordance with GAAP, would be classified on a consolidated
balance sheet of the Companies as "current assets".
Current Liabilities. On any date, all liabilities of the Companies on
such date which, in accordance with GAAP, would be classified on a
consolidated balance sheet of the Companies as "current liabilities"
(other than the current portion of long-term Indebtedness).
Damaged Property. See Section 6.02.
<PAGE>
DBS. See the Recitals.
DBS Agreements. The NRTC Member Agreements and any and all other
agreements entered into by the Borrower or any of the Subsidiaries from
time to time (as amended from time to time with the Lenders' consent, if
required under this Agreement), to license the right to deliver DBS
Services.
DBS Rights. Any rights to market, sell, deliver and retain revenues from
direct broadcast television programming initially transmitted over
satellite frequencies, and all rights to distribute services of the type
known as "DBS Services" under the NRTC Member Agreements, including
without limitation all such rights with respect to DIRECTV and DBS under
the DirecTv Agreements or the NRTC Member Agreements.
DBS Subscriber Areas. On any date, all of the geographic areas in which
the Companies, or any of them, have the right to distribute DIRECTV and
other DBS services, as described in the NRTC Member Agreements.
DBS Subsidiaries. Any Subsidiary of the Borrower which now or hereafter
holds DBS Rights.
DBS Transfer. The purchase by PSTH from PSH of all of the issued and
outstanding shares of capital stock of PSH's subsidiaries (except for
certain outstanding shares of preferred stock constituting Permitted
Preferred Stock) in exchange for (i) a cash payment of $84,593,794, (ii)
the return to PSH of 2,780 shares of the Series A Preferred Stock, $1.00
par value, of PSH, (iii) the assumption by the Borrower of the
outstanding indebtedness of PSH under its then existing senior credit
facilities, including without limitation PSH's obligations to make
reimbursement payments in respect of outstanding NRTC Letters of Credit,
as defined and outstanding thereunder, in the aggregate face amount of
$100,639,130, and (iv) the assumption by the Borrower of certain
scheduled debts of PSH not exceeding $6,000,000 in the aggregate and
principally related to seller financing permitted under its then existing
senior credit facilities.
Default. (a) An Event of Default or (b) an event or condition that, but
for the requirement that time elapse or notice be given, or both, would
constitute an Event of Default.
Defaulting Lender. Any Lender with respect to which a Lender Default is
in effect.
DirecTv. DirecTv, Inc., an affiliate of HCG, and any successor thereof.
DIRECTV. The video, audio and data services provided over satellite
frequencies by DirecTv.
<PAGE>
DirecTv Agreements. The HCG Agreement (as defined in the NRTC Member
Agreements) whether or not assigned to DirecTv by HCG, and any other
material agreements under which NRTC has obtained rights to distribute
DBS services covered by any of the NRTC Member Agreements or has obtained
any other DBS Rights granted to any of the Companies by NRTC.
Disposition. See Section 7.03.
Dollars and $. Lawful money of the United States of America.
EBITDA. For any period, Net Income for such period, plus, to the extent
deducted in the determination of Net Income and not otherwise restored in
accordance with the definition of such term, (a) Total Interest Expense,
(b) depreciation, (c) amortization, (d) taxes in respect of income and
profits expensed during such period, including without limitation but
without duplication payments owed under the Tax Sharing Agreement, (e)
Transaction Costs, and (f) other non-cash expenses (including the
amortization of television program license and rental fees) minus (g)
television program license and rental fees actually paid in cash; all
determined on a consolidated basis, after eliminating intercompany items,
in accordance with GAAP.
Effective Date. See Section 1.08.
Environmental Laws. Any and all present and future Federal, state, local
and foreign laws, rules or regulations, and any orders or decrees, in each case
as now or hereafter in effect, relating to the regulation or protection of human
health, safety or the environment or to emissions, discharges, releases or
threatened releases of pollutants, contaminants, chemicals or toxic or hazardous
substances or wastes into the indoor or outdoor environment, including, without
limitation, ambient air, soil, surface water, ground water, wetlands, land or
subsurface strata, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, chemicals or toxic or hazardous substances or wastes.
Environmental Questionnaire. See Section 4.24.
Environmental Site Assessment. See Section 4.24.
ERISA. The Employee Retirement Security Act of 1974, as amended.
Excess Cash Flow. For any period, EBITDA for such period minus (a) Fixed
Charges for such period, minus (b) voluntary prepayments of the Notes
made in connection with voluntary permanent reductions of the Commitments
during such period, as provided in Section 1.06(a), minus (c) Restricted
Payments made under Sections 5.05(a), 5.05(b)(v) and 5.05(b)(vi) during
such period minus (d) any increase in Working Capital during such period,
measured as of the last day of such period by comparison with Working
Capital on the first day of such period, plus (e) any decrease in Working
Capital during such period, measured as of the last day of such period by
comparison with Working Capital on the first day of such period.
<PAGE>
Excluded Disposition. A Disposition permitted under Section 7.03(a) or
Section 7.03(b), so long as no Default has occurred and is continuing on
the date such Disposition is consummated.
Expiration Date. See Section 1.01.
Event of Default. See Article VIII.
FAA. The Federal Aviation Administration or any other federal
governmental agency which may hereafter perform its functions.
FCC. The Federal Communications Commission or any other federal
governmental agency which may hereafter
perform its functions.
FCC Consents. In connection with any Acquisition of broadcast television
properties, all consents of the FCC to such Acquisition and to the
execution and delivery of the related Security Documents required
hereunder.
FCC Licenses. Any Licenses issued by the FCC; including those listed on
Schedule 4.08.
Federal Funds Rate. For any period, a fluctuating interest rate per annum
(based on a 360 day year) equal for each day during such period to the
weighted average of the rates of interest charged on overnight Federal
funds transactions with member banks of the Federal Reserve System
arranged by Federal funds brokers on such day, as published for any day
which is a Business Day by the Federal Reserve Bank of New York (or, in
the absence of such publication, as reasonably determined by the Agent).
Fee Letter. The Fee Letter entered into as of October 8, 1997, between
the Borrower and Bankers Trust Company, individually and as Agent, as
amended from time to time in accordance with the respective terms
thereof.
Financial Statements. See Section 4.01.
Fixed Charges. For any fiscal year, the sum of (a) capitalized Subscriber
Acquisition Costs for such fiscal year, (b) Total Debt Service for such
period; (b) Capital Expenditures made by the Companies during such fiscal
year and (c) taxes paid or payable by the Companies during such fiscal
year in respect of income and profits, including without limitation
payments owed under the Tax Sharing Agreement.
Franchise Areas. The communities listed in Schedule 4.07.
Funded Debt. Without duplication, all Indebtedness with respect to any of
the following: (a) money borrowed (whether recourse or non-recourse),
including principal and overdue interest and premiums, (b) Rate Hedging
Obligations, (c) obligations evidenced by a bond, debenture, note or
other like written obligation to pay money, (d) Capital Lease
Obligations, (e) obligations under conditional sales or other title
retention agreements or secured by any Lien, (f) any letters of credit,
bankers acceptances or similar instruments (including reimbursement
obligations with respect thereto), (g) the deferred unpaid purchase price
of property or services, except trade payables and accrued expenses
incurred in the ordinary course of business, or (h) any guaranty of any
or all of the foregoing.
<PAGE>
GAAP. Generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or such other
entity as may be approved by a significant segment of the accounting
profession, as in effect on December 31, 1996, applied on a basis
consistent with (a) the application of the same in prior fiscal periods,
(b) that employed by the Accountants in preparing the financial
statements referred to in Section 6.05(a) and (c) the accounting
principles generally utilized in the cable television, broadcast
television or direct broadcast satellite industry, as the case may be.
General Purpose Letters of Credit. Any and all Letters of Credit issued
pursuant hereto, other than NRTC Letters of Credit and Seller Letters of
Credit, provided that no such Letter of Credit may be issued for the
purpose of supporting any Indebtedness constituting "antecedent debt" (as
such term is used in Section 547 of the United States Bankruptcy Code).
General Purpose Letter of Credit Exposure. The portion of the aggregate
Letter of Credit Exposure arising from General Purpose Letters of Credit.
Governmental Authority. Any nation or government, any state or other
political subdivision thereof and any entity exercising any executive,
legislative, judicial, regulatory or administrative functions of, or
pertaining to, government.
Gross Subscriber Additions. For any period, the total amount of Paying
Subscribers for DBS services of the DBS Subsidiaries added in the
ordinary course of operations of such Companies, excluding (a) any Paying
Subscribers which resubscribe to the Companies' DBS services during such
period, (b) any Paying Subscribers purchased, acquired or swapped during
such period and (c) any Paying Subscribers sold or otherwise disposed of
during such period.
Hazardous Materials. (a) any petroleum or petroleum products, flammable
materials, explosives, radioactive materials, asbestos, urea formaldehyde
foam insulation, and transformers or other equipment that contain
polychlorinated biphenyls ("PCB's"), (b) any chemicals or other materials
or substances that are now or hereafter become defined as or included in
the definition of "hazardous substances", "hazardous wastes", "hazardous
materials", "extremely hazardous wastes", "restricted Hazardous wastes",
"toxic substances", "toxic pollutants", "contaminants", "pollutants" or
words of similar import under any Environmental Law and (c) any other
chemical or other material or substance, exposure to which is now or
hereafter prohibited, limited or regulated under any Environmental Law.
<PAGE>
Headend Site Leases. See Section 4.13.
HCG. Hughes Communications Galaxy, Inc. and any successor thereof.
Hedging Lender. Any Lender, or any affiliate of any Lender, which from
time to time enters into a Rate Hedging Agreement with any Company.
Indebtedness or indebtedness. As applied to any Person, (a) all items
(except items of capital stock, capital or paid-in surplus or of retained
earnings) which, in accordance with GAAP, would be included in
determining total liabilities as shown on the liability side of a balance
sheet of such Person as at the date as of which Indebtedness is to be
determined, including Capital Lease Obligations but excluding
Indebtedness of the Companies with respect to trade obligations and other
normal accruals in the ordinary course of business not yet due and
payable or not more than ninety (90) days in arrears measured from the
date of billing; (b) all indebtedness secured by any mortgage, pledge,
lien or conditional sale or other title retention agreement to which any
property or asset owned or held by such Person is subject, whether or not
the indebtedness secured thereby shall have been assumed; and (c) all
indebtedness of others which such Person has directly or indirectly
guaranteed, endorsed (otherwise than for collection or deposit in the
ordinary course of business), discounted or sold with recourse or agreed
(contingently or otherwise) to purchase or repurchase or otherwise
acquire, or in respect of which such Person has agreed to supply or
advance funds (whether by way of loan, stock or equity purchase, capital
contribution, makewell or otherwise) or otherwise to become directly or
indirectly liable.
Indemnified Liabilities. See Section 14.13.
Indemnified Parties. See Section 14.13.
Insurance Proceeds. With respect to any Casualty Event, any proceeds of
insurance, condemnation award or other compensation in respect thereof.
Interest Expense. For any period, the aggregate amount (determined on a
consolidated basis, after eliminating intercompany items, in accordance
with GAAP) of interest, commitment fees and letter of credit fees accrued
(whether or not paid) during such period (including without limitation
the Commitment Fee, the Issuance Fee and the Letter of Credit Fee and the
interest component of Capital Lease Obligations, but excluding
non-recurring structuring and facility fees payable under the Fee Letter
and interest in respect of overdue trade payables) by the Companies in
respect of all Indebtedness for borrowed money.
<PAGE>
Interest Period. With respect to each LIBOR Loan, the period commencing
on the date such Loan is made or converted from a Base Rate Loan, or the
last day of the immediately preceding Interest Period, as to LIBOR Loans
being continued as such, and ending one (1), two (2), three (3) or six
(6) months thereafter, as the Borrower may elect in the applicable Loan
Request or Interest Rate Option Notice, provided that:
(a) any Interest Period (other than an Interest Period
determined pursuant to clause (d) below) that would otherwise end on a
day that is not a Business Day shall be extended to the next succeeding
Business Day unless such Business Day falls in the next calendar month,
in which case such Interest Period shall end on the immediately preceding
Business Day;
(b) if the Borrower shall fail to give notice as provided in
Section 1.04, the Borrower shall be deemed to have requested a conversion
of the affected LIBOR Loan to a Base Rate Loan on the last day of the
then current Interest Period with respect thereto;
(c) any Interest Period relating to a LIBOR Loan that begins on
the last Business Day of a calendar month (or on a day for which there is
no numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (d) below, end on the last
Business Day of a calendar month;
(d) any Interest Period related to a LIBOR Loan that would
otherwise end after the final maturity date of the Loans shall end on
such final maturity date;
(e) no Interest Period shall include a principal repayment date
for the Loans unless an aggregate principal amount of Loans at least
equal to the principal amount due on such principal repayment date shall
be Base Rate Loans or LIBOR Loans having Interest Periods ending on or
before such date; and
(f) notwithstanding clauses (d) and (e) above, no Interest
Period shall have a duration of less than one (1) month.
Interest Rate Option Notice. A notice given by the Borrower to the Agent
of the Borrower's election to convert Loans to a different type or
continue Loans as the same type, in accordance with Section 1.04(c).
Issuance Fee. See Section 1.02.
<PAGE>
Issuing Bank. Bankers Trust Company, any affiliate thereof designated by
Bankers Trust Company or any other Lender which may serve as the "Issuing
Bank" in the event that Bankers Trust Company elects to cease providing
letter of credit services hereunder.
Junior Reorganization Securities. With respect to any Seller
Subordination Agreement, debt or equity securities of the Company
obligated under the applicable Permitted Seller Subordinated Debt, or of
any successor corporation provided for by a plan of reorganization, that
are subordinated at least to the same extent that such Permitted Seller
Subordinated Debt is subordinated to the payment of the Obligations then
outstanding (including all limitations on rights of action set forth in
such Seller Subordination Agreement and all other obligations and
restrictions imposed thereunder); provided that (a) if a new corporation
results from such reorganization, such corporation shall have assumed all
Obligations not paid in full in cash in connection with such
reorganization and (b) no such debt or equity securities shall be
permitted if the issuance thereof causes or could cause the applicable
Permitted Seller Subordinated Debt to be treated in any bankruptcy,
reorganization or similar proceeding as part of (i) the same class of
claims as any of the Obligations or (ii) any class of claims pari passu
with, or senior to, any of the Obligations with respect to any payment or
distribution.
Lender Default. (a) The refusal (which has not been retracted) of a
Lender to make available its portion of any Loan or, if applicable, to
fund its portion of any Letter of Credit Disbursement, or (b) a Lender
having notified the Borrower and/or the Agent in writing that it does not
intend to lend under this Agreement or comply with its obligation, if
any, with respect to any Letter of Credit Disbursement; in either case
other than by reason of any failure of the Borrower to meet any material
condition precedent thereto hereunder.
Lenders. See the Preamble.
Letter of Credit and Letters of Credit. See Section 1.02.
Letter of Credit Disbursement. See Section 1.02.
Letter of Credit Documents. See Section 1.02.
Letter of Credit Exposure. The sum of (a) the aggregate amount of all
Reimbursement Obligations and (b) the aggregate undrawn amount under all
outstanding Letters of Credit. The Letter of Credit Exposure of any
Lender at any time shall mean its pro rata percentage of the aggregate
Letter of Credit Exposure, based on the aggregate Commitments.
<PAGE>
Letter of Credit Fee. See Section 1.02.
Letter of Credit Request. See Section 1.02.
LIBOR Base Rate. With respect to each day during each Interest Period
pertaining to any LIBOR Loan, the rate per annum determined by the Agent
to be the arithmetic mean of the offered rates for deposits in Dollars
with a term comparable to such Interest Period that appears on the
Telerate British Bankers Assoc. Interest Settlement Rates Page (as
defined below) at approximately 11:00 A.M., London time, on the second
full Business Day preceding the first day of such Interest Period;
provided, however, that if there shall at any time no longer exist a
Telerate British Bankers Assoc. Interest Settlement Rates Page, the term
"LIBOR Base Rate" shall mean, with respect to each day during each
Interest Period pertaining to any LIBOR Loan, the rate per annum equal to
the rate at which the Agent is offered Dollar deposits at or about 10:00
A.M., New York City time, two (2) Business Days prior to the beginning of
such Interest Period in the London interbank deposit market where the
eurodollar and foreign currency and exchange operations in respect of its
LIBOR Loans are then being conducted for delivery on the first day of
such Interest Period for the number of days comprised therein and in an
amount comparable to the amount of its LIBOR Loan to be outstanding
during such Interest Period. As used herein, the "Telerate British
Bankers Assoc. Interest Settlement Rates Page" means the display
designated as Page 3750 on the Telerate System Incorporated Service (or
such other page as may replace such page on such service for the purpose
of displaying the rates at which Dollar deposits are offered by leading
banks in the London interbank deposit market).
LIBOR Loans. Loans bearing interest at a rate determined on the basis of
the LIBOR Rate.
LIBOR Rate. With respect to each day during each Interest Period
pertaining to a LIBOR Loan, a rate per annum determined for such day in
accordance with the following formula (rounded upward, if necessary, to
the nearest 1/16th of 1%):
LIBOR Base Rate
1.00 - LIBOR Reserve Requirements
LIBOR Reserve Requirements. For any day as applied to a LIBOR Loan, the
aggregate (without duplication) of the rates (expressed as a decimal
fraction) of reserve requirements in effect on such day (including
without limitation basic, supplemental, marginal and emergency reserves)
under any regulations of the Board of Governors of the Federal Reserve
System (or other Governmental Authority having jurisdiction with respect
thereto) prescribed for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of such Board) maintained by a
member bank of the Federal Reserve System.
License Agreements. The several Operating Agreements dated as of October
31, 1994 between PBT and each of the License Subsidiaries, as the same
are in effect as of the date hereof, and all similar Operating Agreements
entered into after the date hereof in connection with the acquisition of
new Stations..
Licenses. A license, authorization or permit to construct, own or operate
any Station granted by the FCC or any other Governmental Authority. The
term "License" shall include each of the Licenses set forth on Schedule
4.07(b).
License Subsidiaries. WDBD License Corp., WDSI License Corp., HMW, Inc.,
Pegasus Broadcast Associates, L.P., and WOLF License Corp., each a
Subsidiary of Pegasus Broadcast Television, Inc. formed for the sole
purpose of owning one or more FCC Licenses.
<PAGE>
Liens. See Section 4.13.
LMA. A local marketing agreement, program service agreement or time
brokerage agreement between a broadcaster and a television station
licensee pursuant to which the broadcaster provides programming to, and
retains the advertising revenues of, such station in exchange for fees
paid to licensee.
LMA Purchase Option. With respect to any Permitted LMA, any option to
purchase the broadcast station or assets subject thereto which is binding
upon any one or more of the Companies.
Loan Documents. This Agreement, the Notes, the Security Documents and all
other agreements, instruments and certificates contemplated hereby and
thereby, including without limitation any Rate Hedging Agreements entered
into with any of the Lenders or their Affiliates.
Loan Request. See Section 1.04.
Loans. See Section 1.01.
Location Cash Flow. With respect to any Subsidiary or Subsidiaries of the
Borrower, for any fiscal period, EBITDA for such period derived from such
segment(s), after restoring thereto amounts deducted for corporate
overhead charges, determined on a consolidated basis, in accordance with
GAAP.
Maintenance Capital Expenditures. For any period, Capital Expenditures
incurred by the Companies during such period, excluding any portion of
Subscriber Acquisition Costs which would otherwise be capitalized in
accordance with GAAP.
Management Fees. Amounts due and payable by the Companies to the Manager
in consideration for management and administrative support services.
Manager. Pegasus Communications Management Company, a Pennsylvania
corporation which is wholly owned by the Parent.
Margin Stock. See Section 4.17.
Material Adverse Effect. (a) An adverse effect on the validity or
enforceability of this Agreement or any of the other Loan Documents in
any material respect, (b) an adverse effect on the condition (financial
or other), business, results of operations, prospects or properties of
the Borrower and its Subsidiaries, taken as a whole, in any material
respect or (c) an impairment of the ability of the Companies to fulfill
their obligations under this Agreement or any other Loan Document to
which any Company is a party, in any material respect.
MCT. MCT Cablevision Limited Partnership, a Delaware limited partnership
which is a Subsidiary of Pegasus Cable Television, Inc.
<PAGE>
MCT Note Documents. The $15,000,000 Second Amended and Restated
Promissory Note dated March 12, 1993, issued to Philips Credit
Corporation by MCT; endorsed by Philips Credit Corporation to the
Borrower and by the Borrower to the Agent; the $9,074,135.13 Second
Amended and Restated Promissory Note dated March 12, 1993, issued to
Philips Credit Corporation by MCT, endorsed by Philips Credit Corporation
to the Borrower and by the Borrower to the Agent; and any and all other
instruments, documents, certificates and agreements executed and
delivered in connection therewith.
MCT Systems. The Systems serving Mayaguez, Puerto Rico and certain
contiguous communities and owned and operated by MCT.
Net Cash Proceeds. With respect to any Disposition, the aggregate amount
of all cash payments received by (a) any Company or (b) any Qualified
Intermediary, as defined in the United States Treasury Regulations
promulgated under Section 1031 of the Code and as used in connection with
a like-kind exchange under such Section 1031, directly or indirectly, in
connection with such Disposition, whether at the time thereof or after
such Disposition under deferred payment arrangements or investments
entered into or received in connection with such Disposition, minus the
aggregate amount of any legal, accounting, regulatory, title and
recording tax expenses, commissions and other fees and expenses paid by
any Company in connection with such Disposition, and minus any income
taxes payable by any Company in connection with such Disposition.
Net Income. For any period, net income of the Companies from their
respective operations, after deducting all operating expenses, provisions
for all taxes and reserves (including Management Fees and reserves for
deferred income taxes) and all other proper deductions (including
Interest Expense), but excluding (a) any gains or losses derived from any
sales of assets made during such period, to the extent such gains or
losses are properly includable in the determination of Net Income such
period, (b) the effect of Trades, (c) write-offs of deferred financing
costs incurred by the Borrower and PSH under their most recently existing
senior credit facilities and (d) non-cash restructuring charges, provided
that subsequent cash payments made in respect of such charges shall be
deducted in determining Net Income for the relevant period, all
determined on a consolidated basis, after eliminating intercompany items,
in accordance with GAAP
Net Subscriber Additions. For any period, Gross Subscriber Additions for
such period minus Churn during such period.
New England Systems. The Systems located in Connecticut and
Massachusetts.
Notes. See Section 1.01.
NRTC. The National Rural Telecommunications Cooperative, a District of
Columbia corporation, and any successor thereto under the NRTC Member
Agreements.
<PAGE>
NRTC Consents. In connection with any Acquisition of DBS Rights, all NRTC
or DirecTv consents to the collateral assignment of any related NRTC
Member Agreements and any other DBS Agreements to the Agent, on behalf of
the Lenders.
NRTC Letter of Credit Exposure. That portion of the aggregate Letter of
Credit Exposure arising from NRTC Letters of Credit.
NRTC Letters of Credit. Any and all Letters of Credit issued in favor of
the NRTC, as beneficiary.
NRTC Member Agreements. (a) The NRTC/Member Agreements for Marketing and
Distribution of DBS Services between any Company and the NRTC listed as
such on Schedule 4.07, as amended through the date hereof (including
without limitation the amendment described on Schedule 4.07 providing for
certain letter of credit requirements in connection with the delivery of
DBS by the Subsidiaries to certain households in the DBS Subscriber
Areas), and (b) the NRTC/Member DBS Product Retail Agreements listed on
Schedule 4.07, in each case as originally executed and delivered and as
amended in accordance with Section 7.11, pursuant to which the DBS
Subsidiaries hold the exclusive rights to provide cable programming
services and all other video, audio and data packages transmitted by
DirecTv over the DirecTv frequencies (as defined therein) to residential
and commercial subscribers in specified service areas, and any other
NRTC/Member Agreements for Marketing and Distribution of DBS Services,
NRTC/Member DBS Product Retail Agreements or other agreements between any
Company and the NRTC for the provision of DBS services in any other
specified service areas not covered by the existing NRTC Member
Agreements referred to above.
Obligations. The Loans, the Borrower's obligations to repay Letter of
Credit Disbursements and the other obligations of the Companies under
this Agreement and the other Loan Documents, including without limitation
any and all future loans, advances, debts, liabilities, obligations,
covenants and duties owing by the Companies to the Agent and the Lenders,
or any of them, of any kind or nature, whether or not evidenced by any
note, mortgage or other instrument, whether arising by reason of an
extension of credit, loan, guarantee, letter of credit, indemnification
or in any other manner, whether direct or indirect (including those
acquired by assignment), absolute or contingent, due or to become due,
now existing or hereafter arising and however acquired. The term
"Obligations" also includes, without limitation, all interest, charges,
expenses, fees (including attorneys', accountants', appraisers',
consultants' and other fees) and any other sums chargeable to the
Companies under this Agreement or any other Loan Documents.
Offering. See the Recitals.
Offering Memorandum. See the Recitals.
Opening Balance Sheet. See Section 4.01.
Parent. See the Preamble.
Parent Loans. Any and all unsecured loans made by the Parent to the
Borrower prior to the date of the first Loans under this Agreement up to
an aggregate principal amount outstanding at any time not exceeding
$47,000,000.
Participant. See Section 1.13.
Paying Subscriber. Any subscriber to DBS services provided by a DBS
Subsidiary (a) from whom such DBS Subsidiary has received at least one
payment for programming service, (b) whose account balance is not more
than sixty (60) days past due, measured from the invoice due date
thereof, without giving effect to any extensions thereof, and (c) who
shall not have disconnected service.
Payment Date. The last Business Day of each March, June, September and
December of each year.
PBT. Pegasus Broadcast Television, Inc., a Pennsylvania corporation
wholly owned by the Borrower.
PCC Consolidated Leverage Ratio. The meaning given to the term
"Indebtedness to Adjusted Operating Cash Flow Ratio" in the PCC
Indenture, as in effect on the date hereof, without giving effect to any
amendment thereto after the date hereof (unless the Required Lenders
agree in writing, in their sole discretion, that any such amendment shall
be given effect for purposes of this Agreement).
PCC Indenture. See the Recitals.
PCC Preferred Stock. The Parent's Series A Cumulative Exchangeable
Preferred Stock issued on January 27, 1997, on the terms and conditions
set forth in the PCC Preferred Stock Designation.
<PAGE>
PCC Preferred Stock Designation. The Certificate of Designation,
Preferences and Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications, Limitations and
Restrictions thereof of 12.75% Series A Cumulative Exchangeable Preferred
Stock of Pegasus Communications Corporation filed with the office of the
Secretary of State of the State of Delaware on January 24, 1997.
PCC Preferred Stock Dividends. See Section 5.05.
PCC Senior Notes. See the Recitals.
PCC Subordinated Notes. The Parent's 12.75% Senior Subordinated Exchange
Notes due 2007 issuable in exchange for PCC Preferred Stock pursuant to
the PCC Preferred Stock Designation.
PCT. Pegasus Cable Television, Inc., a Massachusetts corporation wholly
owned by the Borrower.
PCT-CONN. Pegasus Cable Television of Connecticut, Inc., a Connecticut
corporation wholly owned by PCT.
PCT-CONN Note Documents. The following documents: (a) that certain
Promissory Note and Loan Agreement dated as of February 18, 1993 by and
between Pegasus Cable Television of Connecticut, L.P., a Pennsylvania
limited partnership ("PCTOCLP"), and Pegasus Cable Television, L.P., a
Pennsylvania limited partnership ("PCTLP"), as (i) assigned and assumed
to and by PCT-CONN pursuant to (A) that certain Assignment and Assumption
Agreement dated as of October 31, 1994 among PCTOCLP, as assignor,
PCT-CONN, as assignee, and PCTLP, as lender and (B) that certain Bill of
Sale, General Assignment and Assumption Agreement dated October 31, 1994
between PCT-CONN, as buyer, and PCTOCLP, as seller, and (ii) assigned and
assumed to and by PCT pursuant to (A) that certain Assignment, Assumption
and Modification Agreement dated as of October 31, 1994 among PCT-CONN
(as assignee of PCTOCLP), PCTLP, as assignor, and PCT, as assignee, and
recorded with the Winchester, Connecticut Land Records on November 15,
1994 in Volume 254 at Page 508, and (B) that certain Bill of Sale,
General Assignment and Assumption Agreement dated October 31, 1994
between PCT, as buyer, and PCTLP, as seller, (b) that certain Amended and
Restated Security Agreement dated as of August 29, 1996 by and between
PCT-CONN and PCT; (c) that certain Amended and Restated Mortgage Deed
from PCT-CONN to PCT dated as of August 29, 1996 and recorded with the
Winchester, Connecticut Land Records on September 9, 1996 in Volume 264
at Page 780; (d) that certain Mortgage Deed from PCT-CONN to PCT dated as
of even date herewith; and (e) all related UCC-1 financing.
Pegasus San German. Pegasus Cable Television of San German, Inc., a
Delaware corporation wholly owned by PCT.
Permitted Acquisitions. An Acquisition by the Borrower or any Subsidiary
(including the transfer of assets by the Parent to the Borrower, for
further transfer to a Subsidiary, in each case as a capital contribution,
free and clear of any Liens, other than Permitted Liens), subject to the
fulfillment of the following conditions:
(a) If any such Acquisition involves consideration in excess
of $25,000,000 in the aggregate, such Acquisition shall require the prior
written approval of the Required Lenders, in their sole and absolute
discretion.
(b) If such Acquisition involves the purchase of stock or
other ownership interests, the same shall be effected in such a manner as
to assure that the acquired entity becomes a direct or indirect
Subsidiary of the Borrower and that the parent of such Subsidiary shall
own (i) all of such ownership interests or (ii) solely if such subsidiary
is a DBS Subsidiary, at least eighty percent (80%) of all such ownership
interests, including at least eighty percent (80%) of all voting
ownership interests, or such greater percentage thereof as shall be
necessary, under applicable law or contract, to control (legally and
beneficially) such Subsidiary.
(c) If such Acquisition involves the acquisition of broadcast
television properties, each of the related FCC Licenses shall be held
after the Acquisition in a License Subsidiary and each such License
Subsidiary shall enter into an appropriate License Agreement with the
Subsidiary holding the operating assets for the related Station.
<PAGE>
(d) No later than (1) thirty (30) days (or such shorter period
as may be reasonably practicable, if approved by the Agent) prior to the
consummation of any such Acquisition or, if earlier, ten (10) business
days after the execution and delivery of the related Acquisition
Agreement, the Borrower shall have delivered to the Agent (in sufficient
copies for all the Lenders) copies of executed counterparts of such
Acquisition Agreement, together with all Schedules thereto, the forms of
any additional agreements or instruments to be executed at the closing
thereunder (to the extent available), and all applicable financial
information, including new Projections, through December 31, 2003,
updated to reflect such Acquisition and any related transactions, and
Subscriber Reports, (2) promptly following a request therefor, copies of
such other information or documents relating to such Acquisition as any
Lender shall have reasonably requested, and (3) promptly following the
consummation of such Acquisition, certified copies of the agreements,
instruments and documents referred to above to the extent the same has
been executed and delivered at the closing under such Acquisition
Agreement.
(e) The aggregate amount of all consideration payable by the
Borrower or any Subsidiary or Subsidiaries in connection with such
Acquisition (other than noncompetition and consulting agreements,
earn-outs and customary post-closing adjustments, escrows, holdbacks and
indemnities and Indebtedness permitted under Section 7.01) shall be
payable on the date of such Acquisition.
(f) Neither the Borrower nor any Subsidiary shall, in
connection with any such Acquisition, assume or remain liable with
respect to any indebtedness (including any material tax or ERISA
liability) of the related Seller, except (i) to the extent permitted
under Section 7.01 and (ii) obligations of such Seller incurred in the
ordinary course of business and necessary or desirable to the continued
operation of the underlying properties, and any other such liabilities or
obligations not permitted to be assumed or otherwise supported by any of
the Companies hereunder shall be paid in full or released as to the
assets being so acquired on or before the consummation of such
Acquisition.
(g) All other assets and properties acquired in connection
with any such Acquisition shall be free and clear of any liens, charges
and other encumbrances, other than Permitted Liens.
(h) The Borrower shall have complied as applicable with all of
the provisions in Section 2.01, including the execution and delivery of
such additional agreements, instruments, certificates, documents,
consents, environmental site assessments, opinions and other papers as
the Agent may reasonably require.
(i) Immediately prior to any such Acquisition and after giving
effect thereto, the Adjusted Available Commitments shall not be less than
$15,000,000 and no Default shall have occurred and be continuing.
(j) Without limiting the generality of the foregoing, after
giving effect to such Acquisition the Borrower shall be in compliance
with the provisions of Article V, (i) calculated on a pro forma basis as
of the end of and for the fiscal quarter most recently ended prior to the
date of such Acquisition for which financial statements are required to
be provided (and have been so delivered) under Section 6.05 and (ii)
under the Borrower's updated Projections referred to above. The Borrower
shall provide to the Agent a certificate signed on behalf of the Borrower
by its Chief Financial Officer demonstrating such compliance in
reasonable detail.
(k) On or before the consummation of each such Acquisition,
the Borrower shall deliver to the Agent (in sufficient copies for all the
Lenders) and to the Agent's counsel a compliance certificate,
substantially in the form of Schedule 11.01(a) hereto or such other form
as shall be satisfactory to the Agent, duly executed by the Borrower's
chief executive officer or chief financial officer, certifying as to the
matters set forth above with respect to such Acquisition. In the event
that such Acquisition is financed, in whole or in part, with the proceeds
of Loans hereunder, the foregoing requirement shall be deemed satisfied
upon delivery of the compliance certificate required under Section 3.02,
in the form of Schedule 3.02(d), in connection with such Loans.
(l) On or before the consummation of each such Acquisition
involving the purchase or formation of a new Subsidiary and/or the
execution of additional Security Documents or any other Loan Document, or
otherwise, if reasonably required by the Agent, the Agent shall have
received the favorable written opinions of (i) general counsel or
regularly employed outside counsel to the Companies and (ii) special FCC
counsel to the Companies (in the case of Acquisitions of cable television
and broadcast television properties), in each case dated the date of such
Loans, addressed to the Agent and the Lenders and substantially in the
forms attached as Schedules 11.01(b) and (c) hereto.
<PAGE>
(m) Only if reasonably requested in connection with the
recording of any mortgages or similar instruments or any material issues
of state law raised in connection with such Acquisition, the Agent shall
have received the favorable opinion of local counsel to the Companies,
dated the date of such Acquisition, addressed to the Agent and the
Lenders and substantially in the form attached as Schedule 11.01(d)
hereto.
Permitted Investments. (a) Investments in property to be used by the
Subsidiaries in the ordinary course of business; (b) current assets
arising from the sale of goods and services in the ordinary course of
business; (c) investments (of one year or less) in direct or guaranteed
obligations of the United States, or any agency thereof; (d) investments
(of 90 days or less) in certificates of deposit of the Lenders or any
other domestic commercial bank of recognized standing having capital,
surplus and undivided profits in excess of $100,000,000, membership in
the Federal Deposit Insurance Corporation ("FDIC") and senior debt rated
carrying one of the two highest ratings of Standard & Poor's Ratings
Service, A Division of McGraw Hill, Inc., or Moody's Investors Service,
Inc. (an "Approved Institution"); (e) investments (of 90 days or less) in
commercial paper given one of the two highest ratings by Standard and
Poor's Ratings Service, A Division of McGraw Hill, Inc., or by Moody's
Investors Service, Inc.; (f) investments redeemable at any time without
penalty in money market instruments placed through a Lender or an
Approved Institution; (g) existing investments by the Companies in
Subsidiaries; (h) loans between the Borrower and the Subsidiaries which
are permitted under Section 7.01(k); (i) repurchase agreements fully
collateralized by United States government securities; (j) deposits fully
insured by the FDIC; (k) short-term loans to employees and advances to
employees in the ordinary course of business for the payment of bona
fide, properly documented, business expenses to be incurred on behalf of
the Companies, provided that the aggregate outstanding amount of all such
loans and advances shall not exceed $50,000 in the aggregate at any time;
and (l) investments made in connection with Acquisitions permitted
hereunder.
Permitted Liens. See Section 4.13.
Permitted LMA. An LMA which meets the following criteria:
(a) The LMA is entered into between an FCC television station
licensee or permittee and a Subsidiary.
(b) Excess cash flow of each such Subsidiary which is a
special purpose Subsidiary formed for the purpose of operating under the
LMA shall be dividended to the Borrower on a periodic basis as reasonably
required by the Agent, but, in any event, at least once in each fiscal
year.
(c) No LMA shall bind any Company to purchase the broadcast
station or assets subject thereto (unless such Acquisition is otherwise
permitted hereunder).
(d) The Borrower will provide to the Agent at least ten (10)
Business Days' notice prior to the execution and delivery of any LMA
entered into after the date hereof, together with updated Projections
showing calculations of covenant ratios and demonstrating compliance
therewith, and any other information or documents reasonably requested by
the Agent or any Lender.
Permitted Preferred Stock. (a) The Series A Preferred Stock of Pegasus
Satellite Television of Virginia, Inc. having a liquidation preference of
$3,000,000, issued in connection with a prior acquisition, and (b) any
other preferred stock of any of the Companies issued to Sellers in
connection with Permitted Acquisitions which (i) has terms and conditions
satisfactory to the Agent and (ii) without limiting the generality of the
foregoing, (A) will have no redemption or other exit rights which arise
earlier than one year after the scheduled maturity of the Notes, (B) will
not be redeemable, in any event (other than with shares of the common
stock of the Companies or securities of the Parent issued without any
resulting Event of Default), until all of the Obligations have been paid
in full in cash, (C) will not carry any dividend rights (other than
dividends paid in shares of Permitted Preferred Stock or common stock of
the Companies or the Parent issued without any resulting Event of
Default), and (D) will otherwise conform with the meaning of "Qualified
Subsidiary Stock", as such term is defined in the PCC Preferred Stock
Designation.
Permitted Seller Debt. Indebtedness of the Companies (other than
Indebtedness described in Schedule 7.01) to Sellers incurred in
connection with Permitted Acquisitions which (a) has terms and conditions
satisfactory to the Agent and (b) is not secured other than by a Seller
Letter of Credit.
Permitted Seller Debt Outstandings. As of any date, all principal,
overdue interest and other amounts then outstanding in respect of
Permitted Seller Debt, but excluding accrued interest which is not yet
overdue.
<PAGE>
Permitted Seller Subordinated Debt. Indebtedness of the Companies to
Sellers which is incurred in connection with Permitted Acquisitions and
(a) is subordinated to any Indebtedness of the Companies to the Agent or
the Lenders pursuant to one or more Seller Subordination Agreements and
(b) is unsecured.
Person or person. Any individual, corporation, partnership, limited
liability company, joint venture, trust, business unit, unincorporated
organization, or other organization, whether or not a legal entity, or
any government or any agency or political subdivision thereof.
Pricing Period. See Section 1.03.
Pricing Ratio. See Section 1.03.
Projections. See Section 4.21.
Properties. See Section 4.24.
PSH. Pegasus Satellite Holdings, Inc., a Delaware corporation and the
former parent of the DBS Subsidiaries, immediately prior to the DBS
Transfer.
PSTH. PST Holdings, Inc., a Delaware corporation which is wholly owned by
the Borrower and is the parent of the DBS Subsidiaries.
Quarterly Dates. The last Business Day of each January, April, July and
October of each fiscal year.
Rate Hedging Agreements. Any written agreements evidencing Rate Hedging
Obligations, including without limitation the LIBOR provisions of this
Agreement.
Rate Hedging Obligations. Any and all obligations of the Borrower,
whether direct or indirect and whether absolute or contingent, at any
time created, arising, evidenced or acquired (including all renewals,
extensions, modifications and amendments thereof and all substitutions
therefor), in respect of: (a) any and all agreements, arrangements,
devices and instruments designed or intended to protect at least one of
the parties thereto from the fluctuations of interest rates, exchange
rates or forward rates applicable to such party's assets, liabilities or
exchange transactions, including without limitation dollar-denominated or
cross currency interest rate exchange agreements, forward currency
exchange agreements, interest rate cap or collar protection agreements,
forward rate currency or interest rate options, puts and warrants and
so-called "rate swap" agreements; and (b) any and all cancellations,
buy-backs, reversals, terminations or assignments of any of the
foregoing.
Rate Regulation Act. See Section 4.10.
Rate Regulation Rules. See Section 4.10.
Recovering Party. See Section 1.14.
Recovery. See Section 1.14.
Regulation D. Regulation D of the Board of Governors of the Federal
Reserve System, as the same may be amended or supplemented from time to
time.
Regulatory Change. With respect to any Lender, any change after the date
of this Agreement in any law, rule or regulation (including without
limitation Regulation D) of the United States, any state or any other
nation or political subdivision thereof, including without limitation the
issuance of any final regulations or guidelines, or the adoption or
making after the date of this Agreement of any interpretation, directive
or request, applying to a class of banks in which such Lender is included
under any such law, rule or regulation (whether or not having the force
of law and whether or not failure to comply therewith would be unlawful)
by any court or governmental or monetary authority charged with the
interpretation thereof.
Reimbursement Obligations. As of any date, all then outstanding
obligations of the Companies to repay Letter of Credit Disbursements.
<PAGE>
Related Lender Party. With respect to any Lender, such Lender's parent
company and/or any affiliate of such Lender which is at least fifty
percent (50%) owned by such Lender or its parent company or, in the case
of any Lender which is a fund investing in bank loans, any other fund
that invests in bank loans and is managed by the same investment advisor
of such Lender or by a controlled affiliate of such investment advisor.
Remedial Work. All activities, including, without limitation, cleanup
design and implementation, removal activities, investigation, field and
laboratory testing and analysis, monitoring and other remedial and
response actions, taken or to be taken, arising out of or in connection
with Hazardous Materials, including without limitation all activities
included within the meaning of the terms "removal," "remedial action" or
"response," as defined in 42 U.S.C. Section 9601(23), (24) and (25).
Required Lenders. At any time, Lenders, excluding Defaulting Lenders,
holding at least sixty-six and two-thirds percent (66 2/3%) of the sum of
(a) the aggregate outstanding principal amount of the Loans, (b) the
aggregate Letter of Credit Exposure and (c) the aggregate amount of the
unutilized Commitments; provided, however, that, solely with respect to
consents required in connection with an Acquisition or Disposition, the
term "Required Lenders" shall mean Lenders, excluding Defaulting Lenders,
holding more than fifty percent (50%) of such sum.
Required Payment. See Section 1.15.
Replacement Lender. Any entity which becomes a Lender in accordance with
the provisions of Article XIII.
Restoration Period. With respect to any Casualty Event resulting in the
proceeds of insurance, condemnation award or other compensation, one
hundred eighty (180) days following receipt by the Borrower, or any other
Company, of such proceeds.
Restricted Payment. Any distribution or payment of cash or property, or
both, directly or indirectly (a) in respect of any Subordinated Debt, or
(b) to any partner, stockholder or other equityholder of any of the
Companies, any of the Parent Affiliates or of any of their respective
Affiliates for any reason whatsoever, including without limitation,
salaries, loans, debt repayment, consulting fees, Management Fees,
expense reimbursements and dividends, distributions, put, call or
redemption payments and any other payments in respect of equity
interests; provided, however, that Restricted Payments shall not include:
(i) reasonable Transaction Costs;
(ii) payments under the Tax Sharing Agreement arising solely as
a result of the operations of the Companies; and
(iii) transactions that comply with Section 7.11.
Revolvers. See Section 1.01.
Revolving Credit Period. The period from the date of this Agreement to
the Expiration Date.
San German Systems. The Systems serving San German, Puerto Rico, and
certain contiguous communities and owned and operated by Pegasus San
German.
Scheduled Principal Payments. For any fiscal period, (a) the aggregate
principal amount of Loans outstanding on the first day of such period
minus (b) the aggregate Commitments at the close of business on the first
Business Day following the end of such period, as reduced as provided
under Section 1.01(e), but in no event less than zero.
<PAGE>
SEC. See Section 6.05.
Security Agreements. The Security and Pledge Agreement signed by the
Borrower and the Guaranty, Security and Pledge Agreement signed by each
of the Subsidiaries (a) as of the Closing Date or (b) with respect to
Subsidiaries formed or acquired after the date hereof, by joinder
thereto, in connection with their formation or Acquisition as required
under Section 2.01.
Security Document(s). See Section 2.01.
Seller. With respect to any Acquisition permitted hereunder, the owner of
the stock (or other ownership interests) to be acquired, or the entity
the assets and properties of which are to be acquired by the related
respective Company pursuant to such Acquisition.
Seller Letters of Credit. (a) Any and all Letters of Credit issued to
replace letters of credit previously provided by Canadian Imperial Bank
of Commerce to secure Indebtedness permitted under Schedule 7.01 and
designated therein as so secured and (b) any and all Letters of Credit
issued in favor of Sellers, as beneficiaries, in connection with
Permitted Acquisitions.
Seller Letter of Credit Exposure. The portion of the aggregate Letter of
Credit Exposure arising from Seller Letters of Credit.
Seller Subordination Agreements. See Section 2.01.
Significant Franchise. See paragraph (g) of Article VIII.
Specified Authorities. (a) With respect to cable television properties,
the communities included in the related Franchise Areas, the FCC, the
Copyright Office, the FAA, the Commonwealth of Puerto Rico, the
Department of Public Utilities of the State of Connecticut and all other
Governmental Authorities having jurisdiction over the Companies and/or
any CATV Franchise; (b) with respect to broadcast television properties,
the FCC, the FAA and all other Governmental Authorities having
jurisdiction over the Companies and/or any FCC License; and (c) with
respect to DBS Rights, all Governmental Authorities, if any, having
jurisdiction over the Companies and/or any such DBS Rights.
<PAGE>
Specified Subsidiaries. (a) WTLH, Inc. and WTLH License Corp., until such
time as the $3,050,000 promissory note owed by WTLH License Corp. to
General Management Consultants, Inc. and all related indebtedness is paid
in full and each such Subsidiary has complied in full with the
requirements of Section 2.01, and (b) Pegasus Cable Television of Anasco,
Inc. and Pegasus Anasco Holdings, Inc., until each such Subsidiary has
complied in full with the requirements of Section 2.01.
Stations. All of the television stations owned or programmed by the
Companies, where each such station consists of all of the properties and
operating rights constituting a complete, fully integrated system for
transmitting broadcast television signals from a transmitter licensed by
the FCC, together with any subsystem ancillary thereto, without payment
of any fee by the Persons receiving such signals.
Subordinated Debt. (a) Indebtedness of the Borrower and any of its
Subsidiaries to the Subordinated Noteholders under the Subordinated
Indenture and the Subordinated Notes, (b) Seller Subordinated Debt and
(c) any Indebtedness which is subject to an Affiliate Subordination
Agreement.
Subordinated Debt Documents. The Subordinated Indenture, the Subordinated
Notes, the Subsidiary Guarantees executed as required under the
Subordinated Indenture, the Stockholders Agreement executed by the
Subordinated Noteholders in connection with the issuance to them of 8,500
shares of the Borrower's Class B Common Stock and any and all other
agreements and instruments executed pursuant thereto.
Subordinated Indenture. The Indenture dated as of July 7, 1995 among the
Borrower, as Issuer, certain of the Subsidiaries, as Guarantors, and
First Union National Bank (successor to First Fidelity Bank, National
Association), as Trustee, providing for the issuance of the Subordinated
Notes, as amended pursuant to the First Supplemental Indenture dated as
of September 26, 1997.
Subordinated Indenture Default. Any "Event of Default", as defined in the
Subordinated Indenture.
Subordinated Noteholders. The registered holders from time to time of the
Subordinated Notes.
Subordinated Notes. The 12 1/2% Series B Senior Subordinated Notes due
2005 of the Borrower, in the aggregate principal amount of $85,000,000,
issued to the Subordinated Noteholders under the Subordinated Indenture
on November 14, 1995, in exchange for the 12 1/2% Series A Senior
Subordinated Note due 2005 of the Borrower in the same aggregate
principal amount issued under the Subordinated Indenture on July 7, 1995.
Subscriber Acquisition Costs. For any period, those expenses and
capitalized costs incurred in the generation of Gross Subscriber
Additions, such as sales commissions, advertising expenses and
promotional expenses, including the amount, if any, by which the cost of
equipment sold to subscribers to the DBS services offered by the DBS
Subsidiaries (including rebates, subsidies and the like) exceeds the
revenue generated from such sale(s).
Subscriber Reports. See Section 6.05(f).
Subsidiary. (a) Any corporation, association, joint stock company,
business trust or other similar organization of which more than 50% of
the ordinary voting power for the election of a majority of the members
of the board of directors or other governing body of such entity is held
or controlled by the Borrower or a Subsidiary of the Borrower; (b) any
other such organization the management of which is directly or indirectly
controlled by the Borrower or a Subsidiary of the Borrower through the
exercise of voting power or otherwise; or (c) any joint venture,
association, partnership, limited liability company or other entity in
which the Borrower or a Subsidiary of the Borrower has a 50% equity
interest. All of the Borrower's Subsidiaries as of the date hereof are
listed on Schedule 4.02 and such term shall include each new Subsidiary
formed after the date hereof in compliance with the terms of the
foregoing definition and this Agreement.
Systems. All of the cable television systems owned or managed by the
Companies, where each such system consists of a cable distribution system
that receives broadcast signals by antennae, microwave transmissions,
satellite transmission or any other form of transmission and that
amplifies such signals and distributes them to Persons who pay to receive
such signals.
<PAGE>
Tax Sharing Agreement. The Amended and Restated Tax Sharing Agreement
dated as of July 1, 1997 among the Parent and its subsidiaries.
Taxes. See Section 1.10.
Third Parties. See Section 14.02.
Total Debt Service. For any period, the aggregate amount (determined on a
consolidated basis, after eliminating intercompany items, in accordance
with GAAP) of principal and premium, if any, and cash interest,
commitment fees and agency fees and other amounts required to be paid
during such period in respect of Total Funded Debt. For purposes of this
definition, the aggregate amount of all principal required to be paid in
respect of the Loans shall be limited to Scheduled Principal Payments.
Total Funded Debt. At any time, all outstanding Funded Debt of the
Borrower and its Subsidiaries plus the aggregate amount payable (whether
or not due) in respect of any and all LMA Purchase Options, determined on
a consolidated basis, after eliminating intercompany items, in accordance
with GAAP.
Total Interest Expense. For any period, Interest Expense for such period
which is payable, or currently paid, in cash.
Tower Site Leases. See Section 4.13.
Trades. Those items of income and expense of the Companies which do not
represent the right to receive payment in cash or the obligation to make
payment in cash and which arise pursuant to so-called trade or barter
transactions.
Transaction Costs. For any period, nonrecurring out-of-pocket expenses
(including attorneys' fees, investment banking fees and facility fees,
but excluding recurring costs such as commitment and agency fees) accrued
by the Borrower and the Subsidiaries to Persons who are not Affiliates of
any Company during such period in connection with the closing of the
transactions under this Agreement, the DBS Transfer, any Permitted
Acquisition and any other transactions occurring after the Closing Date
which are consented to in writing by the Required Lenders.
Transaction Documents. See Section 4.03.
Working Capital. On any date, Current Assets minus Current Liabilities on
such date.
<PAGE>
XII. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS; SEPARATE ACTIONS BY THE
LENDERS.
(a) This Agreement (including the Schedules hereto) and the other Loan
Documents constitute the entire agreement of the parties herein and supersede
any and all prior agreements, written or oral, as to the matters contained
herein, and no modification or waiver of any provision hereof or of the Notes or
any other Loan Document, nor consent to the departure by any Company therefrom,
shall be effective unless the same is in writing, and then such waiver or
consent shall be effective only in the specific instance, and for the purpose,
for which given. Except as hereafter provided, the consent of the Required
Lenders shall be required and sufficient (i) to amend, with the consent of the
Borrower, any term of this Agreement, the Notes or any other Loan Document or to
waive the observance of any such term (either generally or in a particular
instance or either retroactively or prospectively); (ii) to take or refrain from
taking any action under this Agreement, the Notes, any other Loan Document or
applicable law, including, without limitation, (A) the acceleration of the
payment of the Notes, (B) the termination of the Commitments, (C) the exercise
of the Agent's and the Lenders' remedies hereunder and under the Security
Documents and (D) the giving of any approvals, consents, directions or
instructions required under this Agreement or the Security Documents; provided
that no such amendment, waiver, consent or other action shall, without the prior
written consent of each Lender (other than a Defaulting Lender and, with respect
to matters addressed in clause (1) below, only such Lenders holding Obligations
directly affected thereby),
(1) extend the final scheduled maturity of any Loan or Note or
extend the stated maturity of any Letter of Credit beyond the Expiration
Date (it being understood that no waiver or modification of any
condition precedent, covenant or Default shall constitute any such
extension), or reduce the rate or extend the time of payment of interest
or fees thereon, or reduce the principal amount thereof (it being
understood that no amendment or modification to the financial
definitions in this Agreement and no waiver or modification of any
condition precedent, covenant or Default shall constitute a reduction in
any rate of interest or fees for purposes of this clause (1));
(2) release all or substantially all of the Collateral (except
as expressly provided in the Security Documents) under all of the
Security Documents;
(3) amend, modify or waive any provision of this Article XII;
(4) reduce any percentage specified in the definition of
Required Lenders (it being understood that, with the consent of the
Required Lenders, additional extensions of credit pursuant to this
Agreement may be included in the determination of the Required Lenders
on substantially the same basis as the Commitments are included on the
Closing Date); or
<PAGE>
(5) consent to the assignment or transfer by the Borrower of any
of its rights and obligations under this Agreement;
and provided, further, that no such amendment, waiver, consent or other action
shall
(x) increase the Commitment of any Lender over the amount
thereof then in effect without the consent of such Lender (it being
understood that (aa) no waiver or modification of any condition
precedent, covenant or Default or of any mandatory reduction in the
aggregate Commitments shall constitute an increase in the Commitment of
any Lender and (bb) an increase in the available portion of any
Commitment of any Lender shall not constitute an increase in the
Commitment of such Lender);
(y) without the consent of the Issuing Bank, amend, modify or
waive any provision of Section 1.02 or alter its rights or obligations
with respect to Letters of Credit;
(z) without the consent of the Agent, amend, modify or waive any
provision of Article X as same applies to the Agent or any other
provision of any Loan Document as same relates to the rights or
obligations of the Agent;
and provided, further, that neither notice to, nor the consent of, the Borrower
shall be required for any modification, amendment or waiver of the provisions of
this Article XII governing the number of Lenders required to consent to any act
or omission under the Loan Documents or, subject to Article XIII, of the
definition of "Required Lenders".
(b) If, in connection with any such proposed amendment, waiver, consent
or other action under any of the provisions of this Agreement as contemplated by
clauses (1) through (5), of subsection (a) above, the consent of the Required
Lenders is obtained but the consent of one or more of such other Lenders whose
consent is required is not obtained, then the Borrower shall have the right (so
long as all non-consenting Lenders whose individual consent is required are
treated as described in either clause (i) or (ii) below), to either (i) replace
such non-consenting Lender or Lenders with one or more Replacement Lenders, so
long as at the time of such replacement each such Replacement Lender consents to
the proposed amendment, waiver, consent or other action or (ii) terminate such
non-consenting Lender's Commitment (if such Lender's consent is required as a
result of its Commitment) and repay all outstanding Loans of such Lender which
gave rise to the need to obtain such Lender's consent and/or cash collateralize
its Letter of Credit Exposure, in accordance with Sections 1.02(f) and 1.06(g),
provided that, unless the Commitment which is terminated and the Loans which are
repaid pursuant the preceding clause (ii) are immediately replaced in full at
such time through the addition of one or more new Lenders or the increase of the
Commitments and/or outstanding Loans of existing Lenders (which in each case
must specifically consent thereto), then in the case of any action pursuant to
the foregoing clause (ii), the Required Lenders (determined after giving effect
to the proposed action) shall specifically consent thereto, and provided,
further, that the Borrower shall not have the right to replace a Lender,
terminate its Commitment or repay its Loans solely as a result of the exercise
of such Lender's rights (and the withholding of any required consent by such
Lender) pursuant to the second proviso to subsection (a) of this Article XII.
(c) Any amendment or waiver effected in accordance with this Article XII
shall be binding upon each holder of any Note at the time outstanding, each
future holder of any Note and the Borrower. The Lenders' failure to insist
(directly or through the Agent) upon the strict performance of any term,
condition or other provision of this Agreement, any Note, or any of the Security
Documents or other Loan Documents, or to exercise any right or remedy hereunder
or thereunder, shall not constitute a waiver by the Lenders of any such term,
condition or other provision or default or Event of Default in connection
therewith, nor shall a single or partial exercise of any such right or remedy
preclude any other or future exercise, or the exercise of any other right or
remedy; and any waiver of any such term condition or other provision or of any
such default or Event of Default shall not affect or alter this Agreement, any
Note or any of the Security Documents or other Loan Documents, and each and
every term, condition and other provision of this Agreement, the Notes and the
Security Documents or other Loan Documents shall, in such event, continue in
full force and effect and shall be operative with respect to any other then
existing or subsequent default or Event of Default in connection therewith. An
Event of Default hereunder and a default under any Note or under any of the
Security Documents shall be deemed to be continuing unless and until cured or
waived in writing by the applicable Lenders, as provided in subsection (a)
above.
<PAGE>
XIII. BENEFIT OF AGREEMENT; ASSIGNMENTS AND PARTICIPATIONS
(a) This Agreement shall be binding upon and inure to the benefit of the
Borrower, the Lenders and the Agent and their respective successors and
permitted assigns, and all subsequent holders of any of the Notes or any portion
thereof.
(b) Each Lender may assign its rights and interests under this Agreement,
the Notes and the Security Documents and/or delegate its obligations hereunder
and thereunder, in whole or in part, and sell participations in the Notes and
the Security Documents as security therefor, provided as follows:
(i) Any such assignment, other than an assignment in whole, made
other than to (A) another Lender, (B) a separately organized branch of a
Lender or (C) a Related Lender Party, shall reflect an assignment of such
assigning Lender's Notes and Commitments which is in an aggregate
principal amount of at least $5,000,000, and if greater, shall be an
integral multiple of $1,000,000.
(ii) Notwithstanding any provision of this Agreement to the
contrary, (A) each Lender may at any time pledge all or any portion of
its rights under this Agreement and each of the other Loan Documents,
including without limitation its Loans and the Notes held by such Lender,
to a Federal Reserve Bank (or equivalent thereof in the case of Lenders
chartered outside of the United States) in support of borrowings made by
such Lender from such Federal Reserve Bank and (B) with the consent of
the Agent, any Lender which is a fund may pledge all or any portion of
its Notes or Loans to its trustee in support of its obligations to its
trustee. No pledge pursuant to this subsection (ii) shall release the
transferor Lender from any of its obligations and liabilities under the
Loan Documents.
(iii) Any assignments and/or delegations made hereunder shall be
pursuant to an instrument of assignment and acceptance (the "Assignment
and Acceptance") substantially in the form of Schedule 13 and the parties
to each such assignment shall execute and deliver to the Agent for its
acceptance the Assignment and Acceptance together with any Note or Notes
subject thereto. Upon such execution and delivery, from and after the
effective date specified in each Assignment and Acceptance, which
effective date shall be at least five (5) Business Days after the
execution thereof, (A) the assignee thereunder shall become a party
hereto and, to the extent provided in such Assignment and Acceptance,
have the rights and obligations of a Lender hereunder with applicable
Commitments as set forth therein and (B) the assigning Lender thereunder
shall, to the extent provided in such assignment, be released from its
obligations under this Agreement as to that portion of its obligation
being so assigned and delegated. The Assignment and Acceptance shall be
deemed to amend this Agreement to the extent, and only to the extent,
necessary to reflect the addition of the assignee as a Lender and the
resulting adjustment of Commitments arising from the purchase by and
delegation to such assignee of all or a portion of the rights and
obligations of such assigning Lender under this Agreement.
<PAGE>
(iv) Upon its receipt of an Assignment and Acceptance executed
by an assigning Lender and the assignee together with the Note or Notes
subject to such assignment (or a standard indemnity letter from the
respective assigning Lender in respect of any lost Note or Notes) and
payment by the assignee to the Agent of a registration and processing fee
of $3,500, the Agent shall accept such Assignment and Acceptance.
Promptly upon delivering such Assignment and Acceptance to the Agent, the
assigning Lender shall give notice thereof to the Borrower and the Agent.
Within five (5) Business Days after receipt of such notice, the Borrower
shall execute and deliver to the Agent in exchange for each such
surrendered Note a new Note payable to the order of such assignee in an
amount equal to the portion of the applicable Commitment(s) assumed by
such assignee pursuant to such Assignment and Acceptance and a new Note
payable to the order of the assigning Lender in an amount equal to the
portion of the applicable Commitment(s) retained by it hereunder. Such
new Notes shall be dated the effective date of such Assignment and
Acceptance and shall otherwise be in substantially the form provided in
Section 1.01. Canceled Notes shall be returned to the Borrower upon the
execution and delivery of such new Notes.
(v) Each Lender may sell participations in all or a portion of
its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Commitments and the Notes held by
it); provided, however, that, no Lender shall transfer or grant any
participation under which the participant shall have rights to approve
any amendment to or waiver of this Agreement or any other Loan Document,
except to the extent such amendment or waiver would (A) extend the final
scheduled maturity of any Loan, Note or Letter of Credit (unless such
Letter of Credit is not extended beyond the Expiration Date) in which
such participant is participating, or reduce the rate or extend the time
of payment of interest or fees thereon (except in connection with a
waiver of applicability of any post-default increase in interest rates)
or reduce the principal amount thereof, or increase the amount of the
participant's participation over the amount thereof, or increase the
amount of the participant's participation over the amount thereof then in
effect (it being understood that no waiver or modification of any
condition precedent, covenant or Default or of any mandatory reduction in
the aggregate Commitments shall constitute a change in the terms of such
participation, that an increase in any Commitment or Loan shall be
permitted without the consent of any participant if the participant's
participation is not increased as a result thereof and that any amendment
or modification to the financial definitions in this Agreement shall not
constitute a reduction in any rate of interest or fees for purposes of
this clause (A)), (B) consent to the assignment or transfer by the
Borrower of any of its rights and obligations under this Agreement or (C)
release all or substantially all of the Collateral under all of the
Security Documents (except as expressly provided in the Security
Documents) supporting the Loans hereunder in which such participant is
participating. In the case of any such participation, the participant
shall not have any rights under this Agreement or any of the other Loan
Documents (the participant's rights against such Lender in respect of
such participation to be those set forth in the agreement executed by
such Lender in favor of the participant relating thereto) and all amounts
payable by the Borrower hereunder shall be determined as if such Lender
had not sold such participation.
<PAGE>
(vi) Except for an assignment made to (i) another Lender, (ii) a
separately organized branch of a Lender or (iii) a Related Lender Party,
and except during the existence of a Default, no assignment referred to
above shall be permitted without the prior written consent of the Agent
and the Borrower, which consent shall not be unreasonably withheld or
delayed.
(vii) The Borrower may not assign any of its rights or delegate
any of its duties or obligations hereunder.
(viii) To the extent that an assignment of all or any portion of
a Lender's Commitment and outstanding Loans pursuant to subsection (b) of
Article XII or this Article XIII would, due to circumstances existing at
the time of such assignment, result in costs under Sections 1.08, 1.10 or
1.11 which are increased from those being charged by the respective
assigning Lender prior to such assignment, then the Borrower shall not be
obligated to pay such increased costs (although the Borrower shall be
obligated to pay any other increased costs of the type described above
resulting from changes after the date of the respective assignment).
(ix) Any Lender may, in connection with any assignment or
participation pursuant to this Section, disclose to the assignee or
participant any information relating to the Companies and the Parent
Affiliates furnished to such Lender by or on behalf of the Borrower and
such assignee or participant shall treat such information as
confidential.
XIV. MISCELLANEOUS
Section 14.01. Survival. This Agreement and all covenants, agreements,
representations and warranties made herein and in the certificates delivered
pursuant hereto, shall survive the making by the Lenders of the Loans and shall
continue in full force and effect so long as any Obligation is outstanding and
unpaid or any Lender has any obligation to advance funds to the Borrower or any
other Company hereunder. In addition, notwithstanding anything herein or under
applicable law to the contrary, the provisions of this Agreement and the other
Loan Documents relating to indemnification or payment of fees, costs and
expenses, including without limitation the provisions of Sections 1.08, 1.10,
1.11, 10.05, 14.02 and 14.14, shall survive the payment in full of all Loans,
the termination or expiration of the Commitments and any termination of this
Agreement or of any other Loan Document.
Section 14.02. Fees and Expenses; Indemnity; Etc. The Borrower agrees (a)
to pay or reimburse the Agent for all its reasonable out-of-pocket costs and
expenses incurred in connection with the development, preparation, negotiation,
interpretation and execution of, and any amendment, supplement or modification
to, this Agreement, the Notes and any other Loan Documents and the consummation
and administration of the transactions contemplated hereby, including without
limitation the reasonable fees and disbursements of (i) counsel to the Agent,
and (ii) such agents of the Agent not regularly in its employ, and accountants,
other auditing services, consultants and appraisers engaged by or on behalf of
the Agent or by the Borrower at the request of the Agent (collectively, "Third
Parties"); (b) to pay or reimburse the Agent for all its reasonable costs and
expenses incurred in connection with the enforcement or preservation of any
rights under this Agreement, the Notes and any other Loan Documents, including,
without limitation, the reasonable fees and disbursements of (i) counsel to the
Agent and (ii) Third Parties; (c) following the occurrence of an Event of
Default hereunder, to pay or reimburse the Lenders for the reasonable fees and
disbursements of counsel for the respective Lenders engaged for the preservation
or enforcement of such Lender's rights under this Agreement or any other Loan
Documents relating to such Event of Default; (d) to pay, indemnify, and hold
each Lender and the Agent harmless from, any and all recording and filing fees
and taxes, lien discharge fees and taxes, intangible taxes and any and all
liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other taxes, if any, which may be payable or determined to be payable
in connection with the execution and delivery of, or consummation or
administration of any of the transactions contemplated by, or any amendment,
supplement or modification of, or any waiver or consent under or in respect of,
this Agreement, the Notes and any other Loan Documents; and (e) to pay,
indemnify, and hold each Lender and the Agent (and their respective directors,
officers, employees, agents and other affiliates) harmless from and against any
and all other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever with respect to the execution, delivery, enforcement, performance and
administration of, or any transaction contemplated by, any Loan Document or the
use or proposed use of the proceeds of the Loans or the refinancing or
restructuring of the credit arrangement provided under this Agreement in the
nature of a "work-out" or any proceedings with respect to the bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or liquidation of
any Company or any other party other than the Lender or the Agent to any Loan
Document (all the foregoing in this clause (e), collectively, the "indemnified
liabilities"), provided, that the Borrower shall have no obligation hereunder to
the Agent or any Lender with respect to indemnified liabilities arising from the
gross negligence or willful misconduct of the Agent or any such Lender. The
agreements in this Section shall survive repayment of the Notes and all other
amounts payable hereunder.
<PAGE>
Section 14.03. Notice.
(a) All notices, requests, demands and other communications provided for
hereunder (including without limitation Loan Requests) shall be in writing
(including telecopied communication) and mailed or telecopied or delivered to
the applicable party at the addresses indicated below.
If to the Agent:
Bankers Trust Company
One Bankers Trust Plaza
130 Liberty Street - 34th Floor
New York, New York 10006
Attention: Mr. David J. Bell, Vice President,
Structured Finance Portfolio Group
Telecopy No.: (212) 250-7218
and
Bankers Trust Company
One Banker Trust Plaza
130 Liberty Street - 37th Floor
New York, New York 10006
Attention: Loan Syndications
Telecopy No.: (212) 250-1343
and if to any Lender, at the address set forth on the appropriate signature page
hereto or, with respect to any assignee of the Notes under Article XIII, at the
address designated by such assignee in a written notice to the other parties
hereto.;
in each case (except for routine communications), with a copy to:
Elizabeth H. Munnell, Esquire
Edwards & Angell
101 Federal Street
Boston, Massachusetts 02110
Telecopy No.: (617) 439-4170
If to the Borrower:
Mr. Marshall W. Pagon
Pegasus Media & Communications, Inc.
c/o Pegasus Communications Management Company
5 Radnor Corporate Center, Suite 454
100 Matsonford Road
Radnor, Pennsylvania 19087
Telecopy No.: (610) 341-1835
with a required copy to Ted S. Lodge, Esq. at the immediately
foregoing address
and
with a copy (except for routine communications) to:
Michael B. Jordan, Esq.
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
Telecopy No.: (215) 988-2757
or, as to each party, at such other address as shall be designated by
such parties in a written notice to the other party complying as to delivery
with the terms of this Section. All such notices, requests, demands and other
communication shall be deemed given upon receipt by the party to whom such
notice is directed.
(b) The address of the Agent for payment hereunder is as follows:
Bankers Trust Company
One Bankers Trust Plaza
130 Liberty Street - 14th Floor
New York, New York 10006
ABA: 021001033
For credit to Commercial Loan Division,
Account No.: 99401268
Re: Pegasus Media & Communications, Inc.
Telecopy No.: (212) 250-7351
Attention: Mr. George Pottanat
Section 14.04. Governing Law. This Agreement and the Notes shall be
construed in accordance with and governed by the internal laws of the State of
New York.
<PAGE>
Section 14.05. CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL.
(a) THE BORROWER, TO THE EXTENT THAT IT MAY LAWFULLY DO SO, HEREBY
CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK
AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AS
WELL AS TO THE JURISDICTION OF ALL COURTS TO WHICH AN APPEAL MAY BE TAKEN FROM
SUCH COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT
OF ANY OF ITS OBLIGATIONS ARISING HEREUNDER OR UNDER THE NOTES OR THE SECURITY
DOCUMENTS OR WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY, AND EXPRESSLY
WAIVES ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE, INCLUDING, WITHOUT
LIMITATION, THE INCONVENIENCE OF SUCH FORUM, IN ANY OF SUCH COURTS. IN ADDITION,
TO THE EXTENT THAT IT MAY LAWFULLY DO SO, THE BORROWER CONSENTS TO THE SERVICE
OF PROCESS BY PERSONAL SERVICE OR U.S. CERTIFIED OR REGISTERED MAIL, RETURN
RECEIPT REQUESTED, ADDRESSED TO THE BORROWER AT THE ADDRESS PROVIDED HEREIN. TO
THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM
JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR
NOTICE, ATTACHMENT PRIOR TO JUDGMENT ATTACHMENT IN AID OF EXECUTION OR
OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY
IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS TO THE MAXIMUM EXTENT PERMITTED BY LAW.
(b) WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE AGENT AND THE
LENDERS HEREBY VOLUNTARILY AND IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION
BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT, THE NOTES, THE SECURITY DOCUMENTS
OR ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH.
Section 14.06. Severability. Any provision of this Agreement, the Notes
or any of the Security Documents or other Loan Documents which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
Section 14.07. Section Headings, Etc. Any Article and Section headings in
this Agreement are included herein for convenience of reference only and shall
not constitute a part of this Agreement for any other purpose.
Section 14.08. Several Nature of Lenders' Obligations. Notwithstanding
anything in this Agreement, the Notes or any of the Security Documents to the
contrary, all obligations of the Lenders hereunder shall be several and not
joint in nature, and in the event any Lender fails to perform any of its
obligations hereunder, the Borrower shall have no recourse against any other
Lender(s) who has (have) performed its (their) obligations hereunder. The
amounts payable at any time hereunder to each Lender shall be a separate and
independent debt, and each Lender shall be entitled to protect and enforce its
rights arising out of this Agreement, subject to the provisions of Article XII,
and it shall not be necessary for any other Lender to be joined as an additional
party in any proceeding for such purpose.
Section 14.09. Counterparts. This Agreement may be executed by the
parties hereto in several counterparts hereof and by the different parties
hereto on separate counterparts hereof, each of which shall be an original and
all of which counterparts shall together constitute one and the same agreement.
Delivery of an executed signature page of this Agreement by facsimile
transmission shall be effective as an in-hand delivery of an original executed
counterpart hereof.
Section l4.10. Knowledge and Discovery. All references in this Agreement
to "knowledge" of, or "discovery" by, the Borrower shall be deemed to include,
without limitation, any such knowledge of, or discovery by, the Borrower or any
executive officer of the Borrower.
Section 14.11. Amendment of Other Agreements. All references in this
Agreement to other documents and agreements to which the Lenders are not parties
(including without limitation the Acquisition Agreements, the PCC Preferred
Stock Designation, the Management Agreement, the Affiliate Agreements, the
Subordinated Debt Documents, the NRTC Member Agreements and any other DBS
Agreements) shall be deemed to refer to such documents and agreements as
presently constituted and, except for any amendments and modifications not
prohibited under Section 7.11, not as hereafter amended or modified unless the
Lenders shall have expressly consented in writing to such amendment(s) or
modification(s).
<PAGE>
Section 14.12. FCC and Municipal Approvals. Notwithstanding anything
herein or in any of the Security Documents to the contrary, but without limiting
or waiving in any way the Borrower's obligations under Section 2.01, the Agent's
and the Lenders' rights hereunder and under the Security Documents are subject
to all applicable rules and regulations of the FCC and other Specified
Authorities. The Agent and the Lenders will not take any action pursuant to this
Agreement or the Security Documents which would constitute or result in any
assignment or transfer control of any FCC License or CATV Franchise, whether de
jure or de facto, if such assignment or transfer of control would require under
then existing law (including the written rules and regulations promulgated by
the FCC), the prior approval of the FCC or other Specified Authority, without
first obtaining such approval. The Agent and the Lenders specifically agree that
(a) voting rights in the ownership interests of the Companies will remain with
the holders thereof even in an Event of Default unless any required prior
consent of the FCC or other Specified Authority shall be obtained to the
transfer of such voting rights; (b) in an Event of Default, there will be either
a private or public sale of the ownership interests of the Companies; and (c)
prior to the exercise of member or other equityholder rights by a purchaser at
such sale, the prior consent of the FCC, pursuant to 47 U.S.C. ss. 310(d), in
each case only if required, will be obtained prior to such exercise. The
Borrower agrees to take any action which the Agent or any Lender may reasonably
request in order to cause the Agent and the Lenders to obtain and enjoy the full
rights and benefits granted to by this Agreement and the other Loan Documents,
including specifically, at the cost and expense of the Borrower, the use of its
best efforts to assist in obtaining approval of the FCC or any state or
municipality or other governmental authority for any action or transaction
contemplated by this Agreement or any Security Document which is then required
by law, and specifically, without limitation, upon request following an Event of
Default, to prepare, sign and file (or cause to be filed) with the FCC or such
state or municipality or other governmental authority the assignor's,
transferor's or controlling person's portion of any application or applications
for consent to (i) the assignment of any FCC License or transfer or control
thereof, (ii) any sale or sales of property constituting any Collateral by or on
behalf of the Lenders or (iii) any assumption by the Agent or the Lenders or
their designees of voting rights or management rights in property constituting
any Collateral effected in accordance with the terms of this Agreement.
Section 14.13. Disclaimer of Reliance. The Borrower has not relied on any
oral representations concerning any of the terms or conditions of the Loans, the
Notes, this Agreement or any of the Security Documents in entering into the
same. The Borrower acknowledges and agrees that none of the officers of the
Agent or any Lender has made any representations that are inconsistent with the
terms and provisions of this Agreement, the Notes and the Security Documents,
and neither the Borrower nor any of its Affiliates has relied on any oral
promises or representations in connection therewith.
Section 14.14. Environmental Indemnification. Without limiting the
generality of Section 14.02, in consideration of the execution and delivery of
this Agreement by the Lenders and the making of the Loans, the Borrower hereby
indemnifies, exonerates and holds the Lenders and each of their respective
officers, directors, employees and agents (collectively, the "Indemnified
Parties") free and harmless from and against any and all actions, causes of
action, suits, losses, costs, liabilities and damages, and expenses incurred in
connection therewith (irrespective of whether any such Indemnified Party is a
party to the action for which indemnification hereunder is sought), including
reasonable attorneys' fees and disbursements (collectively, the "Indemnified
Liabilities"), incurred by the Indemnified Parties or any of them as a result
of, or arising out of, or relating to:
(a) any investigation, litigation or proceeding related to any
environmental cleanup, audit, compliance or other matter relating to the
protection of the environment or the release by any Company of any Hazardous
Material; or
(b) the presence on or under, or the escape, seepage, leakage, spillage,
discharge, emission, discharging or releases from, any real property owned or
operated by any Company of any Hazardous Material (including any losses,
liabilities, damages, injuries, costs, expense or claims asserted or arising
under any Environmental Law), regardless of whether caused by, or within the
control of, any Company;
except, in each case, for any such Indemnified Liabilities arising for the
account of a particular Indemnified Party by reason of the relevant Indemnified
Party's negligence or misconduct, and if and to the extent that the foregoing
undertaking may be unenforceable for any reason, the Borrower agrees to make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. Notwithstanding anything
to the contrary herein contained, the obligations and liabilities under this
Section shall survive and continue in full force and effect and shall not be
terminated, discharged or released in whole or in part irrespective of whether
all the Obligations have been paid in full or the Commitments have been
terminated and irrespective of any foreclosure of any mortgage, deed of trust or
collateral assignment on any real property or acceptance by any Lender of a deed
or assignment in lieu of foreclosure.
<PAGE>
1 BOS 65821 IN WITNESS WHEREOF, the Agent, the Lenders and the
Borrower have caused this Agreement to be duly executed
by their duly authorized representatives, as a sealed instrument, all as of the
day and year first above written.
BORROWER:
PEGASUS MEDIA & COMMUNICATIONS, INC.
By:/s/ Robert N. Verdecchio
------------------------------------------------
Robert N. Verdecchio, Senior Vice President
AGENT:
BANKERS TRUST COMPANY
By:/s/ David J. Bell
------------------------------------------------
David J. Bell, Vice President
LENDER:
BANKERS TRUST COMPANY
By:/s/ David J. Bell
------------------------------------------------
David J. Bell, Vice President
Address for Notice to Bankers Trust Company:
Bankers Trust Company
One Bankers Trust Plaza
130 Liberty Street - 34th Floor
New York, New York 10006
Telecopy: (212) 250-7218
Attention: David J. Bell, Vice President
Structured Finance Portfolio Group
<PAGE>
LENDER:
BANKBOSTON, N.A.
By:/s/ Cindy C. Chen
------------------------------------------------
Cindy C. Chen, Director
Address for Notices:
BankBoston, N.A.
100 Federal Street
Mail Stop: MA BOS 01-08-08
Boston, Massachusetts 02110
Telecopier: (617) 434-3401
Telephone: (617) 434-2880
Attention: Cindy C. Chen, Director
<PAGE>
LENDER:
BANQUE PARIBAS
By:/s/ Lynne S. Randall
------------------------------------------------
Lynne S. Randall, Vice President
By:/s/ William B. Schink
------------------------------------------------
Name: William B. Schink
Title: Director
Address for Notices:
Banque Paribas
787 Seventh Avenue
New York, New York 10019
Telecopier: (212) 841-2369
Telephone: (212) 841-2595
Attention: Lynne S. Randall, Vice President
<PAGE>
LENDER:
BANK OF MONTREAL, CHICAGO BRANCH
By:/s/ Tom Calder
------------------------------------------------
Tom Calder, Director
Address for Notices:
Bank of Montreal
430 Park Avenue
New York, New York 10022
Telecopier: (212) 605-1648
Telephone: (212) 605-1529
Attention: Allegra Griffiths, Director
<PAGE>
LENDER:
FLEET NATIONAL BANK
By:/s/ Stephen J. Healey
------------------------------------------------
Stephen J. Healey, Senior Vice President
Address for Notices:
Fleet National Bank
One Federal Street
Mail Stop: MAOFD03D
Boston, Massachusetts 02110
Telecopier: (617) 346-4346
Telephone: (617) 346-4367
Attention: Stephen J. Healey,
Senior Vice President
<PAGE>
LENDER:
IBJ SCHRODER BANK & TRUST COMPANY
By:/s/ J. Christopher Mangan
------------------------------------------------
J. Christopher Mangan, Managing Director
Address for Notices:
IBJ Schroder Bank & Trust Company
One State Street Plaza - 9th Floor
New York, New York 10004
Telecopier: (212) 858-2767
Telephone: (212) 858-2602
Attention: J. Christopher Mangan,
Managing Director
<PAGE>
LENDER:
MEESPIERSON CAPITAL CORP.
By:/s/ Claudia J. Chifos
------------------------------------------------
Name: Claudia J. Chifos
Title: Vice President
By: /s/ John T. Connors
------------------------------------------------
Name: John T. Connors
Title: Executive Vice President
Address for Notices:
MeesPierson Capital Corp.
445 Park Avenue
New York, New York 10022
Telecopier: (212) 801-0420
Telephone: (212) 801-0445
Attention: Claudia J. Chifos, Vice President
<PAGE>
LENDER:
STATE STREET BANK AND TRUST COMPANY
By:/s/ Hamilton H. Wood, Jr.
------------------------------------------------
Hamilton H. Wood, Jr., Vice President
Address for Notices:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Telecopier: (617) 654-3708
Telephone: (617) 654-3817
Attention: Hamilton H. Wood, Jr.,
Vice President
<PAGE>
LENDER:
COMPAGNIE FINANCIERE DE CIC
ET DE L'UNION EUROPEENNE
By:/s/ Marcus Edward
------------------------------------------------
Marcus Edward, Vice President
By:/s/ Brian O'Leary
------------------------------------------------
Brian O'Leary, Vice President
Address for Notices:
Compagnie Financiere de CIC et
de l'Union Europeenne
520 Madison Avenue - 37th Floor
New York, New York 10022
Telecopier: (212) 715-4535
Telephone: (212) 715-4427
Attention: Marcus Edward, Vice President
<PAGE>
LENDER:
UNION BANK OF CALIFORNIA
By:/s/ Christine P. Ball
------------------------------------------------
Christine P. Ball, Vice President
Address for Notices:
Union Bank of California
445 South Figueroa Street - 15th Floor
Los Angeles, California 90071
Telecopier: (213) 236-5747
Telephone: (213) 236-6176
Attention: Christine P. Ball, Vice President
