-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bdc66mFbrU7F0rPnLJw/we2TRSlvv6kezGJAFJh110/xdN0RS9qhpVQCSL3+eJNM xZUjJik3unB6aaAE9VbxGg== 0000950116-98-001678.txt : 19980814 0000950116-98-001678.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950116-98-001678 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASUS COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001015629 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 510374669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21389 FILM NUMBER: 98686454 BUSINESS ADDRESS: STREET 1: 5 RADNOR CORPORATE CTR STE 454 STREET 2: 100 MATSONFORD RD CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6103411801 MAIL ADDRESS: STREET 1: 1345 CHESTNUT ST STREET 2: 1345 CHESTNUT ST CITY: PHILADELPHIA STATE: PA ZIP: 19107-3496 FORMER COMPANY: FORMER CONFORMED NAME: PEGASUS COMMUNICATIONS & MEDIA CORP DATE OF NAME CHANGE: 19960530 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from__________ to __________ Commission File Number 0-21389 PEGASUS COMMUNICATIONS CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 51-0374669 - ------------------------------- ------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) c/o Pegasus Communications Management Company; 5 Radnor Corporate Center, Suite 454, Radnor, PA 19087 - ------------------------------------------------ ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (888) 438-7488 -------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Number of shares of each class of the registrant's common stock outstanding as of August 7, 1998: Class A, Common Stock, $0.01 par value 11,315,809 Class B, Common Stock, $0.01 par value 4,581,900 PEGASUS COMMUNICATIONS CORPORATION Form 10-Q Table of Contents For the Quarterly Period Ended June 30, 1998
Page ---- Part I. Financial Information Item 1 Consolidated Financial Statements Consolidated Balance Sheets December 31, 1997 and June 30, 1998 3 Consolidated Statements of Operations Three months ended June 30, 1997 and 1998 4 Consolidated Statements of Operations Six months ended June 30, 1997 and 1998 5 Consolidated Statements of Cash Flows Six months ended June 30, 1997 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3 Quantitative and Qualitative Disclosures About Market Risk 21 Part II. Other Information Item 2 Changes in Securities and Use of Proceeds 22 Item 4 Submission of Matters to a Vote of Security Holders 22 Item 5 Other Information 22 Item 6 Exhibits and Reports on Form 8-K 23 Signature 24
2 Pegasus Communications Corporation Consolidated Balance Sheets
December 31, June 30, 1997 1998 -------------- -------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 44,049,097 $ 37,218,433 Restricted cash 1,220,056 20,475,000 Accounts receivable, less allowance for doubtful accounts of $319,000 and $405,000, respectively 13,819,571 17,192,509 Program rights 2,059,346 1,457,256 Inventory 974,920 2,481,545 Deferred taxes 2,602,453 2,602,453 Prepaid expenses and other 788,669 1,418,878 ------------- ------------- Total current assets 65,514,112 82,846,074 Restricted cash, net of current portion 8,666,621 Property and equipment, net 27,686,646 31,369,405 Intangible assets, net 284,774,027 668,205,825 Program rights 2,262,299 1,612,299 Deferred taxes 13,296,554 Deposits and other 624,629 624,629 ------------- ------------- Total assets $ 380,861,713 $ 806,621,407 ============= ============= LIABILITIES AND TOTAL EQUITY Current liabilities: Current portion of long-term debt $ 6,357,320 $ 13,601,883 Accounts payable 4,151,226 9,427,108 Accrued interest 8,177,261 16,870,926 Accrued satellite programming and fees 6,089,389 8,045,255 Accrued expenses 6,973,297 11,695,617 Current portion of program rights payable 1,418,581 808,761 ------------- ------------- Total current liabilities 33,167,074 60,449,550 Long-term debt, net of current portion 201,997,811 443,978,071 Program rights payable 1,416,446 801,446 Deferred taxes 2,652,454 69,651,954 ------------- ------------- Total liabilities 239,233,785 574,881,021 ------------- ------------- Commitments and contingent liabilities -- -- Minority interest 3,000,000 3,000,000 ------------- ------------- Series A preferred stock 111,264,424 118,418,130 ------------- ------------- Common stockholders' equity: Class A common stock 57,399 113,142 Class B common stock 45,819 45,819 Additional paid-in capital 64,034,687 178,524,222 Deficit (36,774,401) (68,360,927) ------------- ------------- Total common stockholders' equity 27,363,504 110,322,256 ------------- ------------- Total liabilities and stockholders' equity $ 380,861,713 $ 806,621,407 ============= =============
See accompanying notes to consolidated financial statements 3 Pegasus Communications Corporation Consolidated Statements of Operations
Three Months Ended June 30, ------------------------------------ 1997 1998 ------------ ------------ (unaudited) Revenues: Basic and satellite service $ 10,797,191 $ 31,793,303 Premium services 1,009,904 4,263,247 Broadcasting revenue, net of agency commissions 6,168,318 6,809,541 Barter programming revenue 1,603,500 1,787,200 Other 227,890 2,086,066 ------------ ------------ Total revenues 19,806,803 46,739,357 Operating expenses: Programming 5,227,494 17,142,089 Barter programming expense 1,603,500 1,787,200 Technical and operations 903,526 1,001,120 Marketing and selling 2,507,011 9,662,340 General and administrative 2,984,004 7,939,859 Incentive compensation 241,155 620,372 Corporate expenses 497,214 796,176 Depreciation and amortization 5,955,962 16,667,645 ------------ ------------ Loss from operations (113,063) (8,877,444) Interest expense (2,869,286) (10,339,353) Interest income 243,918 374,543 Other expenses, net (294,188) (334,665) ------------ ------------ Loss before income taxes (3,032,619) (19,176,919) Provision for income taxes 50,000 50,000 ------------ ------------ Net loss (3,082,619) (19,226,919) Preferred dividends 3,187,500 3,576,853 ------------ ------------ Net loss applicable to common shares ($ 6,270,119) ($22,803,772) ============ ============ Basic and diluted earnings per common share: Net loss ($ 0.64) ($ 1.59) ============ ============ Weighted average shares outstanding 9,801,057 14,310,075 ============ ============
See accompanying notes to consolidated financial statements 4 Pegasus Communications Corporation Consolidated Statements of Operations
Six Months Ended June 30, ------------------------------------ 1997 1998 ------------ ------------ (unaudited) Revenues: Basic and satellite service $ 18,588,844 $ 49,819,774 Premium services 1,933,269 7,072,013 Broadcasting revenue, net of agency commissions 11,445,422 12,151,659 Barter programming revenue 3,054,300 3,246,700 Other 587,729 3,232,903 ------------ ------------ Total revenues 35,609,564 75,523,049 Operating expenses: Programming 9,155,913 27,353,345 Barter programming expense 3,054,300 3,246,700 Technical and operations 1,858,667 2,064,241 Marketing and selling 4,454,658 16,049,139 General and administrative 5,286,048 12,879,982 Incentive compensation 521,006 1,029,577 Corporate expenses 903,675 1,481,442 Depreciation and amortization 10,854,293 26,598,229 ------------ ------------ Loss from operations (478,996) (15,179,606) Interest expense (6,023,752) (16,315,091) Interest income 691,353 720,290 Other expenses, net (239,765) (687,119) Gain on sale of cable system 4,451,320 -- ------------ ------------ Loss before income taxes (1,599,840) (31,461,526) Provision for income taxes 50,000 125,000 ------------ ------------ Net loss (1,649,840) (31,586,526) Preferred stock dividends 5,312,500 7,153,706 ------------ ------------ Net loss applicable to common shares ($ 6,962,340) ($38,740,232) ============ ============ Basic and diluted earnings per common share: Net loss ($ 0.71) ($ 3.14) ============ ============ Weighted average shares outstanding 9,773,933 12,332,244 ============ ============
See accompanying notes to consolidated financial statements 5 Pegasus Communications Corporation Consolidated Statements of Cash Flows
Six Months Ended June 30, -------------------------------------- 1997 1998 ------------- ------------- (unaudited) Cash flows from operating activities: Net loss ($ 1,649,840) ($ 31,586,526) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 10,854,293 26,598,229 Program rights amortization 781,125 1,251,490 Accretion on discount of bonds and seller notes 196,872 535,955 Gain on sale of cable system (4,451,320) -- Bad debt expense 412,284 794,882 Change in assets and liabilities: Accounts receivable (901,085) (1,005,976) Inventory 96,477 (161,357) Prepaid expenses and other (575,556) (424,267) Accounts payable and accrued expenses 925,613 4,783,190 Accrued interest 178,438 3,777,383 Capitalized subscriber acquisition costs (2,729,471) -- Deposits and other (32,906) -- ------------- ------------- Net cash provided by operating activities 3,104,924 4,563,003 ------------- ------------- Cash flows from investing activities: Acquisitions, net of cash acquired (56,586,989) (42,252,899) Cash acquired from acquisitions 164,221 3,112,482 Capital expenditures (5,232,692) (3,647,790) Purchase of intangible assets (2,157,575) (7,608,821) Payments of programming rights (1,287,725) (1,224,220) Proceeds from sale of cable system 6,945,270 -- ------------- ------------- Net cash used for investing activities (58,155,490) (51,621,248) ------------- ------------- Cash flows from financing activities: Repayments of long-term debt (164,267) (5,404,660) Borrowings on bank credit facilities 526,250 46,000,000 Repayments of bank credit facilities (30,126,250) -- Restricted cash (6,892,256) (121,176) Capital lease repayments (169,091) (246,583) Proceeds from issuance of Series A preferred stock 100,000,000 -- Underwriting and preferred offering costs (4,187,920) -- ------------- ------------- Net cash provided by financing activities 58,986,466 40,227,581 ------------- ------------- Net increase (decrease) in cash and cash equivalents 3,935,900 (6,830,664) Cash and cash equivalents, beginning of year 8,582,369 44,049,097 ------------- ------------- Cash and cash equivalents, end of period $ 12,518,269 $ 37,218,433 ============= =============
See accompanying notes to consolidated financial statements 6 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company: Pegasus Communications Corporation ("Pegasus" or together with its subsidiaries stated below, the "Company"), is a diversified media and communications company incorporated under the laws of the State of Delaware in May 1996, and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or the "Parent"). Pegasus' direct subsidiaries are Pegasus Media & Communications, Inc. ("PM&C"), Digital Television Services, Inc. ("DTS"), Pegasus Development Corporation ("PDC"), Pegasus Towers, Inc. ("Towers") and Pegasus Communications Management Company ("PCMC"). PM&C is a diversified media and communications company whose subsidiaries provide direct broadcast satellite television ("DBS") services to customers in certain rural areas of the US, provide capital for various satellite initiatives such as subscriber acquisitions costs, own and operate cable television ("Cable") systems that provide service to individual and commercial subscribers in New England and Puerto Rico, own and operate broadcast television ("TV") stations affiliated with the Fox Broadcasting Company ("Fox") and operate, pursuant to local marketing agreements, stations affiliated with United Paramount Network ("UPN") and The WB Television Network ("WB"). DTS, which was acquired by the Company on April 27, 1998 (see footnote 7 - Acquisitions), provides DBS services to customers in certain rural areas of the US. PDC provides capital for various satellite initiatives such as subscriber acquisitions costs. Towers owns and operates transmitting towers located in Pennsylvania and Tennessee. PCMC provides certain management and accounting services for the Company. 2. Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements include the accounts of Pegasus and all of its subsidiaries. All intercompany transactions and balances have been eliminated. The unaudited consolidated financial statements reflect all adjustments consisting of normal recurring items which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position of the Company and the results of its operations and its cash flows for the interim period. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1997 included in the Company's Annual Report on Form 10-K/A for the year then ended. 7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Common Stock: At December 31, 1997 common stock consists of the following:
Pegasus Class A common stock, $0.01 par value; 30.0 million shares authorized; 5,739,842 issued and outstanding ................... $ 57,399 Pegasus Class B common stock, $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding ................... 45,819 -------- Total common stock ............................................. $103,218 ======== At June 30, 1998 common stock consists of the following: Pegasus Class A common stock, $0.01 par value; 30.0 million shares authorized; 11,314,177 issued and outstanding .................. $113,142 Pegasus Class B common stock, $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding .................. 45,819 -------- Total common stock ............................................. $158,961 ========
The Company's ability to pay dividends on its Common Stock is subject to certain restrictions (see footnote 4 - Redeemable Preferred Stock and footnote 5 - Long-Term Debt). 4. Redeemable Preferred Stock: In January 1997, Pegasus completed a unit offering (the "Unit Offering") in which it sold 100,000 shares of 12.75% Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred Stock") and warrants to purchase 193,600 shares of Class A Common Stock at an exercise price of $15 per share to the public at a price of $1,000 per unit, resulting in net proceeds to the Company of $95.8 million. As a result of the Unit Offering and dividends subsequently declared on the Series A Preferred Stock, the Company had outstanding, at December 31, 1997 and June 30, 1998, 105,490 and 112,215 shares of Series A Preferred Stock, respectively, authorized, issued and outstanding. Each whole share of Series A Preferred Stock has a liquidation preference of $1,000 per share (the "Liquidation Preference"). Cumulative dividends, at a rate of 12.75% are payable semi-annually on January 1 and July 1. Dividends may be paid, occurring on or prior to January 1, 2002, at the option of the Company, either in cash or by the issuance of additional shares of Series A Preferred Stock. Subject to certain conditions, the Series A Preferred Stock is exchangeable in whole, but not in part, at the option of the Company, for Pegasus' 12.75% Senior Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The Exchange Notes would contain substantially the same redemption provisions, restrictions and other terms as the Series A Preferred Stock. Pegasus is required to redeem all of the Series A Preferred Stock outstanding on January 1, 2007 at a redemption price equal to the Liquidation Preference thereof, plus accrued dividends. The carrying amount of the Series A Preferred Stock is periodically increased by amounts representing dividends not currently declared or paid but which will be payable under the mandatory redemption features. The increase in carrying amount is effected by charges against retained earnings, or in the absence of retained earnings, by charges against paid-in capital. Under the terms of the Series A Preferred Stock, Pegasus' ability to pay dividends on its Common Stock is subject to certain restrictions. 8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Redeemable Preferred Stock (continued): Basic earnings per share amounts are based on net income after deducting preferred stock dividend requirements divided by the weighted average number of Class A and Class B Common shares outstanding during the period. 5. Long-Term Debt:
Long-term debt consists of the following : December 31, June 30, 1997 1998 ---------------- ---------------- Series B Notes payable by PM&C, due 2005, interest at 12.5%, payable semi-annually in arrears on January 1 and July 1, net of unamortized discount of $3,018,003 and $2,820,179 as of December 31, 1997 and June 30, 1998, respectively ....................................................... $ 81,981,997 $ 82,179,821 Series B Notes payable by DTS, due 2007, interest at 12.5%, payable semi-annually in arrears on February 1 and August 1, net of unamortized discount of $1,943,598 as of June 30, 1998 ......................................................... -- 153,056,402 Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%, payable semi-annually in arrears on April 15 and October 15, commencing on April 15, 1998 ............................. 115,000,000 115,000,000 Senior six-year $180.0 million revolving credit facility, payable by PM&C, interest at PM&C's option at either the bank's base rate plus an applicable margin or LIBOR plus an applicable margin ............. -- 46,000,000 Senior six-year $70.0 million revolving credit facility, payable by DTS, interest at DTS' option at either the bank's base rate or the Eurodollar Rate .................................. -- 9,500,000 Senior six-year $20.0 million term loan facility, payable by DTS, interest at DTS' option at either the bank's base rate or the Eurodollar Rate .............................................. -- 20,000,000 Mortgage payable, due 2000, interest at 8.75% ................................ 477,664 464,664 Note payable, due 1998, interest at 10% ...................................... 3,050,000 -- Sellers' notes, various maturities and interest rates ........................ 7,171,621 30,683,832 Capital leases and other ..................................................... 673,849 695,235 ------------ ------------ 208,355,131 457,579,954 Less current maturities ...................................................... 6,357,320 13,601,883 ------------ ------------ Long-term debt ............................................................... $201,997,811 $443,978,071 ============ ============
9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Long-Term Debt (continued): In December 1997, PM&C entered into a $180.0 million six-year senior revolving credit facility (the "New Credit Facility"), which is collateralized by substantially all of the assets of PM&C and its subsidiaries. Interest on the New Credit Facility is, at PM&C's option, at either the bank's base rate plus an applicable margin or LIBOR plus an applicable margin. The New Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. The New Credit Facility will be used to finance future acquisitions and for working capital, capital expenditures and general corporate purposes. In October 1997, Pegasus completed an offering of senior notes (the "Senior Notes Offering") in which it sold $115.0 million of its 9.625% Series A Senior Notes due 2005 (the "9.625% Series A Senior Notes"), resulting in net proceeds to the Company of approximately $111.0 million. A portion of the proceeds from the Senior Notes Offering were used to retire an existing $130.0 million credit facility. In February 1998, pursuant to a registered exchange offer, Pegasus exchanged all $115.0 million of its 9.625% Series A Notes for $115.0 million of its 9.625% Series B Senior Notes due 2005 (the "9.625% Series B Senior Notes", and together with the 9.625% Series A Senior Notes, the "Senior Notes"). The 9.625% Series B Senior Notes have substantially the same terms and provisions as the 9.625% Series A Senior Notes. No gain or loss was recorded in connection with the exchange of the notes. In July 1997, DTS entered into an amended and restated $70.0 million six-year senior revolving credit facility and a $20.0 million six-year senior term facility (collectively, the "DTS Credit Facility"), which is collateralized by substantially all of the assets of DTS and its subsidiaries. Interest on the DTS Credit Facility is, at DTS' option, at either the bank's base rate or the Eurodollar Rate. The DTS Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. The DTS Credit Facility may be used to refinance certain existing indebtedness, finance future acquisitions and for working capital, capital expenditures and general corporate purposes. In July 1997, DTS completed a senior subordinated notes offering (the "DTS Notes Offering") in which it sold $155.0 million of its 12.5% Series A Senior Subordinated Notes due 2007 (the "DTS Series A Notes"), resulting in net proceeds to DTS of approximately $146.0 million. DTS used the net proceeds to fund an interest escrow account, which is included in restricted cash on the Company's consolidated balance sheets, for the first four semi-annual interest payments on the notes and to repay outstanding indebtedness under the DTS Credit Facility. In January 1998, DTS exchanged its DTS Series A Notes for its 12.5% Series B Senior Subordinated Notes due 2007 (the "DTS Series B Notes", and together with the DTS Series A Notes, the "DTS Notes"). The DTS Series B Notes have substantially the same terms and provisions as the DTS Series A Notes. The DTS Series B Notes are guaranteed on a full, unconditional, senior subordinated basis, jointly and severally by all direct and indirect subsidiaries of DTS, except DTS Capital, which is a co-issuer of the DTS Notes and currently has nominal assets and does not conduct any operations. The Company's indebtedness contain certain financial and operating covenants, including restrictions on the Company's ability to incur additional indebtedness, create liens and pay dividends. 10 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. Net Loss Per Common Share: Calculation of Basic and Diluted Earnings Per Common Share: The following table sets forth the computation of the number of shares used in the computation of basic and diluted earnings per common share:
Three Months Ended June 30, ------------------------------------ 1997 1998 ---- ---- Net loss applicable to common shares ($ 6,270,119) ($22,803,772) ============ ============ Weighted average common shares outstanding 9,801,057 14,310,075 ============ ============ Six Months Ended June 30, ------------------------------------ 1997 1998 ---- ---- Net loss applicable to common shares ($ 6,962,340) ($38,740,232) ============ ============ Weighted average common shares outstanding 9,773,933 12,332,244 ============ ============
For the three and six months ended June 30, 1997 and 1998, net loss per common share was determined by dividing net loss, as adjusted by the aggregate amount of dividends on the Company's Series A Preferred Stock, approximately $3.2 million, $5.3 million, $3.6 million and $7.2 million, respectively, by applicable shares outstanding. The total shares used for the calculation of diluted net loss per common share were not adjusted for securities that have not been issued as they are antidulitive. 7. Acquisitions: As of January 7, 1998, the Company acquired, from an independent DIRECTV(R) ("DIRECTV") provider, the rights to provide DIRECTV programming in certain rural areas of Minnesota and the related assets in exchange for total consideration of approximately $1.9 million, which consisted of $1.8 million in cash and $32,000 in assumed liabilities. As of March 9, 1998, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Nebraska and Texas and the related assets in exchange for total consideration of approximately $15.6 million, which consisted of $5.9 million in cash, $105,000 in assumed liabilities, a $9.4 million note, payable over four years; and $75,000 in cash and a $150,000 obligation, payable over two years, for consultancy and non-compete agreements. As of April 9, 1998, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of New Mexico and Texas and the related assets in exchange for total consideration of approximately $14.3 million, which consisted of $13.1 million in cash, $298,000 in assumed liabilities and 37,304 shares of the Company's Class A Common Stock (amounting to $900,000 at the time of issuance). 11 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7. Acquisitions (continued): On April 27, 1998, the Company acquired, from DTS, which holds the rights to provide DIRECTV programming in certain rural areas of California, Colorado, Georgia, Indiana, Kansas, Kentucky, New Hampshire, New Mexico, New York, South Carolina and Vermont, the related assets and liabilities in exchange for total consideration of approximately $345.2 million, which consisted of approximately 5.5 million shares of the Company's Class A Common Stock (amounting to $119.4 million at a price of $21.71 per share), approximately $158.9 million of assumed net liabilities and approximately $66.9 million of a deferred tax liability. As of May 11, 1998, the Company acquired, from three independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Idaho and Oregon and the related assets in exchange for total consideration of approximately $9.3 million, which consisted of $9.2 million in cash and $140,000 in assumed liabilities. As of June 10, 1998, the Company acquired, from four independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Idaho, South Dakota and Texas and the related assets in exchange for total consideration of approximately $12.5 million, which consisted of $12.2 million in cash, $154,000 in assumed liabilities; and a $120,000 obligation, payable over three years, for a non-compete agreement. The following unaudited summary, prepared on a pro forma basis, combines the results of operations as if the above DBS territories had been acquired as of the beginning of the periods presented, after including the impact of certain adjustments, such as the Company's payments to related parties, amortization of intangibles, interest expense, preferred stock dividends and related income tax effects. The pro forma information does not purport to be indicative of what would have occurred had the acquisitions been made on those dates or of results which may occur in the future. This pro forma information does not include any acquisitions that occurred subsequent to June 30, 1998.
Six Months Ended June 30, ------------------------- (in thousands, except per share data) (unaudited) 1997 1998 ---- ---- Net revenues ....................................... $77,754 $102,675 -------- --------- Operating loss...................................... ($38,532) ($40,867) -------- --------- Net loss............................................ ($48,269) ($58,714) Less: Preferred stock dividends..................... (7,154) (7,154) ========= ========= Net loss applicable to common shares................ ($55,423) ($65,868) ========= ========= Net loss per common share.......................... ($3.53) ($4.15) ========= =========
8. Supplemental Cash Flow Information: The Company incurred significant non-cash investing and financing activities in connection with the April 27, 1998 acquisition of DTS, (see footnote 7 - Acquisitions). The acquisition of DTS was accounted for using the purchase method of accounting. The purchase price of $345.2 million consisted of the issuance of approximately 5.5 million shares of Pegasus Class A Common Stock, valued at $21.71 per share ($119.4 million), to the shareholders of DTS and the assumption of net liabilities amounting to approximately $158.9 million (total assets of $216.4 million less intangibles of $161.0 million less total liabilities of $214.3 million). The Company also recorded a net deferred tax liability, primarily as a result of non-deductible amortization, of approximately $66.9 million of which $53.6 million was allocated to DBS rights and $13.3 million was recorded as a deferred tax asset. 12 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 9. Commitments and Contingent Liabilities: Legal Matters: From time to time the Company is involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the consolidated operations, liquidity, cash flows or financial position of the Company. 10. Other Events: On June 17, 1998 the Board of Directors declared a dividend on the Series A Preferred Stock in the aggregate of approximately 7,154 shares of Series A Preferred Stock, payable on July 1, 1998 to shareholders of record on June 15, 1998. Effective July 1, 1998, the Company sold substantially all the assets of its remaining New England cable systems to Avalon Cable of New England, LLC for approximately $30 million in cash. The Company expects to recognize a nonrecurring gain of approximately $26 million in the third quarter of 1998 relating to this transaction. As of July 10, 1998, the Company acquired, from three independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Alabama, Nebraska and South Dakota and the related assets in exchange for total consideration of approximately $17.9 million, which consisted of $17.8 million in cash; and a $125,000 obligation, payable over one year, for consultancy and non-compete agreements. On July 23, 1998, the Company entered into an agreement to purchase a cable system serving Aguadilla, Puerto Rico and neighboring communities for a purchase price of approximately $42 million in cash. The Aguadilla cable system serves approximately 21,500 subscribers and passes approximately 81,000 of the 90,000 homes in the franchise area. The Aquadilla cable system is contiguous to the Company's existing Puerto Rico cable system and, upon completion of the purchase, the Company intends to consolidate the Aquadilla cable system with its existing cable system. The closing of this acquisition is subject to regulatory and other approvals, as well as customary conditions, and the Company expects this transaction to close in the fourth quarter of 1998 or the first quarter of 1999. In July 1998, Pegasus commenced operations of TV station WFXU, which simulcasts the signal of WTLH, a TV station owned by the Company which is affiliated with Fox. WFXU is in the Tallahassee, Florida Designated Market Area ("DMA") and is being operated under a local marketing agreement ("LMA"). 13 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This Report contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the beliefs of the management of the Company, as well as assumptions made by and information currently available to the Company's management. When used in this Report, the words "estimate," "project," "believe," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. For a discussion of such risks, see the information contained in the section captioned "Risk Factors" (pages 12-21) of Pegasus' Proxy Statement/Prospectus dated April 14, 1998, filed as part of Pegasus' Registration Statement in Form S-4, File No. 333-44929 (the "Proxy Statement/Prospectus"), which section is incorporated by reference herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as the date hereof. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Unless otherwise defined, all defined terms used herein have the same meaning as in the footnotes to the Consolidated Financial Statements included herein. General The Company is a diversified company operating in growing segments of the media and communications industries: multichannel television and broadcast television. Pegasus Multichannel Television includes DBS and cable businesses. As of June 30, 1998, the Company's DBS operations consisted of providing DIRECTV services to approximately 329,000 subscribers in certain rural areas of thirty-five states in which the Company holds the exclusive right to provide such services. Its cable operations consist of a system in Puerto Rico. The Company sold its New Hampshire cable system effective January 31, 1997. The Company sold its remaining New England cable systems (Connecticut and Massachusetts) effective July 1, 1998. Pegasus Broadcast Television owns and operates six TV stations affiliated with Fox and operates one affiliated with UPN and another affiliated with WB. It has entered into an agreement to operate two additional TV stations, which will be affiliated with WB and will commence operations in the second half of 1998. On April 27, 1998, the Company acquired (the "DTS Acquisition") Digital Television Services, Inc. (DTS). Upon completion of the DTS Acquisition, DTS became a wholly owned subsidiary of Pegasus. As of June 30, 1998, DTS' operations consisted of providing DIRECTV services to approximately 150,000 subscribers in certain rural areas of eleven states in which DTS holds the exclusive right to provide such services. Multichannel revenues are derived from monthly customer subscriptions, pay-per-view services, subscriber equipment rentals, home shopping commissions, advertising time sales and installation charges. Broadcast revenues are derived from the sale of broadcast airtime to local and national advertisers. The Company's location operating expenses consist of (i) programming expenses, (ii) marketing and selling costs, including advertising and promotion expenses, local sales commissions and ratings and research expenditures, (iii) technical and operations costs, (iv) general and administrative expenses, and (v) expensed subscriber acquisition costs. Multichannel programming expenses consist of amounts paid to program suppliers, digital satellite system or DSS(R) ("DSS") authorization charges and satellite control fees, each of which is paid on a per subscriber basis, and DIRECTV royalties which are equal to 5% of DBS program service revenues. Broadcast programming expenses include the amortization of long-term program rights purchases, music license costs and "barter" programming expenses which represent the value of broadcast air time provided to television program suppliers in lieu of cash. 14 The Company no longer requires new DBS customers to sign a one-year programming contract and, as a result, subscriber acquisition costs ("SAC"), which were being capitalized and amortized over a twelve-month period, are currently being charged to operations in the period incurred. This change became effective October 1, 1997. Subscriber acquisition costs charged to operations are excluded from pre-marketing location operating expenses. Results of Operations Three months ended June 30, 1998 compared to three months ended June 30, 1997 The Company's net revenues increased by approximately $27.0 million or 136% for the three months ended June 30, 1998 as compared to the same period in 1997. Multichannel Television net revenues increased approximately $26.1 million or 219% and Broadcast Television net revenues increased $824,000 or 10%. The net revenues increased as a result of (i) a $25.6 million or 327% increase in DBS revenues of which $2.1 million or 8% was due to the increased number of DBS subscribers in territories owned at the beginning of 1997 and $23.6 million or 92% resulted from acquisitions made in 1997 and 1998, (ii) a $473,000 or 12% increase in Cable revenues which was due primarily to same system rate increases and increased subscriber levels, (iii) a $816,000 or 10% increase in TV revenues which was the result of a $409,000 or 5% increase in same station revenues due primarily to increases in local advertising sales and a $407,000 increase due to the two new stations launched in August 1997 and October 1997, and (iv) a $8,000 increase in Tower rental income. The Company's total pre-marketing location operating expenses, as described above (before DBS subscriber acquisition costs), increased by approximately $18.2 million or 144% for the three months ended June 30, 1998 as compared to the same period in 1997. Multichannel Television pre-marketing location operating expenses increased approximately $17.5 million or 232% and Broadcast Television location operating expenses increased $676,000 or 13%. The pre-marketing location operating expenses increased as a result of (i) a $17.4 million or 328% increase in operating expenses of the Company's DBS operations due to a same territory increase in programming and other operating costs totaling $1.1 million (resulting from the increased number of DBS subscribers in territories owned at the beginning of 1997) and a $16.3 million increase attributable to territories acquired in 1997 and 1998, (ii) a $94,000 or 4% increase in Cable operating expenses due primarily to increases in same system programming costs, and (iii) a $676,000 or 13% increase in TV operating expenses as the result of a $184,000 or 4% increase in same station operating expenses and a $492,000 increase attributable to the two new stations launched in August 1997 and October 1997. DBS subscriber acquisition costs, which consist of regional sales costs, advertising and promotion, and commissions and subsidies, totaled approximately $6.7 million or $276 per gross subscriber addition for the three months ended June 30, 1998 as compared to approximately $2.1 million or $384 per gross subscriber addition for the same period in 1997. Incentive compensation, which is calculated from increases in pro forma Location Cash Flow, increased by $381,000 or 158% for the three months ended June 30, 1998 as compared to the same period in 1997. Corporate expenses increased by $298,000 or 60% for the three months ended June 30, 1998 as compared to the same period in 1997 primarily due to increased staffing as a result of internal and acquisition related growth, enhanced public relations activities and additional public reporting requirements for the Company. Depreciation and amortization expense increased by approximately $10.7 million or 180% for the three months ended June 30, 1998 as compared to the same period in 1997 as the Company increased its fixed and intangible asset base as a result of twenty-five completed acquisitions during 1997 and thirteen completed acquisitions in the first half of 1998. 15 As a result of these factors, the Company's loss from operations increased by approximately $8.8 million for the three months ended June 30, 1998 as compared to the same period in 1997. Interest expense increased by approximately $7.5 million or 260% for the three months ended June 30, 1998 as compared to the same period in 1997 as a result of an increase in debt associated with the Company's acquisitions. The Company reported a net loss of approximately $19.2 million for the three months ended June 30, 1998 as compared to a net loss of approximately $3.1 million for the same period in 1997. The $16.1 million change was the net result of an increase in the loss from operations of approximately $8.8 million, an increase in interest expense of approximately $7.5 million and a decrease in other expenses of $90,000. The Company's preferred stock dividends, payable by issuing additional shares of Series A Preferred Stock, increased $390,000 for the three months ended June 30, 1998 as compared to the same period in 1997. Six months ended June 30, 1998 compared to six months ended June 30, 1997 The Company's net revenues increased by approximately $39.9 million or 112% for the six months ended June 30, 1998 as compared to the same period in 1997. Multichannel Television net revenues increased approximately $39.0 million or 187% and Broadcast Television net revenues increased $918,000 or 6%. The net revenues increased as a result of (i) a $38.2 million or 299% increase in DBS revenues of which $4.0 million or 11% was due to the increased number of DBS subscribers in territories owned at the beginning of 1997 and $34.1 million or 89% resulted from acquisitions made in 1997 and 1998, (ii) a $839,000 or 10% increase in Cable revenues which was the net result of a $972,000 or 12% increase in same system revenues due primarily to rate increases and increased subscriber levels, and a $133,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997, (iii) a $902,000 or 6% increase in TV revenues which was the result of a $179,000 or 1% increase in same station revenues due primarily to increases in local advertising sales and a $723,000 increase due to the two new stations launched in August 1997 and October 1997, and (iv) a $16,000 increase in Tower rental income. The Company's total pre-marketing location operating expenses, as described above (before DBS subscriber acquisition costs), increased by approximately $27.9 million or 122% for the six months ended June 30, 1998 as compared to the same period in 1997. Multichannel Television pre-marketing location operating expenses increased approximately $26.6 million or 202% and Broadcast Television location operating expenses increased approximately $1.3 million or 14%. The pre-marketing location operating expenses increased as a result of (i) a $26.2 million or 299% increase in operating expenses of the Company's DBS operations due to a same territory increase in programming and other operating costs totaling $2.4 million (resulting from the increased number of DBS subscribers in territories owned at the beginning of 1997) and a $23.8 million increase attributable to territories acquired in 1997 and 1998, (ii) a $362,000 or 8% increase in Cable operating expenses as the net result of a $428,000 or 10% increase in same system operating expenses due primarily to increases in programming costs and a $66,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997, (iii) a $1.3 million or 14% increase in TV operating expenses as the result of a $290,000 or 3% increase in same station operating expenses and a $1.0 million increase attributable to the two new stations launched in August 1997 and October 1997, and (iv) a $3,000 reduction in Tower administrative expenses. DBS subscriber acquisition costs, which consist of regional sales costs, advertising and promotion, and commissions and subsidies, totaled approximately $10.9 million or $279 per gross subscriber addition for the six months ended June 30, 1998 as compared to approximately $3.7 million or $355 per gross subscriber addition for the same period in 1997. 16 Incentive compensation, which is calculated from increases in pro forma Location Cash Flow, increased by $510,000 or 98% for the six months ended June 30, 1998 as compared to the same period in 1997. Corporate expenses increased by $577,000 or 64% for the six months ended June 30, 1998 as compared to the same period in 1997 primarily due to increased staffing as a result of internal and acquisition related growth, enhanced public relations activities and additional public reporting requirements for the Company. Depreciation and amortization expense increased by approximately $15.7 million or 145% for the six months ended June 30, 1998 as compared to the same period in 1997 as the Company increased its fixed and intangible asset base as a result of twenty-five completed acquisitions during 1997 and thirteen completed acquisitions in the first half of 1998. As a result of these factors, the Company's loss from operations increased by approximately $14.7 million for the six months ended June 30, 1998 as compared to the same period in 1997. Interest expense increased by approximately $10.3 million or 171% for the six months ended June 30, 1998 as compared to the same period in 1997 as a result of an increase in debt associated with the Company's acquisitions. The Company reported a net loss of approximately $31.6 million for the six months ended June 30, 1998 as compared to a net loss of approximately $1.7 million for the same period in 1997. The $29.9 million change was the net result of an increase in the loss from operations of approximately $14.7 million, an increase in interest expense of approximately $10.3 million, an increase in the provision for income taxes of $75,000, an increase in other expenses of $418,000 and a nonrecurring gain on the sale of the New Hampshire cable system of approximately $4.5 million during the first quarter of 1997. The Company's preferred stock dividends, payable by issuing additional shares of Series A Preferred Stock, increased approximately $1.8 million for the six months ended June 30, 1998 as compared to the same period in 1997. Liquidity and Capital Resources The Company's primary sources of liquidity have been the net cash provided by its TV and cable operations, credit available under its credit facilities and proceeds from public and private offerings. The Company's principal use of its cash has been to fund acquisitions, to meet debt service obligations, to fund investment in its TV and cable technical facilities and to fund DBS subscriber acquisition costs. Pre-Marketing Location Cash Flow increased by approximately $8.7 million or 122% for the three months ended June 30, 1998 as compared to the same period in 1997. Multichannel Television Pre-Marketing Location Cash Flow increased approximately $8.6 million or 195% and Broadcast Television Location Cash Flow increased $148,000 or 5%. Pre-Marketing Location Cash Flow increased as a result of (i) a $8.2 million or 326% increase in DBS Pre-Marketing Location Cash Flow of which $951,000 or 12% was due to an increase in same territory Pre-Marketing Location Cash Flow and $7.2 million or 88% was attributable to territories acquired in 1997 and 1998, (ii) a $379,000 or 20% increase in same system Cable Location Cash Flow, (iii) a $140,000 or 5% increase in TV Location Cash Flow as the net result of a $225,000 or 8% increase in same station Location Cash Flow and a $85,000 decrease attributable to the two new stations launched in August 1997 and October 1997, and (iv) a $8,000 increase in Tower Location Cash Flow. 17 Pre-Marketing Location Cash Flow increased by approximately $12.0 million or 94% for the six months ended June 30, 1998 as compared to the same period in 1997. Multichannel Television Pre-Marketing Location Cash Flow increased approximately $12.4 million or 160% and Broadcast Television Location Cash Flow decreased $404,000 or 8%. Pre-Marketing Location Cash Flow increased as a result of (i) a $12.0 million or 298% increase in DBS Pre-Marketing Location Cash Flow of which $1.6 million or 13% was due to an increase in same territory Pre-Marketing Location Cash Flow and $10.4 million or 87% was attributable to territories acquired in 1997 and 1998, (ii) a $477,000 or 13% increase in Cable Location Cash Flow which was the net result of a $544,000 or 15% increase in same system Location Cash Flow and a $67,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997, (iii) a $423,000 or 9% decrease in TV Location Cash Flow as a result of a $111,000 or 2% decrease in same station Location Cash Flow, primarily as a result of the cash flow generated by the Super Bowl in the first quarter of 1997, and a $312,000 decrease attributable to the two new stations launched in August 1997 and October 1997, and (iv) a $19,000 increase in Tower Location Cash Flow. During the six months ended June 30, 1998, net cash provided by operating activities was approximately $4.6 million which, together with $44.0 million of cash on hand, $3.1 million of cash acquired from the DTS Acquisition and $40.2 million of net cash provided by the Company's financing activities, was used to fund other investing activities of $54.7 million. Investing activities, net of cash acquired from the DTS Acquisition, consisted of (i) the acquisition of DBS assets from three independent DIRECTV providers during the first quarter of 1998 for approximately $7.8 million, (ii) the acquisition of DBS assets from nine independent DIRECTV providers during the second quarter of 1998 for approximately $34.5 million, (iii) broadcast television transmitter, tower and facility upgrades totaling approximately $2.2 million, (iv) payments of programming rights amounting to $1.2 million, (v) capitalized costs relating to the DTS Acquisition of $4.3 million, and (vi) maintenance and other capital expenditures and intangibles totaling approximately $4.8 million. Financing activities consisted of (i) the repayment of approximately $5.7 million of long-term debt and capital leases, (ii) borrowings on bank credit facilities totaling $46.0 million, and (iii) the net placing of $121,000 in restricted cash to collateralize letters of credit. As of June 30, 1998, the Company's cash on hand approximated $37.2 million. As defined in the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights thereof (the "Certificate of Designation") governing the Series A Preferred Stock and the indenture governing the Senior Notes (the "Senior Indenture"), the Company is required to provide Adjusted Operating Cash Flow data for Pegasus and its Restricted Subsidiaries on a consolidated basis, where Adjusted Operating Cash Flow is defined as "for the four most recent fiscal quarters for which internal financial statements are available, Operating Cash Flow of such Person and its Restricted Subsidiaries, less DBS Cash Flow (Satellite Segment Operating Cash Flow) for the most recent four-quarter period, plus DBS Cash Flow for the most recent quarterly period multiplied by four." Operating Cash Flow is income from operations before income taxes, depreciation and amortization, interest expense, extraordinary items and non-cash charges. Although Adjusted Operating Cash Flow is not a measure of performance under generally accepted accounting principles, the Company believes that Location Cash Flow, Operating Cash Flow and Adjusted Operating Cash Flow are accepted within the Company's business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Restricted Subsidiaries carries the same meaning as in the Certificate of Designation. Pro forma for the twelve completed DBS acquisitions occurring in the fist half of 1998, as if such acquisitions occurred on January 1, 1998, Adjusted Operating Cash Flow would have been approximately $41.5 million, as follows: 18
Four Quarters Ended (in thousands) June 30, 1998 ------------------ Revenues $137,241 Direct operating expenses, excluding depreciation, amortization and other non-cash charges 92,874 ------------- Income from operations before incentive compensation, corporate expenses, depreciation, amortization and other non-cash charges 44,367 Corporate expenses 2,833 ------------- Adjusted operating cash flow $41,534 =============
The Company is restricted by the Senior Notes Indenture from paying dividends on the Series A Preferred Stock in cash prior to July 1, 2002. The indenture governing the PM&C Notes (the "PM&C Notes Indenture") and the New Credit Facility contain certain financial and operating covenants, including restrictions on PM&C's ability to incur additional indebtedness, create liens and pay dividends. The indenture governing the DTS Notes (the "DTS Notes Indenture") and the DTS Credit Facility contain certain financial and operating covenants, including restrictions on DTS' ability to incur additional indebtedness, create liens and pay dividends. Pre-Marketing Location Cash Flow is defined as net revenues less location operating expenses before subscriber acquisition costs. Location Cash Flow is defined as net revenues less location operating expenses. Although Pre-Marketing Location Cash Flow and Location Cash Flow are not measures of performance under generally accepted accounting principles, the Company believes that Pre-Marketing Location Cash Flow and Location Cash Flow are accepted within the Company's business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, these measures should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measures for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. The Company believes that it has adequate resources to meet its working capital, maintenance capital expenditure and debt service obligations. The Company engages in discussions with respect to acquisition opportunities in media and communications businesses on a regular basis. The Company believes that cash on hand, together with available borrowings under the New Credit Facility and the DTS Credit Facility and future indebtedness which may be incurred by the Company and its subsidiaries will give the Company the ability to fund acquisitions and other capital requirements in the future. However, there can be no assurance that the future cash flows of the Company will be sufficient to meet all of the Company's obligations and commitments. The Company closely monitors conditions in the capital markets to identify opportunities for the effective and prudent use of financial leverage. In financing its future expansion and acquisition requirements, the Company would expect to avail itself of such opportunities and thereby increase its indebtedness, which could result in increased debt service requirements. There can be no assurance that such debt financing can be completed on terms satisfactory to the Company or at all. The Company may also issue additional equity to fund its future expansion and acquisition requirements. 19 Capital Expenditures The Company's capital expenditures aggregated $9.9 million in 1997. The Company expects recurring renewal and refurbishment capital expenditures to total approximately $2.0 million per year. In addition to these maintenance capital expenditures, the Company's 1998 capital projects include (i) DBS facility upgrades of approximately $500,000 and (ii) approximately $2.6 million of TV expenditures for broadcast television transmitter, tower and facility constructions and upgrades. The Company commenced the programming of three new TV stations, WPME in August 1997, WGFL in October 1997 and WFXU in July 1998 and its plans are to commence programming of two additional stations in the second half of 1998. There can be no assurance that the Company's capital expenditure plans will not change in the future. Effective October 1, 1997, the Company no longer requires new DBS customers to sign a one-year programming contract and, as a result, subscriber acquisition costs, which were being capitalized through September 30, 1997 and amortized over a twelve-month period, will be charged to operations in the period incurred. The Company's policy is to capitalize subscriber acquisition costs directly related to new subscribers, such as commissions and equipment subsidies, who sign a programming contract. These costs are amortized over the life of the contract. The Company expenses its subscriber acquisition costs when no new contract is obtained. The Company currently does not require new DBS customers to sign programming contracts and, as a result, subscriber acquisition costs are currently being charged to operations in the period incurred. Other The Company has reviewed all of its systems as to the Year 2000 issue. The Company has in the past three years replaced or upgraded, or is in the process of replacing or upgrading, all of its TV traffic systems, cable billing systems and corporate accounting systems. All of these new systems will be in place by the third quarter of 1998. The Company relies on outside vendors for the operation of its DBS satellite control and billing systems, including DIRECTV, the NRTC and their respective vendors. The Company has established a policy to ensure that its vendors are currently in compliance with the Year 2000 issue or have a plan in place to be in compliance with the Year 2000 issue by the first quarter of 1999. Costs to be incurred beyond June 30, 1998 relating to the Year 2000 issue are not expected to be significant. On April 27, 1998, the Company acquired Digital Television Services, Inc. (DTS) for total consideration of approximately $345.2 million, which consisted of approximately 5.5 million shares of the Company's Class A Common Stock (amounting to $119.4 million at a price of $21.71 per share), approximately $158.9 million of assumed net liabilities and approximately $66.9 million of a deferred tax liability. Upon completion of the DTS Aquisition, DTS became a wholly owned subsidiary of Pegasus. As of June 30, 1998, DTS' operations consisted of providing DIRECTV services to approximately 150,000 subscribers in certain rural areas of eleven states in which DTS holds the exclusive right to provide such services. Effective July 1, 1998, the Company sold substantially all the assets of its remaining New England cable systems to Avalon Cable of New England, LLC for approximately $30 million in cash. The Company expects to recognize a nonrecurring gain of approximately $26 million in the third quarter of 1998 relating to this transaction. On July 23, 1998, the Company entered into an agreement to purchase a cable system serving Aguadilla, Puerto Rico and neighboring communities for a purchase price of approximately $42 million in cash. As of June 30, 1998, the Aguadilla cable system serves approximately 21,500 subscribers and passes approximately 81,000 of the 90,000 homes in the franchise area. The Company expects this transaction to close in the fourth quarter of 1998 or the first quarter of 1999. The closing of the acquisition is subject to regulatory and other approvals, as well as customary conditions, and the Company expects this transaction to close in the fourth quarter of 1998 or the first quarter of 1999. 20 As a holding company, Pegasus' ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect subsidiaries. Under the terms of the indenture governing PM&C's Series B Senior Subordinated Notes due 2005 (the "PM&C Notes Indenture"), PM&C is prohibited from paying dividends prior to July 1, 1998. Under the terms of the New Credit Facility, PM&C is restricted from paying dividends. Under the terms of the DTS Notes Indenture and the DTS Credit Facility, DTS is restricted from paying dividends. In addition, Pegasus' ability to pay dividends and Pegasus' and its subsidiaries' ability to incur indebtedness are subject to certain restrictions contained in the Senior Notes Indenture and the Certificate of Designation governing the Series A Preferred Stock. PM&C's ability to incur additional indebtedness is limited under the terms of the PM&C Notes Indenture and the New Credit Facility. These limitations take the form of certain leverage ratios and are dependent upon certain measures of operating profitability. Under the terms of the New Credit Facility, capital expenditures and business acquisitions in excess of certain agreed upon levels will require lender consent. DTS' ability to incur additional indebtedness is limited under the terms of the DTS Notes Indenture and the DTS Credit Facility. These limitations take the form of certain leverage ratios and are dependent upon certain measures of operating profitability and not exceeding a certain "borrowing base" based on the number of paying subscribers and households in DTS' territories. The terms of the DTS Credit Facility contain a number of other significant covenants that, among other things, limit DTS' ability to make capital expenditures and business acquisitions. The Company's revenues vary throughout the year. As is typical in the broadcast television industry, the Company's first quarter generally produces the lowest revenues for the year and the fourth quarter generally produces the highest revenues for the year. The Company's operating results in any period may be affected by the incurrence of advertising and promotion expenses that do not necessarily produce commensurate revenues in the short-term until the impact of such advertising and promotion is realized in future periods. The Company believes that inflation has not been a material factor affecting the Company's business. In general, the Company's revenues and expenses are impacted to the same extent by inflation. Substantially all of the Company's indebtedness bears interest at a fixed rate. In February 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits". In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Management has reviewed the provisions of SFAS No. 132 and SFAS No.133 and the implementation of these standards is not expected to have any significant impact on its consolidated financial statements. Item 3: Quantitative and Qualitative Disclosures About Market Risk Not Applicable 21 Part II. Other Information Item 2: Changes in Securities and Use of Proceeds On April 28,1998, Pegasus issued 37,304 shares of its Class A Common Stock as partial consideration for the acquisition of DIRECTV rights and related assets from an independent provider of DIRECTV in certain rural areas of Texas. In issuing these shares, Pegasus relied upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended. Item 4: Submission of Matters to a Vote of Security Holders April 27, 1998 Special Meeting. On April 27, 1998, Pegasus held a special meeting of its stockholders to approve the merger agreement relating to the acquisition of DTS, proposals to amend certain of Pegasus' employee benefit plans, and proposals to amend certain provisions of the Certificate of Designation governing the Series A Preferred Stock and, if issued, the Exchange Notes. Information regarding the April 27, 1998 special meeting has been "previously reported" within the meaning of Rule 12b-2 of the Securities Exchange Act of 1934, as amended, under Part II, Item 5 of Pegasus' Form 10-Q for the quarterly period ended March 31, 1998. June 17, 1998 Annual Meeting. The 1998 Annual Meeting of Stockholders of Pegasus was held on June 17, 1998. At this meeting, Marshall W. Pagon, Michael C. Brooks, Harry F. Hopper, III, James J. McEntee, III, Mary C. Metzger, William B. Phoenix, Riordon B. Smith, Robert N. Verdecchio, and Donald W. Weber were elected to Pegasus' Board of Directors. In such election, 52,072,288 votes were cast for each director, 750 votes were held in abstention with respect to each director, and no votes were cast against any director. At the 1998 Annual Meeting, 52,073,038 shares were voted for ratification of the appointment of Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP) as Pegasus' independent accountants for 1998 and no votes were held in abstention or cast against ratification of the appointment. Item 5: Other Information New England Cable Sale. Effective July 1, 1998, Pegasus sold substantially all of the assets of its remaining New England cable systems to Avalon Cable of New England, LLC for approximately $30 million in cash. Pegasus expects to recognize a nonrecurring gain of approximately $26 million in the third quarter of 1998 relating to this sale. Puerto Rico Cable Acquisition. On July 23, 1998, a subsidiary of Pegasus entered into a definitive agreement to purchase a cable system serving Aguadilla, Puerto Rico and neighboring communities for a purchase price of approximately $42 million in cash. The Aguadilla system services approximately 21,500 subscribers and passes approximately 81,000 of the 90,000 homes in the franchised area. The Aguadilla system is contiguous to the Company's existing Puerto Rico cable system and, upon completion of the purchase, the Company intends to consolidate the Aquadilla cable system with its existing cable system. The closing of the acquisition is subject to regulatory and other approvals, as well as customary conditions, and the Company expects this transaction to close in the fourth quarter of 1998 or the first quarter of 1999. Tracking Stock. On July 28, 1997, Pegasus announced that it intends to create a new class of common stock to track the results of its Puerto Rico operations. Under the terms of the proposed tracking stock, the entire economic interest in the Puerto Rico operations would be represented by shares of the tracking stock. Holders of tracking stock shares would be exclusively entitled to receive the net proceeds of any disposition of all or substantially all of the Puerto Rico assets. Upon issuance of the tracking stock, existing shares of Pegasus common stock would thereafter represent an economic interest in Pegasus' DBS and TV operations. The creation of the tracking stock is subject to stockholder approval. 22 Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 2.1 Asset Purchase Agreement made as of July 23, 1998 by and among Pegasus Cable Television, Inc., Cable Systems USA, Partners, J&J Cable Partners, Inc., and PS&G Cable Partners, Inc. (Appendices have been omitted but will be provided upon request to the SEC). 3.1 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, as amended by Certificate of Amendment. 27.1 Financial Data Schedule. (b) Reports on Form 8-K On May 11, 1998, Pegasus filed a Current Report on Form 8-K dated April 27, 1998 reporting under Item 5 the following events: (i) the results of the April 27, 1998 special meeting of Pegasus' stockholders and (ii) the merger (the "Merger") of DTS into a wholly-owned subsidiary of Pegasus on April 27, 1998, which resulted in DTS becoming a wholly-owned subsidiary of Pegasus, the issuance of 5,471,296 shares of Pegasus' Class A Common Stock, and the election of three directors to Pegasus' Board of Directors as the designees of certain of DTS' former stockholders under a voting agreement that Pegasus had entered into in connection with the Merger. 23 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 Date August 13, 1998 By /s/ Robert N. Verdecchio - -------------------- --------------------------- Robert N. Verdecchio Senior Vice President, Chief Financial Officer, Assistant Secretary and Director (Principal Financial and Accounting Officer) 24 EXHIBIT INDEX 2.1 Asset Purchase Agreement made as of July 23, 1998 by and among Pegasus Cable Television, Inc., Cable Systems USA, Partners, J&J Cable Partners, Inc., and PS&G Cable Partners, Inc. (Appendices have been omitted but will be provided upon request to the SEC). 3.1 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, as amended by Certificate of Amendment. 27.1 Financial Data Schedule. EX-2 2 EXHIBIT 2.1 ASSET PURCHASE AGREEMENT PEGASUS CABLE TELEVISION, INC. and CABLE SYSTEMS USA, PARTNERS J&J CABLE PARTNERS, INC. PS&G CABLE PARTNERS, INC. -------------------------------- Dated July 23, 1998 --------------------------------
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.............................................................................................1 1.1 Defined Terms........................................................................................1 ARTICLE II BASIC TRANSACTION.....................................................................................11 2.1 Purchase and Sale of Assets.........................................................................11 2.2 Purchase Price......................................................................................11 2.3 Adjustments to the Purchase Price...................................................................11 2.4 Escrow Arrangements.................................................................................12 2.5 Allocation of Purchase Price........................................................................12 2.6 Closing.............................................................................................13 ARTICLE III ASSUMED LIABILITIES AND EXCLUDED ASSETS..............................................................13 3.1 Assignment and Assumption...........................................................................13 3.2 Excluded Assets.....................................................................................13 ARTICLE IV REPRESENTATIONS AND WARRANTIES........................................................................14 4.1 Representations and Warranties of Seller and the Partners...........................................14 4.2 Repesentations and Warranties of Buyer..............................................................30 ARTICLE V PRE-CLOSING COVENANTS..................................................................................31 5.1 Due Diligence Investigation.........................................................................31 5.2 Exclusivity.........................................................................................32 5.3 Corporate Matters...................................................................................32 5.4 Continuity and Maintenance of Operations; Financial Statements......................................32 5.5 Employee Matters....................................................................................34 5.6 Required Consents...................................................................................34 5.7 Projects in Progress................................................................................35 5.8 Notification of Certain Matters.....................................................................35 5.9 Risk of Loss; Condemnation..........................................................................35 5.10 Transfer Taxes......................................................................................36 5.11 Distant Broadcast Signals...........................................................................36 5.12 Programmers.........................................................................................36 5.13 Updated Disclosure Schedule.........................................................................37 5.14 CRIM ...............................................................................................37 5.15 Fondo del Seguro....................................................................................37 ARTICLE VI CONDITIONS PRECEDENT..................................................................................37 6.1 Conditions to the Obligations of Buyer..............................................................37 6.2 Conditions to Obligations of Seller and Partners....................................................40 6.3 Waiver of Conditions................................................................................41
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TABLE OF CONTENTS (continued) Page ARTICLE VII POST-CLOSING COVENANTS...............................................................................42 7.1 Litigation Support..................................................................................42 7.2 Transition..........................................................................................42 ARTICLE VIII TERMINATION.........................................................................................42 8.1 Events of Termination...............................................................................42 8.2 Liabilities in Event of Termination.................................................................43 8.3 Procedure Upon Termination..........................................................................43 ARTICLE IX REMEDIES FOR BREACH OF THIS AGREEMENT.................................................................43 9.1 Survival of Representations and Warranties..........................................................43 9.2 Indemnification Provisions for Benefit of Buyer.....................................................44 9.3 Indemnification Provisions for Benefit of Seller....................................................44 9.4 Matters Involving Third Parties.....................................................................45 9.5 Determination of Adverse Consequences...............................................................46 9.6 Escrow Deposit and Indemnification Fund............................................................46 9.7 Limitations.........................................................................................46 ARTICLE X MISCELLANEOUS..........................................................................................47 10.1 Press Releases and Public Announcements.............................................................47 10.2 Parties Obligated and Benefited.....................................................................47 10.3 Notices.............................................................................................47 10.4 Attorneys' Fees.....................................................................................48 10.5 Waiver..............................................................................................49 10.6 Headings............................................................................................49 10.7 Choice of Law.......................................................................................49 10.8 Rights Cumulative...................................................................................49 10.9 Further Actions.....................................................................................49 10.10 Time ...............................................................................................49 10.11 Late Payments.......................................................................................49 10.12 Counterparts........................................................................................49 10.13 Entire Agreement....................................................................................49 10.14 Amendments and Waivers..............................................................................50 10.15 Severability........................................................................................50 10.16 Construction........................................................................................50 10.17 Expenses............................................................................................50
ii Appendices 1 Form of Escrow Agreement 2 Purchase Price Allocation 3 Excluded Assets 4 Encumbrances To Be Discharged 5 Proof of Performance Tests and Cumulative Leakage Index Reports 6 Form of Bill of Sale 7 Form of Non-Competition Agreement 8 Form of FIRPTA Affidavit 9 Form of Opinion of Baer Marks & Upham LLP 10 Form of Opinion of Cole, Raywid & Braverman, L.L.P. 11 Form of Assumption Agreement 12 Form of Opinion of Drinker Biddle & Reath LLP -i- ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT ("Agreement") is made this 23rd day of July, 1998, by and among PEGASUS CABLE TELEVISION, INC., a Massachusetts corporation ("Buyer"); and CABLE SYSTEMS USA, PARTNERS, a Delaware general partnership doing business as Cable TV Del Noroeste ("Seller"), J&J CABLE PARTNERS, INC., a Delaware corporation ("J&J"), and PS&G CABLE PARTNERS, INC., a Delaware corporation ("PS&G"). J&J and PS&G are collectively referred to herein as the "Partners." Buyer, Seller and the Partners are collectively referred to herein as the "Parties." RECITALS: WHEREAS, Seller owns and operates the System and holds a franchise therefor issued by the Telecommunications Regulatory Board; and WHEREAS, subject to the terms, conditions and provisions hereof, Buyer wishes to acquire from Seller, and Seller wishes to sell to Buyer, substantially all of the Assets of the Business for the Purchase Price stipulated herein. NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, and intending to be legally bound hereby, the Parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Defined Terms. The following terms shall have the following meanings for purposes of this Agreement: "Accountant" means Coopers & Lybrand L.L.P. "Accounts Receivable" means all subscriber, trade and other accounts receivable arising from Seller's operation of the System. "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, reasonable legal, reasonable accounting, experts' and other reasonable fees, costs and reasonable expenses). "Affiliate" means, with respect to any Person: (a) 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; (b) 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; (c) any Person directly or indirectly controlling, controlled by, or under common control with such other Person; (d) any officer, director or partner of such other Person; and (e) if such other person is an officer, director or partner, any Person for which such person acts in any such capacity. "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. "Assets" means all properties, assets, privileges, powers, rights, interests and claims, real and personal, tangible and intangible, of every type and description that are owned, leased, held, used or useful in the Business in which Seller or either of the Partners has any right, title or interest or in which Seller or either of the Partners 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 Seller, including Accounts Receivable, Books and Records, Business Radio Licenses, Equipment, Intangibles, Intellectual Property, Inventory, Real Property and Seller Contracts listed in Section 4.1(r) of the Disclosure Schedule, but excluding any Excluded Assets. "Assumed Liabilities" means and is limited to: (a) Seller's obligations to subscribers of the Business for: (i) subscriber deposits held by Seller as of the Closing Date and which are refundable, in the amount for which Buyer receives credit under Section 2.3; (ii) subscriber advance payments held by Seller as of the Closing Date for services to be rendered by the System after the Closing Date, in the amount for which Buyer receives credit under Section 2.3; (iii) the delivery of cable television service to subscribers of the Business after the Closing Date; and (b) obligations accruing and relating to periods on and after the Closing Date with respect to the Business, including but not limited to obligations under Governmental Permits and Seller Contracts (other than Seller Contracts constituting Excluded Assets); provided, however, that the Assumed Liabilities shall not include: (i) any Liability of Seller or any of its Affiliates for income, transfer, sales, use and other Taxes arising in connection with the consummation of the transactions contemplated hereby, except as expressly provided herein; (ii) any Liability of Seller or any of its Affiliates for the unpaid Taxes of any Person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law) as a transferee or successor, by contract or otherwise; (iii) any obligation of Seller or any of its Affiliates to indemnify any Person (including Seller) by reason of the fact that such Person was an officer, director, shareholder, employee or agent of Seller or was serving at the request of Seller as a partner, trustee, director, officer, employee or agent of another entity (whether such indemnification is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses, expenses or otherwise and whether such indemnification is pursuant to any statute, charter - 2 - document, by-law, agreement or otherwise); (iv) any Liability of Seller or any of its Affiliates for costs and expenses incurred in connection with this Agreement or the transactions contemplated hereby; (v) any Liability or obligation of Seller or any of its Affiliates for underaccrued property taxes with respect to any of the Assets owed to the Commonwealth of Puerto Rico; (vi) any Liability or obligation of Seller or any of its Affiliates under this Agreement or any agreement executed and delivered in connection herewith; (vii) any Liability or obligation to Taxing Authorities, Fondo del Seguro, any other Governmental Authorities or programmers relating to any periods prior to the Closing Date; (viii) any Liability or obligation of Seller or any of its Affiliates to Pole Attachment Authorities relating to any periods prior to Closing; (ix) any obligation to employees, agents or independent contractors of Seller or any of its Affiliates relating to any periods prior to Closing; or (x) any liability relating to civil, criminal and/or administrative cases or proceedings, or awards of arbitration tribunals, relating to periods prior to Closing. "Basic Services" means the group of cable television program services sold to subscribers as a package and described in Section 4.1(q) of the Disclosure Schedule, including broadcast and satellite service programming for which a subscriber pays a fixed monthly fee to Seller, but not including Pay TV. "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. "Books and Records" means all books and records relating to the Business or the System, including purchase and sale order files, subscriber lists, mailing lists, sales materials and records, personnel files, media materials and plates, blueprints, strand maps, as-built maps, other technical data and records, all correspondence with and documents pertaining to subscribers, suppliers, Governmental Authorities and other third parties, all records relating to the System and program carriage, all reports filed with governmental Authorities, all statements of account filed with the United States Copyright Office, and all records evidencing the Accounts Receivable and a schedule of accounts receivable aging. "Business" means the cable television business conducted by Seller on the date of this Agreement through the System in and around the Service Area. "Business Day" means any day other than Saturday, Sunday or a day on which banking institutions in San Juan, Puerto Rico, or New York, New York, are required or authorized to be closed. "Business Radio Licenses" means Business Radio Licenses described in Section 4.(i) of the Disclosure Schedule. "Cash" means cash and cash equivalents (including marketable securities and short term investments) calculated in accordance with GAAP applied on a basis consistent with the preparation of the Financial Statements. - 3 - "Code" means the Internal Revenue Code of 1986, as amended. "CRIM" means the Centro de Recaudacion de Ingresos Municipales of the Commonwealth of Puerto Rico. "EBITDA" means net income adjusted, without duplication, by (i) adding (to the extent deducted in arriving at net income) expense items in respect of interest, taxes on or measured by income, depreciation and amortization, and (ii) eliminating (a) expenses attributable to Seller's office in Crown, Pennsylvania, and (b) items of revenue, expense, gain and loss that are both nonrecurring and unrelated to the operation of the System, whether or not classified as extraordinary items. All determinations under this definition shall be made in accordance with GAAP without regard to any materiality threshold otherwise applicable under GAAP. "Effective Competition Order" means the Memorandum Opinion and Order of the Acting Chief, Cable Services Bureau of the FCC, in In the Matter of Cable TV Del Noroeste, No. DA 98-1269 adopted June 26, 1998, and released June 30, 1998. "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); or (d) Employee Welfare Benefit Plan or material fringe benefit plan or program. "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, assessment, restrictive agreement, restriction, adverse interest, restriction on transfer or any exception to or defect in title or other ownership interest (including reservations, rights of way, possibilities of reverter, encroachments, easements, rights of entry, restrictive covenants, leases and licenses). "Environmental Law" means any Legal Requirement (including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976 and the Occupational Safety and Health Act of 1970, as amended), relating to or concerning pollution or protection of public health, safety or welfare or the environment, including those relating to emissions, discharges, releases or threatened releases of Hazardous Substances into the environment (including ambient air, surface water, ground water or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances. - 4 - "Equipment" means all electronic devices, trunk, distribution and drop coaxial and optical fiber cable and distribution plant, amplifiers, power supplies, transformers, conduit, vaults and pedestals, towers, antennas, grounding and pole hardware, housedrops (including disconnected housedrops), subscribers devices (including converters, encoders, decoders, transformers behind television sets and fittings), headend hardware (including origination, earth stations, transmission and distribution system), test equipment, computers, vehicles (including trucks, tractors and trailers), machinery, office equipment, furnishings, inventories and supplies, spare parts, new and used testing equipment and tools (including those normally used for installation, construction and maintenance) and other tangible personal property owned, leased, used or held for use in the Business, other than any such property listed as an Excluded Asset. "Equivalent Basic Subscribers" means the number of active subscribers equal to the quotient of (1) the aggregate revenues, excluding taxes, earned by the System for Basic Services provided by the System during the month last ended before the Closing Date from (a) billings to hotels, motels, or other nonresidential customers (each a "Commercial Account"), (b) billings to residential multiple dwelling units (each a "MDU"), and (c) billings to other subscribers that are billed for such service on a bulk basis, divided by (2) the System's regular monthly subscription rate for Full Basic Services (as described in Section 4.1(q) of the Disclosure Schedule) for such month. For purposes of the foregoing, there will be excluded: (i) any subscriber who is 45 days or more past due in the payment of any amount payable to Seller, excluding late charges, disconnect fees, and any amount that is the subject of a bona fide dispute; (ii) any subscriber who has not paid at least two full months' payment for Basic Services and all installation charges owed and due; (iii) any subscriber whose service is pending disconnection for any reason; and (iv) any subscriber who was solicited to purchase such services by any promotions or by offers of discounts not described in Section 1.1(a) of the Disclosure Schedule. For purposes of this Agreement, payments on account of monthly billings to a subscriber of the System will be deemed to be due on the first day of the month during which the service to which such billings relate is provided. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escrow Agent" means First Union National Bank. "Escrow Agreement" means the Escrow Agreement to be executed and delivered concurrently with the execution hereof by the Escrow Agent, Buyer, Seller and the Partners, substantially in the form of Appendix 1 hereto. "FCC" means the United States Federal Communications Commission. "Fiduciary" has the meaning set forth in ERISA Section 3(21). "Final Order" means action by the FCC or the Telecommunications Regulatory Board, as applicable, as to which (i) no request for stay by the FCC or the Telecommunications Regulatory Board, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for filing any such request is designated by statute or regulation, such deadline has - 5 - passed; (ii) no petition for rehearing or reconsideration of the action is pending before the FCC or the Telecommunications Regulatory Board, as applicable, and the time for filing any such petition has passed; (iii) the FCC or the Telecommunications Regulatory Board, as applicable, does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal to a court, or request for stay by a court, of the FCC's action or the Telecommunications Regulatory Board, as applicable, is pending or in effect, and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "Fondo del Seguro" means the Puerto Rico Fondo del Seguro del Estado. "Franchise" means the existing or any future authorizations of the Telecommunications Regulatory Board to construct and/or operate the System. "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 the Commonwealth of Puerto Rico and 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. "Governmental Permits" means the Franchise and all approvals, authorizations, permits, consents, licenses, certificates of compliance, easements, registrations, qualifications, leases, variances and similar rights held by Seller from any Governmental Authority and necessary or useful for the operation of the System as now operated. "Hacienda" means the Treasury Department of the Commonwealth of Puerto Rico. "Hazardous Substances" means any pollutant, contaminant, chemical, industrial, toxic, hazardous or noxious substance or waste that is regulated by any Governmental Authority, including: (a) any petroleum or petroleum compounds (refined or crude), flammable substances, explosives, radioactive materials or any other materials or pollutants that pose a hazard or potential hazard to the Real Property or to Persons in or about the Real Property or cause the Real Property to be in violation of any Environmental Laws; (b) asbestos or any asbestos-containing material of any kind or character; (c) polychlorinated biphenyls ("PCBs"), as regulated by the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; (d) any materials or substances designated as "hazardous substances" pursuant to the Clean Water Act, 33 U.S.C. Section 1251 et seq.; (e) any "economic poison," as defined in the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 135 et seq.; (f) any "chemical substance," "new chemical substance" or "hazardous chemical substance or mixture" pursuant to the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; (g) any "hazardous substances" pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq.; (h) any "hazardous waste" pursuant to the Resource Conservation and Recovery Act, 42 U.S.C. - 6 - Section 6901 et seq.; and (i) any "extremely hazardous substance" pursuant to Section 202 of the Emergency Planning and Community Right-to-Know Act of 1986, as amended. "HSR Act" means the Hart-Scott-Rodino antitrust Improvements Act of 1976. "Individual Subscriber" means any active single household subscriber of the System that pays Seller for Basic Services, excluding (i) any subscriber who is 45 days or more past due in the payment of any amount payable to Seller, excluding late charges, disconnect fees, and any amount that is the subject of a bona fide dispute; (ii) any subscriber who has not paid at least two full months' payment for Basic Services and all installation charges owed and due; (iii) any subscriber whose service is pending disconnection for any reason; and (iv) any subscriber who was solicited to purchase such service by any promotions or by offers or discounts not described in Section 1.1(a) of the Disclosure Schedule. For purposes of this Agreement, payments on account of monthly billings will be deemed to be due on the first day of the month during which the service to which such billings relate is provided. "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 (excluding any of the Excluded Assets). "Intellectual Property" means all: (a) patents, patent applications and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions and extensions thereof; (b) trademarks, service marks, trade dress, logos, trade names and corporate names (including the name "Cable TV Del Noroeste" and any variation thereof), together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith; (c) all copyrightable works, all copyrights and all applications, registrations and renewals in connection therewith; (d) 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); (e) all computer software (including data and related documentation); (f) all other proprietary rights; and (g) all copies and tangible embodiments thereof (in whatever form or medium). "Inventory" has the meaning given to that term in the Uniform Commercial Code. "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 (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. - 7 - "Material Consents" means the Required Consents listed under the caption "Material Consents" on Section 4.1(c) of the Disclosure Schedule. "Multiemployer Plan" has the meaning set forth in ERISA Section 3(37). "Ordinary Course" means the ordinary course of business of the Business, consistent with past custom and practice (including with respect to quantity and frequency). "Normal Qualifications" means bankruptcy, insolvency and other laws affecting creditors' rights generally, and general principles of equity. "Pay TV" means premium programming services selected by and sold to subscribers on a package or an a la carte basis for monthly fees in addition to the fee for Basic Services. "PBGC" means the Pension Benefit Guaranty Corporation. "Permitted Encumbrances" mean the following Encumbrances: (a) zoning laws and ordinances; (b) rights reserved to any Governmental Authority to regulate the affected property; and (c) as to Real Property interests, any easements, covenants, conditions, rights-of-way, servitudes, permits, restrictions and minor imperfections or irregularities in title that do not individually or in the aggregate materially and adversely interfere with the conduct of the Business or the right or ability to own, use or operate the Real Property or to convey good, marketable and indefeasible title to such Real Property. "Person" means any natural person, corporation, partnership, trust, unincorporated organization, association, limited liability company, Governmental Authority or other entity. "Pole Attachment Authorities" means the Puerto Rico Telephone Company and the Puerto Rico Electric Power Authority. "Prohibited Transaction" has the meaning set forth in ERISA Section 406 and Code Section 4975. "Real Property" means all Assets consisting of realty or interests therein, including appurtenances, improvements and fixtures located on such realty, and any other interests in real property, including ownership interests in Seller's offices and headend sites, leasehold interests, easements, permits, rights-of-way and other similar rights and privileges used or held for use in connection with the ownership and operation of the Business, other than any such interests relating to Seller's office located in Crown, Pennsylvania. "Reportable Event" has the meaning set forth in ERISA Section 4043. - 8 - "Required Consents" means all franchises, licenses, authorizations, approvals and consents required under Governmental Permits, Seller Contracts or otherwise for: (a) Seller to transfer the Assets to Buyer; (b) Buyer to conduct the Business and to own, lease, use and operate the Assets at the places and in the manner in which the Business is conducted as of the date of this Agreement and on the Closing Date; and (c) Buyer to assume and perform the Governmental Permits and Seller Contracts. "Seller Contracts" means all contracts and agreements of whatsoever kind or nature, other than Governmental Permits, pertaining to the ownership, operation and maintenance of the Assets or the Business or used or held for use in the Business, including all leases and installment sale and other financing arrangements relating to vehicles used in the Business (whether or not listed in Appendix 4 and required to be discharged at the Closing). "Seller's or Partner's knowledge," or words of similar import, means with respect to the fact, issue or subject that is the subject thereof, (i) the actual knowledge of Peter Graf, Jan Fuellhart, Vivian J. Smith, Yvan Rosa, Hiram Rodriguez, Carmen Hernandez, Lillian Roman, and Donna Rathfon and (ii) unless expressly stated otherwise, the knowledge that such persons could obtain by making inquiries that would be made by a reasonable person in the cable television business for the purpose of ascertaining the relevant facts. "Service Area" means the area in which Seller operates the Business, specifically in and around the communities of Aguadilla, Aguada, Moca, Isabela and Quebradillas, Puerto Rico, and all areas included in the municipalities in which such communities lie. "System" means the complete cable television reception and distribution facilities used or useful in the conduct of the Business, consisting of one headend, subscriber drops and associated electronic and other equipment, and that is, or is capable of being without modification, operated as an independent system without interconnections to other systems. Any systems that are interconnected or that are served in total or in part by a common headend will be considered a single System. "Tax" means any federal, state, Commonwealth of Puerto Rico, 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. "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. - 9 - "Taxing Authority" means any Governmental Authority that collects Taxes, including, but not limited to, the following Puerto Rico Governmental Authorities: CRIM and Hacienda. "Telecommunications Regulatory Board" means the Junta Reglamentadora de Telecomunicaciones de Puerto Rico. "Termination Date" means December 31, 1998 or a mutually agreeable earlier date. 1.2 Other Definitions. The following terms are defined in the Sections or other places indicated: Term Section - ---- ------- "Adjusted Final Adjustment Certificate"....................................2.3 "Adjustment Objection Period"..............................................2.3 "Buyer"...............................................................Preamble "Closing"..................................................................2.6 "Closing Balance Sheet".................................................2.3(a) "Closing Date".............................................................2.6 "Communications Act"....................................................4.1(i) "Confidentiality Agreement".............................................4.1(u) "Copyright Statements"....................................................5.14 "Current Items Amount".....................................................2.3 "Disclosure Schedule"......................................................4.1 "Eligible Accounts Receivable".............................................2.3 "Escrow Deposit"...........................................................2.4 "Escrow Funds".............................................................9.6 "Excluded Assets"..........................................................3.2 "Expenses".................................................................2.3 "Extended Termination Date"................................................2.6 "FAA"......................................................................4.1 "Final Adjustment Certificate".............................................2.3 "Final Adjustment Objection Period"........................................2.3 "Final Adjustments Report"..............................................2.3(b) "Financial Statements"..................................................4.1(j) "Indemnification Fund".....................................................2.4 "Most Recent Financial Statements"......................................4.1(j) "Most Recent Fiscal Month End"..........................................4.1(j) "Most Recent Fiscal Year End"...........................................4.1(j) "Operating Adjustments".................................................2.3(a) "Partners"............................................................Preamble "Phase I Audit".........................................................6.1(k) "Pole Attachment Agreements"............................................4.1(i) "Purchase Price"...........................................................2.2 "Seller"..............................................................Preamble "Survival Period"..........................................................9.1 "Taking"................................................................5.9(b) - 10 - ARTICLE II BASIC TRANSACTION 2.1 Purchase and Sale of Assets. On and subject to the terms and conditions of this Agreement, Buyer agrees to purchase from Seller and Seller agrees to sell, transfer, convey and deliver to Buyer, all of Seller's right, title and interest in, to and under the Assets at Closing, free and clear of all Encumbrances (other than Permitted Encumbrances), for the consideration specified below. Except as otherwise specifically provided in this Agreement, all of the Assets are intended to be transferred to Buyer, whether or not described in the Disclosure Schedule. 2.2 Purchase Price. Buyer will pay to Seller at Closing cash in the amount of $42 million ("Purchase Price"), subject to the adjustments set forth in Section 2.3 and the escrow arrangements set forth in Section 2.4, in accordance with Seller's wire transfer delivery instructions. 2.3 Adjustments to the Purchase Price. (a) The Purchase Price will be adjusted by the net amount of the credits and prorations made pursuant to this Section 2.3 (the "Current Items Amount"). i. Except for the adjustment described in Section 5.11(b), adjustments and prorations shall be made to reflect the principle that all liabilities, expenses and income of a recurring nature attributable to the Business and the Assets for the period on and prior to the close of business on the Closing are for the account of Seller, and all liabilities, expenses and income attributable to the Business and the Assets for the period subsequent to the close of business on the Closing Date are for the account of Buyer, all as determined in accordance with GAAP (without regard to any materiality threshold otherwise applicable under GAAP). Items to be prorated shall include, but shall not be limited to, prepaid assets for which Buyer will receive a benefit following Closing, pole rents, franchise fees, taxes (other than income taxes or those based on income, and other than corporate or partnership franchise taxes), copyright royalty payments, fees and payments under cable service agreements, power and utility fees and deposits, rentals and other payments under leases. The amount of such adjustment to which Buyer or Seller is entitled shall be deducted from or added to the amount payable to Seller pursuant to Section 2.2. ii. Additionally, the Purchase Price shall be (A) increased by an amount equal to the face amount of all Accounts Receivable no portion of which is more than 60 days past due ("past due" being measured, for this purpose, from the first day of the period for which the respective services being billed were provided) and (B) reduced by (1) an amount equal to the sum of all obligations and liabilities in respect to customers (including, without limitation, prepayments, credit balances and deposits) which constitute Assumed Liabilities and (2) any liabilities or other obligations of Seller relating to the Business which constitute Assumed Liabilities which have matured or are accrued on or prior to the Closing Date. - 11 - (b) The Current Items Amount will be estimated in good faith by Seller and will be set forth in a certificate (the "Initial Adjustment Certificate"), together with a detailed statement of the calculation thereof, both reasonably satisfactory to Buyer, delivered to Buyer not later than three business days prior to the Closing Date. The Initial Adjustment Certificate shall constitute the basis on which the Current Items Amount paid at Closing is calculated. On or before ninety (90) days after the Closing Date, Buyer shall deliver to Seller a final calculation of the Current Items Amount calculated as of the Closing Date, together with such supporting documentation as Seller may reasonably request, in a certificate (the "Final Adjustment Certificate"), which shall evidence in reasonable detail the nature and extent of each adjustment. If Seller does not object to the Final Adjustment Certificate by delivering to Buyer a reasonably detailed written explanation of its objections thereto within twenty (20) days after the Final Adjustment Certificate is delivered (the "Final Adjustment Objection Period"), Seller or Buyer, as appropriate, shall pay to the other an amount equal to the amount by which the Current Items Amount as set forth in the Final Adjustment Certificate differs from the Current Items Amount as estimated in the Initial Adjustment Certificate. If Seller timely objects to the Final Adjustment Certificate within the Final Adjustment Objection Period, Seller and Buyer shall attempt in good faith to resolve such objections within twenty (20) days after Buyer's receipt of Seller's written objections, failing which the parties shall appoint a mutually agreeable independent accounting firm knowledgeable in the cable television business to review the Final Adjustment Certificate and Seller's written objections thereto, and make adjustments to the Final Adjustment Certificate (the "Adjusted Final Adjustment Certificate") within thirty (30) days after its appointment. The fees and expenses of such firm shall be shared equally by the Parties. The Adjusted Final Adjustment Certificate shall be final and binding. Seller or Buyer, as appropriate, shall pay to the other within five (5) days after resolving Seller's objections or after delivery of the Adjusted Final Adjustment Certificate, as the case may be, an amount equal to the amount by which the Current Items Amount as finally agreed upon by the parties or as set forth in the Adjusted Final Adjustment Certificate, as the case may be, differs from the Current Items Amount as estimated in the Initial Adjustment Certificate. 2.4 Escrow Arrangements. Not later than the second Business Day after the date of this Agreement, Buyer will deposit the sum of $1,000,000 (the "Escrow Deposit") with the Escrow Agent. At the Closing, the amount of the Escrow Deposit, together with interest and income thereon, will be credited against the Purchase Price, but $1,000,000 thereof (the "Indemnification Fund") will be retained by the Escrow Agent. The Escrow Deposit will secure Buyer's obligation hereunder to complete the Closing, and the Indemnification Fund will secure the obligations of Seller and the Partners under Section 9.2 in accordance with Section 9.6. The Escrow Deposit and the Indemnification Fund will be held in escrow pursuant to the terms and conditions of the Escrow Agreement. 2.5 Allocation of Purchase Price. The Purchase Price will be allocated among the Assets as set forth in Appendix 2. Buyer, Seller and the Partners agree to be bound by the allocation and will not take any position inconsistent with such allocation and will file all returns and reports with respect to the transactions contemplated by this Agreement, including all federal, state, Commonwealth of Puerto Rico and local Tax Returns, on the basis of such allocations. - 12 - 2.6 Closing. The closing of the transactions contemplated by this Agreement ("Closing") shall take place at the offices of Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania, or such other location as the Parties may agree, on the fifth Business Day following the satisfaction or waiver of the conditions to the obligations of the Parties to consummate the transactions contemplated hereby (other than those conditions with respect to actions the respective Parties will take at the Closing itself), or such other date as the Parties may mutually determine. The day on which the Closing actually occurs is referred to herein as the "Closing Date," but unless the Closing Date is the last day of a calendar month, the Parties will treat the Closing as having occurred at the opening of business on the first day of the calendar month in which the Closing occurs (both for purposes of Section 2.3 and for all other purposes), and references to the "Closing Date" shall be construed accordingly. The Closing Date shall be no later than the Termination Date; provided, that if the Closing shall not have occurred by the Termination Date due solely to the failure to obtain the consent of the assignment of the Franchise through no fault of any of the Parties, the Termination Date shall be extended to March 31, 1999 (the "Extended Termination Date"). ARTICLE III ASSUMED LIABILITIES AND EXCLUDED ASSETS 3.1 Assignment and Assumption. On and subject to the terms and conditions of this Agreement, Buyer agrees to assume and become responsible for all of the Assumed Liabilities at Closing. Buyer will not assume, nor will it be deemed to have assumed, and will not pay, perform, discharge or be liable in any manner whatsoever for, and will have no responsibility with respect to: (i) any obligation or Liability of the Business, the System, Seller or any of its Affiliates not included within the definition of Assumed Liabilities; or (ii) any Liabilities or obligations associated with the Excluded Assets (including Seller Contracts that are Excluded Assets), in either case whether arising before, at or after the Closing Date, whether arising out of any written or oral agreement or understanding or otherwise. 3.2 Excluded Assets. The Excluded Assets, which will be retained by Seller, will consist of the following: (a) Cash; (b)(i) Seller's copies of tax returns and other documents relating to the Business which Seller is required by law to keep in its possession, for four full fiscal years immediately preceding the Closing, copies of which will be furnished by Seller to and at the reasonable request of the Buyer for a period of four years after the Closing Date, (ii) all books or records of Seller (including those which pertain to the accounting and tax aspects of the Seller or Partners prior to the Closing Date), which do not relate to the operation of the Business, (iii) certificates of deposit with various banking institutions, (iv) all documents relating to the legal existence of Seller or Partners, (v) all agreements other than those constituting an Assumed Liability, (vi) all assets, properties and rights of Seller or Partners not related to the Business, (vii) cash equivalents, (viii) insurance policies, bonds, letters of credit, or other similar items, and any cash surrender value in regard thereto, (ix) any and all claims, rights and interests in and to any refunds for federal, state or local franchise, income or other taxes or fees of any nature whatsoever for any period prior to the Closing Date (unless there shall be an increase in the Purchase Price on - 13 - account of such item under Section 2.3), (x) any chose in action owned by Seller not related to any of the Assets, (xi) the names or trade names "Cable Systems USA", and any related trade names, trademarks, service marks or logo and any derivation thereof, and (xii) all assets of Seller located at Seller's office in Crown, Pennsylvania, other than the Books and Records (Seller and the Partners hereby representing and warranting that no asset located in Crown, Pennsylvania (other than the Books and Records), is necessary for the conduct of the Business as now conducted); and (c) the assets described in Appendix 3. ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations and Warranties of Seller and the Partners. Seller and the Partners jointly and severally represent and warrant to Buyer that the statements contained in this Section 4.1 are correct and complete as of the date of this Agreement (or, to the extent that any such statement expressly refers to an earlier date, such statement was correct and complete as of such date), except as set forth in the disclosure schedule accompanying this Agreement and initialed by the Parties (the "Disclosure Schedule"). The Disclosure Schedule will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Section 4.1. (a) Organization and Qualification; Ownership of Seller. Seller is a general partnership duly organized, validly existing and in good standing under the laws of the State of Delaware, with all requisite partnership power and authority to own, lease and use the Assets as they are currently owned, leased and used and to conduct the Business as it is currently conducted. Each of the Partners is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with all requisite corporate power and authority to own its interest in Seller and to conduct its business as currently conducted. Seller is, and each of the Partners is, duly qualified or licensed to do business under the laws of the Commonwealth of Puerto Rico to the extent required and in each other jurisdiction in which the character of the properties owned, leased or operated by it or the nature of the activities conducted by it make such qualification necessary, except any such jurisdiction where the failure to be so qualified or licensed will not have an adverse effect on Seller, the Partners, the Assets or the Business or on the validity, binding effect or enforceability of this Agreement. The Partners are the only partners in Seller, and no other Person has any right, contingent or otherwise, to acquire an ownership interest in Seller. J&J has the right to less than 50 percent of the profits of Seller and less than 50 percent of the assets of Seller upon liquidation. No stockholder of PS&G (or group of stockholders of PS&G that would be included in the same "person," within the meaning of the HSR Act and the rules, regulations and interpretations thereunder) owns 50 percent or more of the "voting securities" (within the meaning of the HSR Act and the rules, regulations and interpretations thereunder) of PS&G or has the contractual power presently to designate 50% or more of the directors of PS&G. (b) Authority and Validity. Seller has, and each of the Partners has, all requisite corporate or partnership power and authority, as the case may be, to execute and deliver, - 14 - to perform its obligations under, and to consummate the transactions contemplated by, this Agreement. The execution and delivery by Seller and the Partners of, the performance by them of their obligations under, and the consummation by them of the transactions contemplated by, this Agreement have been duly authorized by all requisite partnership and corporate action of Seller and the Partners respectively. This Agreement has been duly executed and delivered by Seller and the Partners and is the valid and binding obligation of Seller and the Partners, enforceable against each of them in accordance with its terms, except insofar as enforceability may be affected by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect affecting creditors' rights generally or by principles governing the availability of equitable remedies. (c) No Breach or Violation. Subject to obtaining the Required Consents (including Required Consents relating to Governmental Permits), all of which are listed on Section 4.1 (c) of the Disclosure Schedule, and subject to compliance with the HSR Act, the execution, delivery and performance of this Agreement by Seller and the Partners will not: (i) violate any provision of the partnership agreement of Seller or the certificate of incorporation or by-laws of either of the Partners; (ii) violate any Legal Requirement; (iii) require any consent, approval or authorization of, or any filing with or notice to, any Person; or (iv)(A) violate, conflict with or constitute a breach of or default under, (B) permit or result in the termination, suspension or modification of, (C) result in the acceleration of (or give any Person the right to accelerate) the performance of Seller or either of the Partners under, or (D) result in the creation or imposition of any Encumbrance under, any Seller Contract or any other instrument evidencing any of the Assets or any instrument or other agreement to which Seller or either of the Partners is a party or by which Seller or either of the Partners or any of the assets of Seller or either of the Partners is bound or affected, except for purposes of this clause (iv) such violations, conflicts, breaches, defaults, terminations, suspensions, modifications and accelerations as would not, individually or in the aggregate, have a material adverse effect on the System, the Business, Seller or the Partners. (d) Title to Real Property Assets. Seller has, and on the Closing Date Seller will have, exclusive, good and marketable title to, or a valid leasehold interest in, the Real Property Assets, free and clear of any and all Encumbrances of any kind or nature, except those set forth on Appendix 4, all of which will be discharged prior to Closing and except for Permitted Encumbrances. (e) Equipment and Other Tangible Assets. All of the Assets consisting of Equipment and other tangible Assets with a book value of $5,000 or more are described in Section 4.1(e) of the Disclosure Schedule. Seller has, and on the Closing Date Seller will have, exclusive, good and marketable title to such tangible Assets, all of which are free and clear of all Encumbrances of any kind or nature, except for those Encumbrances set forth on Appendix 4, all of which shall be discharged prior to Closing, and except for Permitted Encumbrances. None of the Equipment and other tangible Assets are leased by Seller from any other Person except under Seller Contracts described in Section 4.1(e) of the Disclosure Schedule. The Equipment and other tangible Assets constitute all of the tangible assets necessary to permit Buyer to conduct the Business substantially as it is being conducted on the date of this Agreement in compliance with all Legal Requirements and Governmental Permits and to perform all the Assumed Liabilities. - 15 - Attached as Appendix 5 are copies of the latest proof of performance tests and cumulative leakage index reports for the System. All Equipment and other tangible Assets are suitable and adequate for continued use in the manner in which they are currently used. (f) Real Property. i. Section 4.1(f)(i) of the Disclosure Schedule lists and describes briefly all Real Property that Seller owns. With respect to each such parcel of owned Real Property: (A) Seller has, and on the Closing Date Seller will have, good, marketable and valid title in pleno dominio to the parcel of Real Property, free and clear of any and all Encumbrances of any kind or nature, other than Permitted Encumbrances, and the valid and enforceable right to use and possess such parcel of Real Property; (B) there are no pending or, to Seller's or the Partners' best knowledge, threatened condemnation proceedings, lawsuits, or administrative actions relating to the Real Property or other matters affecting materially and adversely the current use, occupancy or value thereof; (C) the legal description of the parcel contained in the deed therefor describes such parcel; the buildings and improvements are located within the boundary lines of the described parcels of land to the best of Seller's and the Partners' knowledge, are not in violation of applicable setback requirements, zoning laws and ordinances (and none of the properties or buildings or improvements thereon are subject to "permitted non-conforming structure" classifications), and, to the best of Seller's and the Partners' knowledge, do not encroach on any easement that may burden the land, and the land does not serve any adjoining property for any purpose inconsistent with the use of the land; and the property is not located within any flood plain or subject to any similar type restriction for which any permits or licenses necessary to the use thereof have not been obtained; (D) all facilities have received all approvals of Governmental Authorities (including licenses and permits) required in connection with the ownership or operation thereof and have been operated and maintained in all material respects in accordance with applicable Legal Requirements and all restrictive covenants, if any, or other Encumbrances affecting all or part thereof; (E) except as set forth in Section 4.1(f)(i) of the Disclosure Schedule, there are no leases, subleases, licenses, concessions or other agreements, written or oral, granting to any party or parties the right of use or occupancy of any portion of the parcel of Real Property; (F) there are no outstanding options or rights of first refusal to purchase the parcel of Real Property, or any portion thereof or interest therein; - 16 - (G) there are no parties (other than Seller) in possession of the parcel of Real Property, other than tenants under any leases disclosed in Section 4.1(f)(i) of the Disclosure Schedule who are in possession of space to which they are entitled; and (H) all facilities located on the parcel of Real Property are supplied with utilities and other services necessary for the operation of such facilities such as electricity, water, telephone, sanitary sewer or septic tank, all of which services comply in all material respects with all applicable Legal Requirements. ii. Seller does not lease, rent or otherwise use or have the right to use (pursuant to easements, rights-of-way, licenses or the like) any Real Property that it does not own. (g) Environmental Matters. i. The Real Property currently complies in all material respects with and, to the best of Seller's and the Partners' knowledge, has previously been operated in compliance with, all Environmental Laws; neither Seller nor either of the Partners has generated, released, stored, used, treated, handled, discharged or disposed of any Hazardous Substances at, on, under, in or about, or in any other manner affecting, the Real Property in violation of any Environmental Law, transported any Hazardous Substances to or from the Real Property or discharged any Hazardous Substances from the Real Property into any body of water, directly or indirectly, in violation of any Environmental Law, and, to the best of Seller's and the Partners' knowledge, no other present or previous owner, tenant, occupant or user of the Real Property or any other Person has committed or suffered any of the foregoing. To the best of Seller's and the Partners' knowledge, no release of Hazardous Substances outside the Real Property has entered or threatens to enter the Real Property, nor is there any pending or threatened claim based on Environmental Laws that arises from any condition of the land surrounding the Real Property. No claim or investigation based on Environmental Laws that relates to the Real Property or any operations on it (A) has been asserted or conducted in the past or is currently pending against or with respect to Seller or either of the Partners; (B) to Seller's and the Partners' best knowledge, has been asserted or conducted in the past or is currently pending against or with respect to any other Person; or (C) to Seller's and the Partners' best knowledge, is threatened or contemplated. ii. To Seller's and the Partners' best knowledge: (A) no underground storage tanks are currently or have been located on the Real Property; and (B) the Real Property has not been used at any time as a gasoline service station or any other facility for storing, pumping, dispensing or producing gasoline or any other petroleum products or wastes. There are no incinerators or cesspools on the Real Property and all waste is discharged into septic tanks that have been designed, built and operated in accordance with all applicable Legal Requirements. iii. Seller has provided Buyer with complete and correct copies of (A) all studies, reports, surveys or other materials in Seller's or either of the Partners' possession relating to the presence or alleged presence of Hazardous Substances at, on or affecting the Real Property; (B) all notices or other materials in Seller's or either of the Partners' possession that were received from any Governmental Authority having the power to administer or enforce any - 17 - Environmental Laws relating to current or past ownership, use or operation of the Real Property or activities at the Real Property; and (C) all materials in Seller's or either of the Partners' possession relating to any claim, allegation or action by any private third party under any Environmental Law. (h) Intellectual Property. i. Seller owns or has the right to use, and on the Closing Date Seller will own or have the right to use, pursuant to license, sublicense, agreement or permission, all Intellectual Property necessary for the operation of the Business as currently conducted. Provided any necessary consent is obtained, each item of Intellectual Property owned or used by Seller immediately prior to the Closing hereunder will be owned or available for use by Buyer on identical terms and conditions immediately subsequent to the Closing hereunder. Seller has taken all necessary and desirable action to maintain and protect each item of Intellectual Property that it owns or uses in the Business. ii. To the best of Seller's and the Partners' knowledge, neither Seller nor either of the Partners has interfered with, infringed upon, misappropriated or otherwise come into conflict with, and the operation of the Business as currently conducted does not, to the best knowledge of Seller and the Partners, violate or infringe upon, any Intellectual Property rights of third parties, and neither Seller nor either of the Partners has ever received any charge, complaint, claim, demand or notice alleging any such interference, infringement, misappropriation or violation (including any claim that either Seller or either of the Partners must license or refrain from using any Intellectual Property rights of any third party). To the best knowledge of Seller and the Partners, no third party has interfered with, infringed upon, appropriated or otherwise come into conflict with any Intellectual Property rights of Seller. iii. Seller does not possess any patent, patent right, registered trademark or copyright and is not a party to any license or royalty agreement with respect to any patent, trademark or copyright except for licenses respecting program material and obligations under the Copyright Act of 1976 applicable to cable television systems generally. Seller has made all required filings with, and all required payments to, the United States Copyright Office, and is otherwise in material compliance with all applicable rules and regulations of the United States Copyright Office. Seller has delivered to Buyer complete and correct copies of all statements of account, correspondence and other filings for the past three and one-half years, made or filed pursuant to copyright rules and regulations with respect to the Business. iv. Section 4.1(h)(iv) of the Disclosure Schedule identifies each license, agreement or other permission that Seller has granted to any third party with respect to any of its Intellectual Property (together with any exceptions). Seller has delivered to Buyer correct and complete copies of all such licenses, agreements and permissions (as amended to date). Section 4.1(h)(iv) of the Disclosure Schedule also identifies each trade name or unregistered trademark used by Seller in connection with the Business. With respect to each item of Intellectual Property required to be identified in Section 4.1(h)(iv) of the Disclosure Schedule: - 18 - (A) Seller possesses all right, title and interest in and to the item, free and clear any and all Encumbrances of any kind or nature other than Permitted Encumbrances; (B) to the best knowledge of Seller and the Partners, the item is not subject to any outstanding injunction, judgment, order, decree, ruling or charge; (C) no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to the best of Seller's and the Partners' knowledge, is threatened that challenges the legality, validity, enforceability, use or ownership of the item; and (D) neither Seller nor either of the Partners has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation or other conflict with respect to the item, except as set forth in the applicable agreement relating to such item. v. Section 4.1(h)(v) of the Disclosure Schedule identifies each item of Intellectual Property that any third party owns and that Seller uses pursuant to license, sublicense, agreement or permission. Seller has delivered to Buyer correct and complete copies of all such licenses, sublicenses, agreements and permissions (as amended to date). With respect to each item of Intellectual Property required to be identified in Section 4.1(h)(v) of the disclosure Schedule: (A) the license, sublicense, agreement or permission covering the item is legal, valid, binding, enforceable and in full force and effect, subject to the Normal Qualifications; (B) subject to obtaining any Required Consent, the license, sublicense, agreement or permission will continue to be legal, valid, binding, enforceable and in full force and effect following the consummation of the transaction contemplated hereby (subject to the Normal Qualifications); (C) to the best of Seller's and the Partners' knowledge, no party to the license, sublicense, agreement or permission is in breach or default, and to the best of Seller's and the Partners' knowledge, no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification or acceleration thereunder; (D) to the best of Seller's and the Partners' knowledge, no party to the license, sublicense, agreement or permission has repudiated any material provision thereof; (E) with respect to each sublicense, the representations and warranties set forth in subsections (A) through (D) above are true and correct with respect to the underlying license, to the best of Seller's and the Partners' knowledge; - 19 - (F) to the best of Seller's and the Partners' knowledge, the underlying item of Intellectual Property is not subject to any outstanding injunction, judgment, order, decree, ruling or charge; (G) no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to the best of Seller's and the Partners' knowledge, is threatened that challenges the legality, validity or enforceability of the underlying item of Intellectual Property; and (H) neither Seller nor either of the Partners has granted any sublicense or similar right with respect to the license, sublicense, agreement or permission. vi. To the best of Seller's and the Partners' knowledge, neither Seller nor either of the Partners will interfere with, infringe upon, misappropriate, or otherwise come into conflict with, any Intellectual Property rights of third parties as a result of Seller's continued operation of the Business until the Closing Date as currently conducted and as currently proposed to be conducted. (i) Compliance. i. Except as set forth in Section 4.1(i) of the Disclosure Schedule, Seller and the Partners have complied in all material respects with all Legal Requirements of all Governmental Authorities (including the Communications Act of 1934, as amended, and the FCC rules and regulations promulgated thereunder) and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed, commenced or, to the best of Seller's and the Partners' knowledge, threatened against Seller or either of the Partners alleging any failure to so comply, and, to the best of Seller's and the Partners' knowledge, without independent investigation, there is no Basis for any claim that such a failure to comply exists, except as set forth in Section 4.1(i) of the Disclosure Schedule. ii. Complete and correct copies of the Governmental Permits currently in effect, all of which are listed in Section 4.l(i) of the Disclosure Schedule, have been delivered by Seller to Buyer. Except as set forth in Section 4.1(i) of the Disclosure Schedule, the Governmental Permits are the only franchises, licenses and authorizations necessary for Seller and the Partners to operate the System lawfully and in the manner in which it is presently being operated. Seller and the Partners have timely filed with the appropriate Governmental Authorities all appropriate requests for renewal under the Communications Act of 1934. Each of Governmental Permits is currently in full force and effect and constitutes the valid and binding obligation of the respective Governmental Authority, and is legally enforceable against such Governmental Authority in accordance with its terms, subject to Normal Qualifications. Except as set forth in Section 4.1(i) of the Disclosure Schedule, neither Seller nor either of the Partners has received any notice of any legal action, governmental proceeding or investigation, pending or threatened, to terminate, suspend or modify any Governmental Permit, and, to the best of Seller's and the Partners' knowledge, without independent investigation, there is no Basis for any of the foregoing. - 20 - iii. Section 4.1(i) of the Disclosure Schedule sets forth a true and complete list of the current channel alignment (including all broadcast stations and satellite services carried, cable channel assignment, frequencies utilized and pilot frequencies) for the System. iv. Seller has filed offset notifications for or obtained appropriate waivers for all aeronautical frequencies in use by the System. Seller's use of such aeronautical frequencies is in material compliance with all applicable FCC rules, regulations and requirements. The System is presently carrying channels and is providing reception on all such channels in material compliance with the technical standards set forth in all applicable FCC rules, regulations and requirements. Section 4.1(i) of the Disclosure Schedule sets forth a true and complete list of such frequencies, the geographic coordinates of the approximate center of the System's service areas and the authorized radius of the System. v. Except as set forth in Section 4.1(i) of the Disclosure Schedule, all material royalties, fees, reports, schedules and returns relating to the System which are required to be filed by Seller or either of the Partners with and paid to any Governmental Authority or any utility have been filed and paid. vi. All necessary Federal Aviation Administration ("FAA") and FCC approvals, registrations and filings with respect to the System's towers have been obtained, and the towers have been maintained in material compliance with the rules, policies and regulations of the FAA and the FCC. Section 4.1(i) of the Disclosure Schedule contains a true and complete list of each of the System's towers and copies of all relevant FAA determinations with respect thereto. vii. Except as set forth in Section 4.1(i) of the Disclosure Schedule, Seller is, and each of the Partners is, in material compliance with the rules and regulations of the FCC, the rules and regulations of the United States Copyright Office, the Copyright Act and the Communications Act of 1934, as amended by the Cable Communications Policy Act of 1984 and by the Cable Television Consumer Protection and Competition Act of 1992 and the 1996 Telecommunications Act (collectively, the "Communications Act"). Seller and the Partners have provided appropriate notices to subscribers of their right to privacy in accordance with the requirements of the Communications Act. Except as set forth in Section 4.1(i) of the Disclosure Schedule, Seller and the Partners are currently in material compliance with 47 C.F.R. Sections 76.92 and 76.151 with respect to network non-duplication protection and syndicated exclusivity, and Seller and the Partners are not aware of any complaint filed with the FCC alleging Seller's non-compliance with such regulations. viii. All of the communities to which Seller provides service have been registered with the FCC. Section 4.1(i) of the Disclosure Schedule contains a true and complete list of each such community and its corresponding community unit identification number. Each employment unit operated by Seller, including headquarters offices, is currently and has been in compliance with the equal employment opportunity requirements of Section 554 of the Communications Act and the FCC's implementing rules and regulations, and (except as disclosed - 21 - in Section 4.1(i) of the Disclosure Schedule) the FCC has not for any employment period failed to certify an employment unit. ix. Except as set forth in Section 4.1(i) of the Disclosure Schedule hereto, all broadcast television station signals carried on the System, excluding superstations carried pursuant to 47 C.F.R. Section 76.64, are being carried pursuant to a must carry election, and no broadcast television signals are being carried pursuant to retransmission consent agreements. Except as set forth in Section 4.1(i) of the Disclosure Schedule, there is no dispute pending or, to Seller's or the Partners' knowledge, threatened with respect to the carriage or channel position of any broadcast station. x. Section 4.1(i) of the Disclosure Schedule sets forth all of the pole attachment authorizations and agreements and the respective current attachment fees (the "Pole Attachment Agreements") presently held by Seller and the public utility, municipality or other authority which has granted such authorizations. True, complete and correct copies of each written agreement, ordinance, resolution, license and permit granting such Pole Attachment Agreements have been furnished by Seller to Buyer, and Section 4.1(i) of the Disclosure Schedule contains an accurate and complete description of any of the foregoing that are not in writing. Except as set forth in Section 4.1(i) of the Disclosure Schedule, all of the Pole Attachment Agreements are validly existing, legally enforceable obligations of the parties thereto, subject to the Normal Qualifications, and Seller is validly and lawfully operating the System under the Pole Attachment Agreements. Except as set forth in Section 4.1(i) of the Disclosure Schedule, Seller has duly complied with all of the terms and conditions of the Pole Attachment Agreements in all material respects and has not done or performed any act which would invalidate or materially impair its rights under the Pole Attachment Agreements. There is no pending assertion or claim made against Seller or either of the Partners that operations pursuant to any Pole Attachment Agreement have been improperly conducted or maintained. Except as set forth in Section 4.1(i) of the Disclosure Schedule, there is no claim or action, either pending or, to the best knowledge of Seller and the Partners, threatened against Seller or either of the Partners by any Pole Attachment Authority, or any third party, which would materially and adversely affect the rights of Seller, or materially increase the costs of Seller, under the Pole Attachment Agreements. The Pole Attachment Agreements cover all pole attachments currently used by the System. Except as described in Section 4.1(i) of the Disclosure Schedule, all rearrangement work on the poles and all pole changeout work requested of Seller prior to the date hereof by any Pole Attachment Authority has been completed or will be completed on or before the Closing Date. (j) Financial Statements. Section 4.1(j) of the Disclosure Schedule contains the following financial statements (collectively, "Financial Statements"): (i) Seller's audited balance sheet and statements of operations, changes in partners' deficit and cash flows as of and for the fiscal years ended December 31, 1995 through December 31, 1997 (the latter herein called the "Most Recent Fiscal Year End"); and (ii) Seller's unaudited balance sheet and statements of income, operations, changes in partners' deficit and cash flows (the "Most Recent Financial Statements") as of and for the three months ended March 31, 1998 (the "Most Recent Fiscal Month End"). The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and - 22 - fairly present Seller's financial position, results of operations and cash flows 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 absence of footnotes. (k) Events Subsequent to Most Recent Fiscal Year End. Since the Most Recent Fiscal Year End and except as disclosed in Section 4.1(k) of the Disclosure Schedule, there has not been any material, adverse change in the business, condition (financial or otherwise) operations, results of operations or prospects of Seller or the Business, other than changes affecting the cable television industry generally. Without limiting the generality of the foregoing, since that date: (i) Seller has not sold, leased, transferred or assigned any assets of Seller or the Business, tangible or intangible except in the Ordinary Course; (ii) Seller has not entered into any agreement, contract, lease or license (or series of related agreements, contracts, leases and licenses) either involving more than $7,500 or outside the Ordinary Course; (iii) no third party has accelerated, terminated, modified or canceled any agreement, contract, lease or license (or series of related agreements, contracts, leases and licenses) involving more than $7,500 to which Seller is a party or by which Seller is bound; (iv) Seller has not imposed any Encumbrance upon any assets of the Business, tangible or intangible; (v) Seller has not made any capital expenditure (or series of related expenditures) either involving more than $7,500 or outside the Ordinary Course; (vi) Seller has not 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) either involving more than $7,500 or outside the Ordinary Course; (vii) Seller has not issued any note, bond or other debt security or created, incurred, assumed or guaranteed any indebtedness for borrowed money or capitalized lease obligations either involving more than $7,500 singly or $12,500 in the aggregate; (viii) Seller has not delayed or postponed the payment of accounts payable and other Liabilities outside the Ordinary Course; (ix) Seller has not canceled, compromised, waived or released any right or claim (or series of related rights and claims) either involving more than $7,500 or outside the Ordinary Course; (x) Seller has not granted any license or sublicense of any rights under or with respect to any Intellectual Property; (xi) there has been no change made or authorized in the partnership agreement of Seller or the certificate of incorporation or by-laws of either Partner; (xii) Seller has not issued, sold or otherwise disposed of any of its partnership interest or granted any options, warrants, or other rights to purchase or obtain any interest therein; (xiii) Seller has not set aside or paid any distribution to its partners or redeemed, purchased or otherwise acquired any of its partnership interests from any of its partners; (xiv) Seller has not experienced any damage, destruction or loss (whether or not covered by insurance) to any property of the Business; (xv) Seller has not made any loans to, or entered into any other transaction with, any employees of the Business or any of Seller's current or former officers or partners; (xvi) Seller has not entered into any employment contract or collective bargaining agreement, written or oral, nor modified the terms of any existing contract or agreement with any employees of the Business; (xvii) Seller has not granted any increase in the base compensation of any employees of the Business outside the Ordinary Course; (xviii) Seller has not adopted, amended, modified or terminated any bonus, profit-sharing, incentive, severance or other plan, contract or commitment for the benefit of employees of the Business (or taken any such action with respect to any other Employee Benefit Plan); (xix) Seller has not made any other change in employment terms for any employees of the Business outside the Ordinary Course; (xx) Seller has not paid any amount to any third party with respect to any Liability or obligation (including any costs and expenses Seller or either of the - 23 - Partners has incurred or may incur in connection with this Agreement and the transactions contemplated hereby) that would not constitute an Assumed Liability if in existence as of the Closing; (xxi) Seller has not changed the rates charged for Basic Services; (xxii) Seller has not made or pledged to make any charitable or other capital contribution outside the Ordinary Course; (xxiii) there has not been any other material occurrence, event, incident, action, failure to act or transaction outside the Ordinary Course involving the Business or Seller; and (xxiv) Seller has not committed to any of the foregoing. Since the Most Recent Financial Statements, there has been no material adverse change in, and no event has occurred which is likely, individually or in the aggregate, to result in any material adverse change in, the business, operations, assets, prospects or condition (financial or otherwise) of the Business. (l) Undisclosed Liabilities. Except as set forth in Schedule 4.(l) of the Disclosure Schedule, Seller does not have, and on the Closing Date Seller will not have, any Liability and, to the best of Seller's and the Partners' knowledge, without independent investigation, there is no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against Seller or either of the Partners giving rise to any Liability, except for: (i) Liabilities set forth on the face of the balance sheet in the Most Recent Financial Statements (rather than in any notes thereto); and (ii) Liabilities that have arisen after the Most Recent Financial Statements in the Ordinary Course (none of which results from, arises out of, relates to, is in the nature of, or was caused by any breach of contract, breach of warranty, tort, infringement or violation of any Legal Requirement). (m) Legal Proceedings. Except as set forth in Section 4.1(m) of the Disclosure Schedule, there are no outstanding judgments against or otherwise affecting Seller, either of the Partners, the System, the Business or the Assets other than those affecting the cable television industry generally. There is no order of any Governmental Authority and no action, suit, complaint, proceeding or investigation, judicial, administrative or otherwise, that is pending or, to the best knowledge of Seller and the Partners, threatened and which, if adversely determined, might materially and adversely affect the System, the Business or the Assets (other than those affecting the cable television industry generally) or which challenges the validity or propriety of any of the transactions contemplated by this Agreement. To the best of Seller's and the Partners' knowledge, without independent investigation, there is no Basis upon which any such action, suit, proceeding or investigation could be brought or initiated. (n) Tax Returns; Other Reports. Seller and the Partners have duly and timely filed in proper form all Tax Returns for all Taxes required to be filed with the appropriate Governmental Authority. Except as set forth in Section 4.1(n) of the Disclosure Schedule, all Taxes due and payable by Seller (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 are being contested diligently and in good faith and are not in the aggregate material and for which Seller has adequately reserved on the Most Recent Financial Statements. If any Tax Return for any period has been examined, all additional Taxes, if any, assessed as a result of such examination have been paid. To the extent any of such Tax Returns have not been examined and settled, there are no outstanding agreements or waivers extending the statutory period of limitations applicable thereto - 24 - for any period. There are no pending audits, claims or proceedings relating to, or asserted for, Taxes against Seller, except as listed in Section 4.1(n) of the Disclosure Schedule. (o) Employees. i. Section 4.1(o)(i) of the Disclosure Schedule contains a complete and correct list of names and positions of all employees of Seller engaged in the Business and their current hourly wages or monthly salaries and other compensation. Except as disclosed in Section 4.1(o)(i) of the Disclosure Schedule, there are no other employees or material forms of compensation paid by Seller to any of its employees. Except as disclosed in Section 4.1(o)(i) of the Disclosure Schedule, no employee, officer, partner or Affiliate of Seller has any material financial interest, direct or indirect, in any supplier or other outside business which has significant transactions with the System or the Business. ii. Seller has complied in all material respects with all Legal Requirements relating to the employment of labor, including ERISA, continuation coverage requirements with respect to group health plans, and those relating to wages, hours, collective bargaining, unemployment compensation, worker's compensation, equal employment opportunity, age and disability discrimination, immigration control and the payment and withholding of social security and other Taxes, and neither the System nor the Business is liable for any material arrearages of wages or any Taxes for failure to comply with any of the foregoing. iii. Seller is not a party to or bound by any collective bargaining agreement, nor has Seller experienced any strikes, grievances, claims of unfair labor practices or other collective bargaining disputes. Seller has not committed any unfair labor practices. Seller has not recognized or agreed to recognize and is not required to recognize any union or other collective bargaining unit. Except as described in Section 4.1(o) of the Disclosure schedule, no union or other collective bargaining unit has been certified as representing any of its employees, nor has Seller received any requests from any party for recognition as a representative of employees for collective bargaining purposes. To Seller's and the Partners' best knowledge, no employees of the Business are engaged in any organizing activity with respect to any labor organization. Neither Seller nor either of the Partners has employment agreements of any kind, oral or written, express or implied, that would require Buyer to employ any Person after the Closing Date. (p) Employee Benefits. Seller does not have, maintain or contribute to, nor is Seller required to contribute to, any Employee Pension Benefit Plans of any kind or nature (including Multiemployer Plans). Except as disclosed in Section 4.1(p) of the Disclosure Schedule, Seller does not have, maintain or contribute to, nor is Seller required to contribute to, any Employee Welfare Benefit Plans providing medical, health or life insurance or other welfare-type benefits for current or future retired or terminated employees or their spouses or their dependents. There has been no material violation of the "continuation coverage requirements" of "group health plans" as set forth in Section 4980B of the Code and Part 6 of Subtitle B of Title I of ERISA with respect to any Employee Benefit Plan maintained by the Seller. - 25 - (q) System Information. No Person other than Seller has been granted or, to the Seller's and the Partners' knowledge, has applied for a cable television franchise in any portion of the Service Area. Section 4.1(q) of the Disclosure Schedule sets forth a true and accurate description of the following information: i. The approximate number of miles of plant that are included in the System, the approximate number of homes in the Service Area, and the approximate number of homes passed by the System's existing plant. ii. A general description of Basic Services available from the System and the rates charged by Seller for such services. iii. The stations and signals carried by the System and the channel position of each such station and signal. iv. The megahertz capacity of the System. v. The channel capacity of the System. vi. The principal marketing, promotional and advertising programs currently in effect for the System and any other such program that was in effect at any time since January 1, 1997. vii. Seller's procedures and policies for disconnection and discontinuance of services to subscribers whose accounts are delinquent. (r) Seller Contracts. Section 4.1(r) of the Disclosure Schedule lists the following contracts and other agreements to which Seller is a party, or to which either Partner is a party and that relates to the System (including contracts and other agreements that constitute Excluded Assets and are listed on Appendix 3 and contracts and other agreements that relate to liens that are to be discharged at the closing and are described on Appendix 4): i. each Pole Attachment Agreement, programming agreement, multiple dwelling unit agreement and retransmission consent agreement; ii. any agreement (or group of related agreements) for the lease of personal property to or from any Person providing for lease payments in excess of $2,500 per annum; iii. any agreement (or group of related agreements) for the purchase or sale of raw materials, commodities, supplies, products or other personal property, or for the furnishing or receipt of services, the performance of which will extend over a period of more than one year, result in a loss to Seller or involve consideration in excess of $2,500. iv. any agreement concerning a partnership or joint venture; - 26 - v. any agreement (or group of related agreements) under which Seller has created, incurred, assumed or guaranteed any indebtedness for borrowed money, or any capitalized lease obligation, in excess of $6,500 or under which Seller has imposed an Encumbrance on any of its or his assets, tangible or intangible; vi. any agreement concerning confidentiality or non-competition; vii. any agreement involving any employee, officer, partner or Affiliate of Seller; viii. any agreement for the employment of any individual on a full-time, part-time, consulting or other basis providing annual compensation in excess of $10,000 or providing severance benefits; ix. any agreement relating to the services of independent contractors, including sales representatives; x. any agreement under which Seller or either of the Partners has advanced or lent any amount to any System or Business employees or under which Seller has advanced or lent any amount to any of Seller's current or former partners, officers or Affiliates; and xi. any other agreement (or group of related agreements) the performance of which involves consideration in excess of $7,500. Seller has delivered to the Buyer a correct and complete copy of each written agreement listed in Section 4.1(r) of the Disclosure Schedule (as amended to date) and a written summary setting forth the terms and conditions of each oral agreement referred to in Section 4.l(r) of the Disclosure Schedule. With respect to each such agreement: (A) the agreement is legal, valid, binding and enforceable, subject to the Normal Qualifications, and in full force and effect; (B) in the case of each agreement that is to be assigned to and assumed by the Buyer, assuming any applicable Required Consent is obtained, the agreement will continue to be legal, valid, binding and enforceable, subject to the Normal Qualifications, and in full force and effect following the consummation of the transactions contemplated hereby (including the assignments and assumptions referred to in Article III above); (C) Seller has not, and to the best of Seller's and the Partners' knowledge, without independent investigation, no other party is in breach or default in any material respect, and no event has occurred which with notice or lapse of time would constitute a breach or default in any material respect, or permit termination, modification or acceleration, under the agreement; and (D) neither the Seller nor, to the best of Seller's and the Partners' knowledge, any other party has repudiated any provision of the agreement. (s) Books and Records; Accounts Receivable. Section 4.1(s) of the Disclosure Schedule briefly describes all the material Books and Records. All notes and accounts receivable - 27 - of the Business are reflected properly in all material respects on such Books and Records and are valid receivables subject to no setoffs or counterclaims. (t) Powers of Attorney. There are no outstanding powers of attorney executed on behalf of Seller. (u) Outstanding Rights. Except for this Agreement and the confidentiality agreement dated April 28, 1998, and the confidentiality provisions of the confidentiality and exclusivity agreement dated April 28, 1998, each between Buyer and Seller (collectively, the "Confidentiality Agreement"), there is no agreement to which Seller or either of the Partners is a party or is otherwise bound relating to the sale of all or substantially all the Assets, the transfer of the System franchise, a merger or consolidation of Seller or either Partner with or into any entity or the sale of all or any part of Seller's partnership interest or other ownership interests. (v) Projects in Progress. There are no projects in progress or which have been committed to third parties or to the Telecommunications Regulatory Board, for construction or otherwise, except for ongoing subscriber installations being made in the Ordinary Course and except those listed in Section 4.1(v) of the Disclosure Schedule. Except as set forth in Section 4.1(v) of the Disclosure Schedule, neither Seller nor either of the Partners has received notice from the Telecommunications Regulatory Board relating to line extensions or unbuilt areas. (w) Insurance. Section 4.1(w) of the Disclosure Schedule sets forth the following information with respect to each insurance policy (including policies providing property, casualty, liability and workers' compensation coverage and bond and surety arrangements) to which Seller has been a party, a named insured, or otherwise the beneficiary of coverage at any time since the beginning of Seller's operation of the Business, or to which either of the Partners has been a party, a named insured, or otherwise the beneficiary of coverage at any such time and that relates to the Business: 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. Section 4.1(w) of the Disclosure Schedule also sets forth each insurance claim made or loss incurred in connection with the Business pursuant to property, casualty, liability, workers' - 28 - compensation and bond and surety policies since 1995 in excess of $25,000, and except as indicated therein, no such claim is outstanding. (x) Holding Period. Neither Seller nor either of the Partners will violate nor be subject to any requirement to obtain a waiver under the anti-trafficking provisions of the Cable Television Consumer Protection and Competition Act of 1992 and the FCC rules promulgated thereunder as a result of the transfer of the System contemplated under this Agreement. (y) Partners' Interest in Assets. Neither of the Partners and none of their Affiliates owns or otherwise has any interest in any of the Assets, except by reason of its ownership of its partnership interest in Seller. (z) Disclosure. No representation or warranty of Seller or either of the Partners in this Agreement and no statement in any certificate, report, instrument, list or other document furnished or to be furnished by Seller or either of the Partners pursuant to this Agreement or in connection with the transactions contemplated hereby, contained, contains or will contain on the date of this Agreement or of such certificate, report, instrument, list or other document, any untrue statement of a material fact, or omitted or will omit on such date to state any material fact necessary in order to make the statements made, in the 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 the light of the circumstances under which they were made, not misleading. There is no fact known to Seller or either of the Partners that is not applicable to or known by the cable television industry generally and which adversely affects, or which in the future may materially or adversely affect, the System, the Business or the Assets that has not been disclosed in this Agreement. (aa) Finders and Brokers. Except for Charles S. James and his Affiliates, all negotiations relating to this Agreement and the transactions contemplated herein have been carried on by Seller and the Partners directly with Buyer and without the intervention of any other person as a result of any act of Seller or either of the Partners (and, to the best of and Seller's and the Partners' knowledge, without the intervention of any other Person) in such a manner as to give rise to any valid claim against any of the Parties hereto for a brokerage commission, finder's fee, financial advisor's fee or other like payment. Seller will pay and discharge promptly when due all amounts payable to Charles S. James and his Affiliates, for fees to which the latter will be entitled as a result of the execution of this Agreement or the completion of the Closing. (bb) Independent Contractors. Section 4.1(bb) of the Disclosure Schedule contains a complete and correct list of the names of independent contractors (including, but not limited to, sales representatives) performing services for the Business during the last three years and their dates of service and compensation. Except as disclosed in Section 4.1(bb) of the Disclosure Schedule: (i) Seller has complied in all material respects with all Legal Requirements relating to the engagement of independent contractors; (ii) all Persons listed in Section 4.1(bb) of the Disclosure Schedule have been and are properly treated as independent contractors under applicable Legal Requirements and are not employees under applicable Legal Requirements; and - 29 - (iii) neither the System nor the Business is liable for any incorrect treatment by Seller of employees as independent contractors. Seller has no agreements of any kind, oral or written, express or implied, that would require Buyer to engage any Person as an independent contractor. 4.2 Representations and Warranties of Buyer. Buyer represents and warrants to Seller and the Partners that the statements contained in this Section 4.2 are correct and complete as of the date of this Agreement. (a) Organization and Qualification. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has all requisite corporate power to carry on its business as currently conducted and to own, lease, use and operate its assets. As of the Closing Date, Buyer or its permitted assignee will be duly qualified or licensed to do business and will be in good standing under the laws of the Commonwealth of Puerto Rico and each other jurisdiction in which the character of the properties owned, leased or operated 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 Buyer or its permitted assignee, as the case may be, or on the validity, binding effect or enforceability of this Agreement. (b) Authority and Validity. Buyer has all requisite power and authority to execute and deliver, to perform its obligations under, and to consummate the transactions contemplated by, this Agreement. The execution and delivery by Buyer of, the performance by Buyer of its obligations under, and the consummation by Buyer of the transactions contemplated by, this Agreement have been duly authorized by all requisite action of Buyer, and this Agreement constitutes the valid and binding obligation of Buyer, enforceable in accordance with its terms, except insofar as enforceability may be limited or affected by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect affecting creditors' rights generally or by principles governing the availability of equitable remedies. (c) No Breach or Violation. Subject to obtaining the Required Consents listed in Section 4.1(c) of the Disclosure Schedule, and subject to compliance with the HSR Act, and subject to Buyer's obtaining any required consent under any agreement relating to debt financing provided to Buyer or any of its Affiliates, the execution, delivery and performance of this Agreement by Buyer will not: (i) violate any provision of Buyer's certificate of incorporation or bylaws; (ii) violate any Legal Requirement; (iii) require any consent, approval or authorization of, or any filing with or notice to, any Person except notifications to lenders and filings under the Securities Exchange Act of 1934, as amended; or (iv) (A) violate, conflict with or constitute a breach of or default under (without regard to requirements of notice, passage of time or elections of any Person), (B) permit or result in the termination, suspension, modification of, (C) result in the acceleration of (or give any Person the right to accelerate) the performance of Buyer under, or (D) result in the creation or imposition of any Encumbrance under, any instrument or other agreement to which Buyer is a party or by which Buyer or any of its assets is bound or affected, except for purposes of this subclause (iv) such violations, conflicts, breaches, defaults, terminations, suspensions, modifications and accelerations as would not, individually or in the aggregate, have a material adverse effect on Buyer or its assignee (provided such assignee is a - 30 - permitted assignee under the terms of Section 10.2), as the case may be, or on the validity, binding effect or enforceability of this Agreement. (d) No Judgment or Litigation Pending. There is no action, suit, proceeding or investigation, judicial, administrative or otherwise, of which Buyer has knowledge, that is pending or threatened against Buyer, or that challenges the validity or propriety of any of the transactions contemplated by this Agreement. (e) Finders and Brokers. Except for Charles S. James and his Affiliates, whose fees will be paid by Seller and the Partners, all negotiations relative to this Agreement have been carried on by Buyer directly with Seller without the intervention of any person as the result of any act by Buyer (and, to Buyer's best knowledge, without the intervention of any other Person) in such manner as to give rise to any valid claim against any of the Parties hereto for a brokerage commission, finder's fee or like payment. (f) Qualification. Buyer knows of no facts which would, under present law and present rules, regulations and policies of the applicable Governmental Authorities, disqualify Buyer with respect to the assignment or transfer of the Governmental Permits and other agreements contemplated to be assigned to it by Seller pursuant hereto or that would prevent the Telecommunications Regulatory Board's consenting to the assignment of the Franchise to Buyer. Should Buyer become aware of any such facts, it will promptly notify the Seller in writing thereof and use its best efforts to prevent any such disqualification. ARTICLE V PRE-CLOSING COVENANTS The Parties covenant and agree as follows: 5.1 Due Diligence Investigation. From and after the execution and delivery of this Agreement to and including the Closing Date, Seller and the Partners will give to Buyer and its counsel, accountants and other authorized representatives, full access to all the Assets and all the premises and books, contracts, documents and records of the Business and shall furnish Buyer with all such information concerning the Business and the Assets as Buyer may reasonably request in order that Buyer may have full opportunity to make reasonable investigations of the Assets and the affairs of the Business for the purpose of verifying the performance of and compliance with Seller's and the Partners' representations, warranties, covenants and conditions contained herein or for other purposes related thereto. Seller and the Partners will take all action reasonably necessary to enable Buyer, its counsel, accountants and other representatives to discuss the Assets, affairs, System operations and records of the Business at such times and as often as Buyer may reasonably request with executives, independent accountants, engineers and counsel of the System and the Business. Without limiting the generality of the foregoing, Buyer will be entitled to conduct a full physical and engineering inspection of the Assets and an examination of the Books and Records - 31 - and to approach and negotiate with Governmental Authorities and Pole Attachment Authorities and suppliers of goods and services to the Business for or on behalf of the Business. Buyer will not approach the Telecommunications Regulatory Board without first obtaining Seller's approval, which will not be unreasonably withheld, and will permit Seller to participate in any communications with the Telecommunications Regulatory Board if Seller so requests. Notwithstanding any investigation that Buyer may conduct of the Business and the Assets, Buyer may fully rely on Seller's and the Partners' representations, warranties, covenants and indemnities, which will not be waived or affected by or as a result of such investigation. 5.2 Exclusivity. Neither Seller nor either of the Partners will, nor will any of them permit any of its representatives or Affiliates to: (a) solicit, initiate or encourage the submission of any proposal or offer from any Person relating to the acquisition of any of Seller's partnership interests or other ownership interests, or any substantial portion of Seller's assets (including any acquisition structured as a merger, consolidation, or equity exchange); or (b) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing. Seller and the Partners will notify Buyer immediately if any Person makes any proposal, offer, inquiry or contact with respect to any of the foregoing. 5.3 Corporate Matters. Pending Closing, Seller and the Partners will maintain Seller's existence at all times as a general partnership duly organized, validly existing and in good standing under the laws of the State of Delaware, and will make no change to Seller's partnership agreement. Subsequent to the date hereof and until the Closing, neither Seller nor either Partner will: (a) sell or deliver any partnership interest or other ownership interest in Seller to any Person or enter into any agreement to do so; (b) issue any options, warrants or other rights calling for or permitting the issue, transfer, sale or delivery of any partnership interest or other ownership interest in Seller or enter into any agreement to do so; or (c) declare, set aside or pay any in-kind dividend or distribution to the Partners of any Assets or enter into any agreement to do so. 5.4 Continuity and Maintenance of Operations; Financial Statements. Until Closing: (a) Seller and the Partners will duly comply with all Legal Requirements, will fulfill all of their respective obligations under and maintain in full force and effect all contracts, commitments, agreements, insurance policies, licenses, and authorizations, including the Franchise and all other Governmental Permits and Seller Contracts, and will not, without Buyer's prior written consent, alter, modify or amend any of the foregoing. Seller and the Partners will continue to operate the Business in the Ordinary Course, consistent with past practices, subject to the restrictions contained in this Agreement. Seller and the Partners will use reasonable efforts to preserve the Business and its relationships with its present employees and to preserve for Buyer the goodwill of its suppliers, customers and others having business relations with it, and will promptly notify Buyer of any material change in business or prospects, financial or otherwise, of the Business. Without limiting the generality of the foregoing, Seller and the Partners will maintain the Assets, will maintain adequate inventories of spare Equipment consistent with past practice, will maintain insurance as in effect on the date of this Agreement and will keep all the books, records and files of the Business in the Ordinary Course. Neither Seller nor either of the - 32 - Partners will itself pay or credit in any way any subscriber accounts receivable prior to the Closing Date, and will not permit any of its or his respective agents or employees, to do so either. Seller and the Partners will continue to implement Seller's procedures and policies for disconnection and discontinuance of service to subscribers whose accounts are delinquent in accordance with those in effect for the period preceding the date of this Agreement, which procedures and policies are described in Section 4.1(q) of the Disclosure Schedule. (b) Neither Seller nor either of the Partners will, without the prior written consent of Buyer: (i) change the rate charged for Basic Services or Pay TV or add or delete any program services or alter the System's channel line-up; (ii) sell, lease, transfer, convey or assign any of the Assets (or enter into any contract to do any of the foregoing) other than in the Ordinary Course or permit the creation of any Encumbrance on any Asset; (iii) permit the amendment or cancellation of any of the Governmental Permits, Seller Contracts or any other contract or agreement (other than those constituting Excluded Assets) which affects or is applicable to the System or the Business other than in the Ordinary Course; or (iv) enter into any contract or commitment or incur any indebtedness or other liability or obligation of any kind relating to the System or the Business involving an expenditure in excess of $20,000; (c) Neither Seller nor either of the Partners will take or omit to take any action that would cause Seller or either of the Partners to be in breach of any of its representations or warranties in this Agreement. (d) Seller and the Partners will provide the Accountant with access to Vega Palau & Co., the independent accounting firm engaged by Seller to perform audits of Seller's financial statements for the most Recent Fiscal Year End. Seller and the Partners will cause Vega Palau & Co. to provide to the Accountant access to all work papers and other documents used by that firm in performing its audits of Seller. In addition, Seller and the Partners will provide to the Accountant access to Seller's management and accounting personnel and other financial information and documents of Seller, but shall not be required to provide any such information with respect to the Partners. (e) Seller has delivered or will deliver to Buyer correct and complete copies of monthly and quarterly financial statements and operating reports for the Business and any reports with respect to the operations of the System prepared by or for Seller at any time for the period March 31, 1998 through Closing. All financial statements so delivered will be prepared in accordance with GAAP on a basis consistent with the Financial Statements referred to in Section 4.1(j). Seller will also deliver to Buyer not later than July 31, 1998, a 1999 fiscal year operating and capital budget for the Business. (f) Seller will not enter into any agreement with either of its Partners or with any Affiliate of Seller or of either of the Partners. - 33 - 5.5 Employee Matters. (a) Neither Seller nor either of the Partners will, without Buyer's prior written consent, enter into any fixed term employment or similar contract with any employee of the Business or any person providing services to the Business. Seller will pay to employees employed in the Business all compensation, including salaries, commissions, bonuses, deferred compensation, severance, insurance, pensions, profit sharing, vacation, sick pay and other compensation or benefits to which they are entitled for periods prior to Closing. Other than as required by applicable law (prompt notice of which shall be given to Seller), neither Seller nor either of the Partners will pay or obligate itself to pay any pension, retirement, insurance, death or other fringe benefit or other form of incentive or special compensation to any employee of the Business, except pursuant to plans and arrangements in effect on the date of this Agreement, or change or terminate any pension or other such plans in effect on the date of this Agreement, or make any material increase in rates of pay or salaries of any employees or officers of the Business except pursuant to contracts or agreements in effect on the date of this Agreement. Buyer will have no obligation to offer employment to any of the current employees of Seller or either of the Partners. (b) Seller and the Partners will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller or either of the Partners pursuant to the provisions of such plans. Buyer will assume neither any liability for any such accrued benefits nor any fiduciary or administrative responsibility to account for or dispose of any such accrued benefits under any Employee Benefit Plans maintained by Seller or either of the Partners. (c) All claims and obligations under, pursuant to or in connection with any welfare, medical, insurance, disability or other Employee Benefit Plans of Seller or either of the Partners or arising under any Legal Requirement affecting employees of Seller, either of the Partners, the System or the Business incurred on or before the Closing Date or resulting or arising from events or occurrences occurring or commencing on or prior to the Closing Date will remain the responsibility of Seller and the Partners, whether or not such employees are hired by Buyer after Closing. Buyer will have and assume no obligation or liability under or in connection with any such plan and will assume no obligation with respect to any preexisting condition of any employee who is hired as an employee of Buyer. 5.6 Required Consents. Subject to the provisions of this Section 5.6, Seller, the Partners and Buyer will use their respective best efforts to consummate the transactions contemplated by this Agreement and will use reasonable efforts to obtain, as soon as possible and at their expense, all the Required Consents, in form and substance reasonably satisfactory to Buyer. Without limiting the generality of the foregoing provision, promptly, and in any event within 20 days, after the delivery of the Escrow Deposit to the Escrow Agent, Seller and the Partners will, with Buyer's full cooperation, make all filings, applications, statements and reports to all Governmental Authorities that are required to be made prior to the Closing Date by them or on their behalf pursuant to any statute, rule or regulation in connection with the transactions contemplated by this Agreement, including, without limitation, and all applications necessary to - 34 - transfer the Franchise to Buyer. Buyer will fully cooperate with Seller and the Partners to obtain all Required Consents, but Buyer will not be required to agree to any changes in, or the imposition of any condition to the transfer to Buyer of, any Seller Contract or Governmental Permit as a condition to obtaining any Material Consent, if the change or imposition would cause the condition precedent stated in Section 6.1(c) not to be satisfied. If any Required Consent is not obtained at the time of the Closing, Seller and the Partners will continue to cooperate with Buyer following the Closing Date in obtaining such Required Consent. 5.7 Projects in Progress. With respect to ongoing subscriber installations and the projects in progress listed on Section 4.1(v) of the Disclosure Schedule, Seller will proceed with all such projects without material undue delay or interruption. From the date hereof until Closing, Seller and the Partners will permit Buyer reasonable opportunity for inspection of System construction, which will be in accordance with FCC standards in all material respects. Seller will also keep Buyer informed of all opportunities known to it to pursue or obtain agreements with developers, builders or businesses, provided that Buyer will have the final right of approval of all contracts that may be entered into by Seller (other than contracts entered into in the Ordinary Course) by or on behalf of the System or the Business with such entities or persons. 5.8 Notification of Certain Matters. Seller and the Partners will promptly notify Buyer of any fact, event, circumstance or action: (a) that, if known on the date of this Agreement, would have been required to be disclosed to Buyer pursuant to this Agreement; or (b) the existence or occurrence of which would cause any of Seller's or the Partners' representations or warranties under this Agreement not to be correct and complete. In addition, each Party will give prompt written notice to the other Party of any material adverse development causing a breach of any of its own representations and warranties in Section 4.1 and Section 4.2 above. No disclosure by any Party pursuant to this Section 5.8, however, shall be deemed to amend or supplement the Disclosure Schedule or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant. 5.9 Risk of Loss; Condemnation. (a) Seller will bear the risk of any loss or damage to the Assets resulting from fire, theft or other casualty (except reasonable wear and tear) at all times prior to Closing. If any such loss or damage is so substantial as to prevent normal operation of any material portion of the System or the replacement or restoration of the lost or damaged property within 60 days after the occurrence of the event resulting in such loss or damage, Seller will immediately notify Buyer of that fact and Buyer, at any time within 10 days after receipt of such notice, may elect by written notice to Seller either: (i) to waive such defect and proceed toward consummation of the acquisition of the Assets in accordance with terms of this Agreement; or (ii) terminate this Agreement. If Buyer elects so to terminate this Agreement, the Parties will be discharged of any and all obligations hereunder. If Buyer elects to consummate the transactions contemplated by this Agreement notwithstanding such loss or damage and does so, there will be no adjustment in the consideration payable to Seller on account of such loss or damage but all insurance proceeds payable as a result of the occurrence of the event resulting in such loss or damage will be delivered - 35 - by Seller and/or the Partners to Buyer, or the rights to such proceeds will be assigned by Seller and/or the Partners to Buyer if not yet paid over to Seller and/or the Partners. If, however, prior to Closing Seller and/or the Partners correct all such loss or damage to the Assets to the reasonable satisfaction of Buyer, there will be no remitting or assignment of insurance proceeds to Buyer and no adjustment to the Purchase Price. (b) If, prior to Closing, any part of or interest in the Assets is taken or condemned as a result of the exercise of the power of eminent domain, or if a Governmental Authority having such power informs Seller, either of the Partners or Buyer that it intends to condemn all or any part of the Assets (such event being called in either case, a "Taking"), and if the Taking is of the Real Property, the headend equipment of the System, or property the Taking of which could have a material adverse effect on Buyer's ability to operate the Business, as now conducted, after the Closing, then Buyer may terminate this Agreement. If Buyer does not elect to terminate this Agreement, then: (i) there will be no adjustment to the Purchase Price on account of the Taking: (ii) Buyer will have the sole right, in the names of Seller and the Partners, if Buyer so elects, to negotiate for, claim, contest and receive all damages with respect to the Taking; (iii) Seller will be relieved of its obligation to convey to Buyer the Assets or interests that are the subject of the Taking; (iv) at Closing, Seller and/or the Partners will assign to Buyer all of Seller's and the Partners' rights to all damages payable with respect to such Taking and will pay to Buyer all damages previously paid to Seller and/or the Partners with respect to the Taking; and (v) following Closing, Seller and the Partners will give Buyer such further assurances of such rights and assignment with respect to the Taking as may from time to time be reasonably required to effectuate the foregoing. 5.10 Transfer Taxes. Seller will pay the Puerto Rico documentary tax on the original of the deed conveying the Real Property and the notarial tariff relating to such conveyance. Buyer will pay the Puerto Rico documentary tax on the certified copy of such deed and the recording tax relating to such conveyance. Seller and Buyer will share equally in the payment of any other sales, use, transfer, excise, documentary or license taxes or fees or any other charge (including filing fees) imposed by any Governmental Authority with respect to the transfer of any of the Assets pursuant to this Agreement. 5.11 Distant Broadcast Signals. If the Closing shall not have occurred on or before December 31, 1998, either (a) Seller will cease carrying WGN on the System on or before December 31, 1998, or (b) the adjustment described in Section 2.3(a)(i) will include a reduction in the Purchase Price equal to the entire amount of the copyright royalty directly associated with carriage of WGN on Seller's independent System, without regard to any other cable facility, for the copyright period beginning January 1, 1999. If Seller elects to cease carrying WGN under clause (a), and if Seller replaces WGN with WOR beginning on or after January 1, 1999, the amount of copyright royalty for WOR for the copyright period beginning January 1, 1999, will be prorated based on the Closing Date pursuant to Section 2.3(a)(i). 5.12 Programmers. Seller will pay all obligations owed to programmers at or before Closing. Any amounts invoiced by programmers after Closing relating to the operation of the - 36 - Business prior to Closing will be paid promptly by Seller and/or the Partners directly to such programmers. 5.13 Updated Disclosure Schedule. Not less than five days prior to Closing, Seller and the Partners will deliver to Buyer a revised copy of the Disclosure Schedule, which shall have been updated to show any changes occurring between the date of this Agreement and the date of delivery; provided, however, that for purposes of Seller's and the Partners' representations and warranties and covenants in this Agreement, all references to the Disclosure Schedule will mean the version of the Disclosure Schedule attached to this Agreement on the date of signing, and provided further that if the effect of any such updates to the Disclosure Schedule is to disclose any one or more additional properties, privileges, rights, interests or claims as Assets, Buyer, at or before Closing, will have the right (to be exercised by written notice to Seller) to cause any one or more of such items to be designated as and deemed to constitute Excluded Assets for all purposes under this Agreement. 5.14 CRIM. At least 10 days prior to Closing, Seller will obtain from CRIM invoices (and furnish copies thereof to Buyer) for any deficiencies assessed by CRIM, and Seller will pay all such invoices prior to the Closing Date. In addition, prior to Closing, Seller will obtain from CRIM and deliver to Buyer a certification, in form reasonably satisfactory to Buyer, that there are no taxes due to CRIM with respect to the Assets or System other than the assessed deficiencies. 5.15 Fondo del Seguro. At least 10 days prior to Closing, Seller will obtain from Fondo del Seguro invoices (and furnish copies thereof to Buyer) for any deficiencies assessed by Fondo del Seguro, and Seller will pay all such invoices prior to the Closing Date. Prior to Closing, Seller will obtain from Fondo del Seguro and deliver to Buyer a certification, in form reasonably satisfactory to Buyer, that there are no amounts due to Fondo del Seguro other than the assessed deficiencies. ARTICLE VI CONDITIONS PRECEDENT 6.1 Conditions to the Obligations of Buyer. All obligations of Buyer under this Agreement shall be subject to the fulfillment at or prior to Closing of each of the following conditions, it being understood that Buyer may, in its sole discretion, to the extent permitted by applicable Legal Requirements, waive any or all of such conditions in whole or in part: (a) All representations and warranties of Seller and the Partners contained in this Agreement 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. - 37 - (b) Seller and the Partners 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 each of them at or prior to Closing. (c) Seller shall have procured all Material Consents without any change in the terms thereof or the imposition of any condition thereon that is materially more burdensome to Buyer than those now in effect and shall have delivered to Buyer copies thereof or other evidence, in form and substance reasonably satisfactory to Buyer, that all of such Material Consents have been obtained or given as provided herein and are in full force and effect. In the case of the consent of the Telecommunications Regulatory Board to the assignment of the Franchise, such consent shall have become a Final Order. In the event that the Material Consents are not obtained for assignment of the Pole Attachment Agreements and Buyer is required to enter into new pole attachment agreements, Buyer shall have entered into new pole attachment agreements sufficient to operate the System as now operated. Buyer acknowledges and agrees that notwithstanding anything to the contrary contained in this Agreement, terms and conditions materially more burdensome to Buyer shall not be deemed to have occurred and the foregoing condition shall be deemed satisfied with respect to Material Consents involving Pole Attachment Agreements, if any changes, concessions or modifications are required by the pole attachment company or Buyer is required to enter into new Pole Attachment Agreements, provided such changes, concessions or modifications or new agreement contain terms and conditions not materially different from those then prevailing in Puerto Rico. (d) The Telecommunications Regulatory Board shall have extended the term of the System franchise until not earlier than May 5, 2008, and such action shall have become a Final Order. (e) There shall have been no material adverse change in the Assets, or in the condition (financial or otherwise) of the System or the Business since the date hereof. On the Closing Date the System will not fail in any material respect to meet or exceed the performance standards met by the System as shown in the proof of performance tests and cumulative leakage index reports appearing in Appendix 5. (f) 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, that would: (i) prohibit or materially adversely affect Buyer's ownership or operation of all or a material portion of the System, the Business or the Assets or otherwise materially impair the ability of Buyer to realize the benefits of the transactions contemplated by this Agreement; (ii) compel Buyer to dispose of or hold separate all or a material portion of the System, the Business or the Assets as a result of any of the transactions contemplated by this Agreement; (iii) prevent or make illegal the consummation of any transactions contemplated by this Agreement; or (iv) cause any of the transactions contemplated by this Agreement to be rescinded following consummation. - 38 - (g) As of the Closing Date, the System shall have total Individual Subscribers and Equivalent Basic Subscribers of not less than 20,750, and Buyer shall have received a certificate signed by Seller, dated the Closing Date, to that effect. (h) Seller shall have delivered financial statements and other documentation reasonably satisfactory to Buyer that Seller's revenues and EBITDA for the 12 months ending on the last day of the second month before the Closing Date were not less than $9,250,000 and $4,800,000, respectively. Such financial statements will be prepared in accordance with GAAP on a basis consistent with the Financial Statements referred to in Section 4.1(j) and will be reviewed by the Accountant. (i) There shall be an adequate supply of cable inventory and spare equipment for the System as of the Closing Date to ensure no interruption of the daily operations of the System for a period of one month. (j) Buyer, at its own expense and upon prior notice to Seller, may engage an environmental engineering firm of national reputation to perform a Phase I environmental audit of the Real Property in accordance with ASTM standards ("Phase I Audit"), and either (i) such environmental audit and accompanying report shall reflect the satisfactory environmental condition of the Real Property without any recommendation by such firm of additional environmental testing, or (ii) the results of any additional environmental testing recommended in such report (which Buyer will obtain promptly at its expense) shall reflect that there are no conditions existing on, at or under such Real Property that are reasonably likely to result in material liability to the owner or operator of such Real Property under the Environmental Laws.. (k) As of the Closing Date, (i) the Effective Competition Order shall have become a Final Order or (ii) the Telecommunications Regulatory Board shall have withdrawn its certification to regulate rates. (l) Seller and the Partners shall have delivered to Buyer: (i) a certificate, dated the Closing Date, stating that the conditions set forth in Sections 6.1(a) through (l) have been satisfied; and (ii) such other documents as Buyer may reasonably request in connection with the transactions contemplated by this Agreement. (m) Seller shall have delivered to Buyer certificates of compliance, statements of account and/or other documentation reasonably satisfactory to Buyer evidencing that Seller is not delinquent or deficient with respect to filings with and payments to (i) the Telecommunications Regulatory Board, (ii) the FCC, (iii) Fondo del Seguro, (iv) the United States Copyright Office (v) Hacienda, (vi) CRIM, and (vii) municipalities having jurisdiction to collect the Municipal License Tax. (n) Seller shall have paid all amounts due to Charles S. James and his Affiliates for fees to which the latter will be entitled at the time of Closing. - 39 - (o) Seller shall have executed (or caused to be executed) and delivered to Buyer each of the following items: i. a Bill of Sale and Assignment in the form attached as Appendix 6; ii. a deed of purchase and sale conveying the owned Real Estate in accordance with the terms hereof, in form reasonably acceptable to Buyer and Seller; iii. Non-Competition Agreement signed by Seller, each of the Partners, and each of their respective Affiliates in the form attached as Appendix 7; iv. an affidavit of Seller that Seller is not a "foreign person" (as defined in the Foreign Investment in Real Property Tax Act and applicable regulations) and that Buyer is not required to withhold any portion of the consideration payable under this Agreement under the provisions of such Act in the form attached as Appendix 8. v. motor vehicle title certificates and such other transfer instruments as Buyer may reasonably deem necessary or advisable to transfer the Assets to Buyer and to perfect Buyer's rights in the Assets; vi. certified copies of Seller's partnership agreement and of each of the Partners' certificate of incorporation and by-laws, together with good standing certificates from such jurisdictions as Buyer may reasonably specify, and certified resolutions of the boards of directors of the Partners authorizing this Agreement and the transactions contemplated hereby; and vii. documents required to be delivered pursuant to Article V. (p) Buyer shall have received the opinions of Baer, Marks & Upham LLP, dated the Closing Date, in substantially the form set forth in Appendix 9 and the opinion of Cole, Raywid & Braverman, L.L.P.. in substantially the form set forth in Appendix 10. Such opinions shall expressly allow reliance thereon by any party providing debt financing to Buyer or any of its Affiliates. (q) Seller shall have delivered releases, in form satisfactory to Buyer, of all Encumbrances affecting any of the Assets (other than Permitted Encumbrances). (r) Seller shall have terminated all contracts with independent contractors. (s) Seller shall have fewer than three decertifications with respect to equal employment opportunity compliance under the Communications Act during the period 1987-1997. 6.2 Conditions to Obligations of Seller and Partners. All obligations of Seller and the Partners under this Agreement shall be subject to the fulfillment at or prior to Closing of the following conditions, it being understood that Seller and the Partners may, in their sole discretion, - 40 - to the extent permitted by applicable Legal Requirements, waive any or all of such conditions in whole or in part. (a) All representations and warranties of Buyer contained in this Agreement 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. (b) Buyer shall, in all material respects, have performed and complied with each obligation, agreement, covenant and condition contained in this Agreement and required by this Agreement to be performed or complied with by Buyer at or prior to Closing. (c) 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 by any Governmental Authority, that would: (i) prevent or make illegal consummation of any of the transactions contemplated by this Agreement; or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation. (d) Buyer shall have delivered to Seller: (i) a certificate to the effect that each of the conditions specified above in Section 6.2(a) through (d) is satisfied in all respects; and (iii) such other documents as Seller may reasonably request in connection with the transactions contemplated by this Agreement. (e) Buyer shall have executed and delivered to Seller an Assumption Agreement in the form attached as Appendix 11. (f) Buyer shall have paid the Purchase Price (as adjusted in accordance with this Agreement). (g) Seller shall have received the opinion of Drinker Biddle & Reath LLP dated the Closing Date, in substantially the form set forth in Appendix 12. (h) All Material Consents shall have been obtained. (i) Seller shall have received certified copies of Buyer's articles of incorporation and by-laws, and certified copies of resolutions of the board of directors of Buyer and of Pegasus Communications Corporation, Buyer's parent company, authorizing this Agreement and the transactions contemplated hereby. 6.3 Waiver of Conditions. Any Party may waive in writing any or all of the conditions to its obligations under this Agreement to the extent permitted by applicable Legal Requirements. - 41 - ARTICLE VII POST-CLOSING COVENANTS The Parties agree as follows with respect to the period following Closing: 7.1 Litigation Support. If and for so long as any Party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand in connection with: (a) any transaction contemplated under this Agreement; or (b) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction on or prior to the Closing Date involving Seller, the Partners or the Business, the other Party will cooperate with the contesting or defending Party and his or its counsel in the contest or defense, make available his or its personnel and provide such testimony and access to his or its books and records as shall be reasonably necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Article IX below). 7.2 Transition. Neither Seller nor either Partner will take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier or other business associate of Seller, either of the Partners, the System or the Business from maintaining the same business relationships with Buyer after Closing as it maintained with Seller and/or the Partners prior to Closing. Seller and the Partners will refer all customer inquiries relating to the Business or the System to Buyer from and after Closing. ARTICLE VIII TERMINATION 8.1 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 or elsewhere in this Agreement: (a) Buyer, Seller and the Partners may terminate this Agreement by mutual written consent at any time prior to Closing. (b) Buyer may terminate this Agreement by giving written notice to Seller at any time prior to Closing: i. if Seller and/or either of the Partners has breached any representation, warranty or covenant contained in this Agreement applicable to them in any material respect, Buyer has notified Seller of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach; or ii. if Closing shall not have occurred on or before the Termination Date by reason of the failure of any condition precedent under Section 6.1 hereof (unless the failure - 42 - results primarily from Buyer itself breaching any representation, warranty or covenant contained in this Agreement). (c) Seller and the Partners may jointly terminate this Agreement by giving written notice to Buyer at any time prior to Closing: i. if Buyer has breached any representation, warranty or covenant contained in this Agreement in any material respect, Seller has notified the Buyer of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach; or ii. if Closing shall not have occurred on or before the Termination Date by reason of the failure of any condition precedent under Section 6.2 hereof (unless the failure results primarily from Seller and/or either of the Partners itself breaching any representation, warranty or covenant contained in this Agreement applicable to them). (d) If the Telecommunications Regulatory Board makes a timely request to the FCC for reconsideration of, or takes a timely appeal from, the Effective Competition Order, and if Buyer does not waive in writing the condition precedent stated in Section 6.1(k) within 42 days thereafter, Seller and the Partners may jointly terminate this Agreement by written notice to Buyer. 8.2 Liabilities in Event of Termination. The termination of this Agreement will in no way limit 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 representations, warranties, covenants or agreements contained in this Agreement. Notwithstanding the foregoing, if Seller and the Partners terminate this Agreement pursuant to Section 8.1(c)(i), or if the Closing does not occur as a result of Buyer's breach of any representation, warranty or covenant contained in this Agreement in any material respect, the liability of Buyer shall be limited to, and shall be satisfied solely out of, the Escrow Funds. 8.3 Procedure Upon Termination. If this Agreement is terminated by Buyer or Seller pursuant to this Article VIII, notice of such termination will promptly be given by the terminating Party to the other. ARTICLE IX REMEDIES FOR BREACH OF THIS AGREEMENT 9.1 Survival of Representations and Warranties. All of the representations and warranties of Buyer, Seller and the Partners contained in this Agreement shall survive Closing (even if the damaged Party knew or had reason to know of any misrepresentation or breach of warranty at the time of Closing) and continue in full force and effect for a period of one year thereafter, except that the representations and warranties in Section 4.1(a), (b), (c), (d), (g), (n) and (p) and in Section 4.2(a), (b) and (c) shall survive until the expiration of the applicable statute of limitation. The period of survival of the representations and warranties prescribed by this Section - 43 - 9.1 is referred to as the "Survival Period." The liabilities of Buyer, Seller and the Partners under their respective representations and warranties will expire as of the expiration of the applicable Survival Period; provided, however, that such expiration will not include, extend or apply to any representation or warranty, the breach of which has been asserted by either Party in a written notice to the other before such expiration or about which either Party has given the other written notice before such expiration indicating that facts or conditions exist that, with the passage of time or otherwise, can reasonably be expected to result in a breach (and describing such potential breach in reasonable detail). The covenants and agreements of Buyer, Seller and the Partners in Article II and Sections 5.5, 5.6 (last sentence), 5.9, 5.10, 5.12 and 10.9 of this Agreement and in the Non-Competition Agreement, the Bill of Sale and the Assumption Agreement, and rights to indemnification under Sections 9.2 and 9.3 relating to such covenants and agreements, shall survive Closing and will continue in full force and effect. 9.2 Indemnification Provisions for Benefit of Buyer. Subject to Section 9.7, Seller and the Partners, jointly and severally, agree to indemnify Buyer and its Affiliates, and the shareholders, directors, officers, employees, agents, successors and assigns of any of such Persons, from and against the entirety of any Adverse Consequences that any such Person may suffer resulting from, arising out of, relating to, in the nature of, or caused by any of the following: (i) any breach of any covenant, agreement or obligation of Seller and/or the Partners contained in this Agreement; (ii) any act or omission of Seller and/or either of the Partners with respect to, or any event or circumstance related to, the ownership or operation of the Assets or the conduct of the Business, which act, omission, event or circumstance occurred or existed prior to the Closing Date, without regard to whether a claim with respect such matter is asserted before or after the Closing Date, including any matter described in the Disclosure Schedule; (iii) any Real Property title defect (other than Permitted Encumbrances) not waived by Buyer at or before the Closing that Seller or the Partners fail to eliminate as an exception from a title insurance commitment; (iv) any claim that the transactions contemplated by this Agreement violate the Worker Adjustment and Retraining Notification Act, as amended, or any similar state, Commonwealth of Puerto Rico or local law; (v) any Liability of Seller, any Affiliate of Seller, the System or the Business that is not an Assumed Liability; (vi) any Liability of Buyer arising by operation of law (including under any bulk transfer law of any jurisdiction or under any common law doctrine of de facto merger or successor liability or under any fraudulent conveyance law of any jurisdiction) that is not an Assumed Liability, including Liabilities for Taxes and Liabilities in respect of Employee Benefit Plans; (vii) the presence, generation, removal or transportation of a Hazardous Substance on or from any of the Real Property prior to the Closing Date, including the costs of removal or clean-up of such Hazardous Substance and other compliance with the provisions of any Environmental Laws (whether such costs are incurred before or after Closing); (viii) any rate refund ordered by a Governmental Authority for periods prior to the Closing Date; and (ix) any breach (or breach alleged by any third party) by Seller or either Partner of any of its respective representations and warranties contained in this Agreement; provided, that, with respect to any claim for indemnification pursuant to this Section 9.2, Buyer shall have made a written claim for indemnification to Seller and/or either of the Partners (as the case may be) within the applicable Survival Period specified in Section 9.1. Seller's and the Partners' obligations under this Section 9.2 shall expire at the end of the applicable Survival Period. - 44 - 9.3 Indemnification Provisions for Benefit of Seller. Buyer agrees to indemnify, defend and hold harmless Seller, the Partners and their respective Affiliates, and the shareholders, directors, officers, employees, agents, successors and assigns of each such Person, from and against the entirety of any Adverse Consequences that any such Person may suffer resulting from, arising out of, relating to or caused by any of the following: (i) any breach (or breach alleged by any third party) of any covenant, agreement or obligation of Buyer contained in this Agreement; (ii) any act or omission of Buyer with respect to, or any event or circumstances related to, the ownership or operation of the Assets or the conduct of the Business, which act, omission, event or circumstance occurs or exists on or after the Closing Date; (iii) any obligation or Liability resulting from, arising out of or related to any of the Assumed Liabilities, and (iv) any breach by Buyer of any of its representations or warranties contained herein; provided, that, with respect to any claim for indemnification pursuant to Section 9.3, Seller shall have made a written claim for indemnification to Buyer within the applicable Survival Period specified in Section 9.1. 9.4 Matters Involving Third Parties. (a) If any third party shall notify either Buyer, Seller or either of the Partners (the "Indemnified Party") 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 IX, 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 shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (b) Any Indemnifying Party will 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 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; (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 establish a precedential custom or practice 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 Section 9.4(b) above: (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 will 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 - 45 - (not to be withheld unreasonably); and (iii) the Indemnifying Party will 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 9.4(b) above is or becomes unsatisfied, 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 will reimburse the Indemnified Party promptly and periodically for the costs of defending against the Third Party Claim (including attorneys' fees and expenses); and (iii) the Indemnifying Party will 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 provided in this Article IX. 9.5 Determination of Adverse Consequences. All indemnification payments under this Article IX shall be net of insurance proceeds related to such payments and shall be deemed adjustments to the Purchase Price. 9.6 Escrow Deposit and Indemnification Fund. (a) Escrow Deposit. Upon any termination of this Agreement, other than under Section 8.1(c)(i), Buyer shall be entitled to receive the Escrow Deposit and all earnings thereon. Upon any termination of this Agreement under Section 8.1(c)(i), Seller shall be entitled to receive the Escrow Deposit and any earnings thereon as liquidated damages. (b) Indemnification Fund. The Indemnification Fund will provide a fund for, and will secure Seller's and the Partners' obligation to make, payment of claims for which Buyer shall be entitled to indemnification under this Article IX. On the day which is one year after the Closing Date, Sellers shall be entitled to return of the Indemnification Fund and all interest and other earnings accrued thereon; provided, that if on such date Buyer has any indemnification claims pending, the Escrow Agent shall retain an amount sufficient to satisfy such claims and shall remit only the remaining balance to Seller. After all claims for indemnification are settled and paid, Seller shall be entitled to the immediate return of the difference between the amounts paid and the balance then remaining in the Indemnification Fund. (c) Other Remedies. The disbursement of the Indemnification Fund to Buyer shall not preclude Buyer from exercising any other rights or remedies provided for in this Agreement or at law or equity in the event of a breach by Seller or either of the Partners of its obligations under this Agreement, including the right to seek damages for Adverse Consequences in excess of the Indemnification Fund. (d) Instructions to Escrow Agent. To the extent there is no dispute between the Parties concerning the disposition of the Escrow Deposit or the Indemnification Fund, or to the extent the Parties have resolved any such dispute, they will promptly give the Escrow Agent joint - 46 - directions to disburse funds held by the Escrow Agent in accordance with this Agreement or the resolution of such dispute. 9.7 Limitations. Notwithstanding anything to the contrary contained herein, no indemnification shall be required to be made by Seller or Partners until the aggregate amount of Buyer's claims exceeds $50,000. Any written notice delivered by Buyer pursuant to this Article IX with respect to a claim for indemnification shall set forth with reasonable specificity the basis of the claim for Buyer's Adverse Consequences and an estimate of the amount thereof. In no event shall Buyer's right to indemnification for Buyer's Adverse Consequences or otherwise in connection with the transactions contemplated hereby exceed the amount of the Purchase Price actually paid by Buyer. ARTICLE X MISCELLANEOUS 10.1 Press Releases and Public Announcements. No party shall issue any press release or make any public announcement relating to the subject matter of this Agreement prior to Closing without the prior written approval of the other Party; provided, however, that any Party may make any public disclosure it believes in good faith is required by applicable law (in which case the disclosing Party will use its best efforts to advise the other Party prior to making the disclosure). 10.2 Parties Obligated and Benefited. Subject to the limitations set forth below, this Agreement will be binding upon the Parties and their respective assigns and successors in interest and will inure solely to the benefit of the Parties and their respective assigns and successors in interest, and no other Person will be entitled to any of the benefits conferred by this Agreement. Without the prior written consent of the other Party, no Party may assign this Agreement or any of its rights or interests or delegate any of its duties under this Agreement; except that (i) subject to any required consent of the Telecommunications Regulatory Board, Buyer may assign this Agreement or any of its rights or interests or delegate any of its duties hereunder to an Affiliate(s), provided, however, that no such assignment may be made after application has been made to the Telecommunications Regulatory Board for its consent to the assignment of the Franchises; and (ii) Buyer or such Affiliate(s) may collaterally assign its rights under this Agreement to any Persons providing debt financing to Buyer or any of its Affiliates. 10.3 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 10.3 as promptly as practicable thereafter). Notices shall be addressed as follows: - 47 - (a) If to Buyer to: Pegasus Cable Television, Inc. c/o Pegasus Communications Management Company 5 Radnor Corporate Center 100 Matsonford Road, Suite 454 Radnor, Pennsylvania 19087 Attn: Ted S. Lodge, Esq. Telecopy: 610-341-1835 with a copy to: Michael B. Jordan, Esq. Drinker Biddle & Reath LLP 1345 Chestnut Street Philadelphia, PA 19107-3496 Telecopy: 215-988-2757 (b) If to Seller or either of the Partners: Cable Systems USA, Partners Route 66 North Crown, Pennsylvania 16220 Attn: Jan Fuellhart Telecopy: 814-744-8324 with a copy to: Leslie J. Levinson, Esq. Baer Marks & Upham LLP 805 Third Avenue New York, New York 10022 Telecopy: 212-702-5835 or 5941 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 10.3. 10.4 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, the prevailing Party will be entitled to recover reasonable attorneys' fees and other costs of such action or suit from the other Party. - 48 - 10.5 Waiver. This Agreement or any of its provisions may not be waived except in writing. The failure of any Party to enforce any right arising under this Agreement on one or more occasions will not operate as a waiver of that or any other right on that or any other occasion. 10.6 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. 10.7 Choice of Law. This Agreement and the rights of the parties under it will be governed by and construed in all respects in accordance with the laws of the State of New York, without giving effect to any choice of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 10.8 Rights Cumulative. All rights and remedies of each of the Parties under this Agreement will be cumulative, and the exercise of one or more rights or remedies will not preclude the exercise of any other right or remedy available under this Agreement or applicable law. 10.9 Further Actions. The Parties will execute and deliver to the 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. 10.10 Time. 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 will be extended to the next succeeding Business Day. 10.11 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. 10.12 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. 10.13 Entire Agreement. This Agreement (including the Disclosure Schedule and the other agreements and documents executed in connection herewith, which are incorporated in and constitute a part of this Agreement) and the Confidentiality Agreement contain the entire agreement of the Parties and supersede all prior oral or written agreements, understandings and representations to the extent that they relate in any way to the subject matter hereof or thereof. - 49 - 10.14 Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Buyer, Seller and the Partners. No waiver by any Party of any default, misrepresentation or breach of warranty or covenant hereunder, 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. 10.15 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 10.16 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, Commonwealth, 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. The Parties intend that each representation, warranty, covenant and condition precedent contained herein shall have independent significance. 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. 10.17 Expenses. If Buyer elects to purchase insurance to protect itself from the consequence of the breach of Seller's and the Partner's representations and warranties contained herein, Seller will pay the lesser of one-half of the premium for such insurance or $40,000. Otherwise, each Party will bear his or 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. IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement as of the day and year first above written. PEGASUS CABLE TELEVISION, INC. By: /s/ Ted S. Lodge ----------------------------------- Ted S. Lodge, Senior Vice President - 50 - CABLE SYSTEMS USA, PARTNERS By J & J CABLE PARTNERS, INC., general partner By:/s/ Janice Fuellhart ----------------------------------- Name: Title: And by P S & G CABLE PARTNERS, INC. By:/s/ Peter Graf ----------------------------------- Name: Peter Graf Title: President J & J CABLE PARTNERS, INC. By:/s/ Janice Fuellhart ----------------------------------- Name: Title: P S & G CABLE PARTNERS, INC. By:/s/ Peter Graf ----------------------------------- Name: Peter Graf Title: President - 51 - EX-3.1 3 CERTIFICATE OF DESIGNATION 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 ------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------- Pegasus Communications Corporation (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, certifies that pursuant to the authority contained in Article Fourth of its Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, a duly constituted committee of the Board of Directors of the Company, acting within the scope of the authority delegated to it by the Board of Directors, by unanimous written consent dated January 22, 1997 duly approved and adopted the following resolution (this "Certificate of Designation") which resolution remains in full force and effect on the date hereof: RESOLVED, that pursuant to the authority vested in the Pricing Committee of the Board of Directors by resolutions duly adopted by the Board of Directors on November 21, 1996, the Pricing Committee of the Board of Directors does hereby designate, create, authorize and provide for the issue of 12.75% Series A Cumulative Exchangeable Preferred Stock due January 1, 2007 (the "Series A Preferred Stock"), par value $0.01 per share, with a liquidation preference of $1,000 per share, consisting of 100,000 shares, having the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: 1. Certain Definitions. Unless the context otherwise requires, the terms defined in this Section 1 shall have, for all purposes of this resolution, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Adjusted Operating Cash Flow" means, for the four most recent fiscal quarters for which internal financial statements are available, Operating Cash Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow for the most recent four-quarter period plus DBS Cash Flow for the most recent quarterly period, multiplied by four. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Affiliate Transaction" has the meaning set forth in Section 8(d) below. "Applicable Redemption Price" means a price per share equal to the following redemption prices specified below (expressed as percentages of the Liquidation Preference thereof), in each case, together with accumulated and unpaid dividends, if any, to the date of redemption if redeemed during the 12-month period commencing on January 1 of each of the years set forth below: 2002.........................................106.375% 2003.........................................104.250% 2004.........................................102.125% 2005 and thereafter..........................100.000% "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of a sale and leaseback) other than in the ordinary course of business consistent with past practices and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the following transactions will not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned Restricted Subsidiary of the Company or by a Wholly Owned Restricted Subsidiary of the Company to the Company or to another Wholly Owned Restricted Subsidiary of the Company, (ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary of the Company to the Company or to another Wholly Owned Restricted Subsidiary of the Company and (iii) a Restricted Payment that is permitted by the provisions of Section 8(a) hereof. "Asset Swap" means an exchange of assets by the Company or a Restricted Subsidiary of the Company for one or more Permitted Businesses or for a controlling equity interest in any Person whose assets consist primarily of one or more Permitted Businesses. 2 "Bank Facilities" means, with respect to the Company or any of its Restricted Subsidiaries, one or more debt facilities or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Basket Period" has the meaning set forth in Section 8(a) below. "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case, with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days or on demand for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above and (v) commercial paper having the highest rating at acquisition obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition. "Certificated Securities" has the meaning set forth in Section 14(d) below. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principal or his Related Parties, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as defined above) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the 3 right to acquire, whether such right is exercisable immediately or only after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more of the Class A Common Stock of the Company than is beneficially owned (as defined above) at such time by the Principal and his Related Parties in the aggregate, (B) the Principal and his Related Parties collectively cease to beneficially own (as defined above) Voting Stock of the Company having at least 30% of the combined voting power of all classes of Voting Stock of the Company then outstanding or (C) the Principal and his Affiliates acquire, in the aggregate, beneficial ownership (as defined above) of more than 66 2/3 % of the shares of Class A Common Stock at the time outstanding or (iv) the first day on which a majority of the members of the Board of Directors are not Continuing Directors. "Change of Control Offer" has the meaning set forth in Section 7(a) below. "Change of Control Payment" has the meaning set forth in Section 7(a) below. "Change of Control Payment Date" has the meaning set forth in Section 7(d)(ii) below. "Class A Common Stock" means the Class A Common Stock, par value $.01 per share, of the Company. "Closing Date" means the date on which shares of Series A Preferred Stock are first issued. "Commission" means the Securities and Exchange Commission. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) the cumulative effect of a change in accounting principles shall be excluded and (iv) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Subsidiaries. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the Closing Date or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Cumulative Operating Cash Flow" means, as of any date of determination, Operating Cash Flow for the Company and its Restricted Subsidiaries for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the most recently ended fiscal quarter for which internal financial statements are available at such date of determination, plus all cash dividends received by the Company or a Wholly Owned Restricted Subsidiary of the Company from any Unrestricted Subsidiary of the Company or any Unrestricted Subsidiary of any Wholly Owned Restricted Subsidiary of the Company to the extent that such dividends are not included 4 in the calculation of permitted Restricted Payments under Section 8(a)(i)(3) hereof by virtue of clause (C) of such section. "Cumulative Total Interest Expense" means, with respect to the Company and its Restricted Subsidiaries, as of any date of determination, Total Interest Expense for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the most recently ended fiscal quarter for which internal financial statements are available at such date of determination. "Depositary" has the meaning set forth in Section 14(a) below. "DBS Cash Flow" means income from operations (before depreciation, amortization and Non-Cash Incentive Compensation to the extent deducted in arriving at income from operations) for the Satellite Segment determined on a basis consistent with the segment data contained in the Company's consolidated audited financial statements. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "DGCL" has the meaning set forth in Section 2(b) below. "Disqualified Stock" means any Capital Stock (other than the Series A Preferred Stock) that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the mandatory redemption date of the Series A Preferred Stock set forth in this Certificate of Designation unless, in any such case, the issuer's obligation to pay, purchase or redeem such Capital Stock is expressly conditioned on its ability to do so in compliance with the provisions of Section 8(a) hereof. "Dividend Payment Date" has the meaning set forth in Section 2(a) below. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Event of Default" means any Event of Default under the Exchange Note Indenture. "Exchange Act" means the Securities and Exchange Act of 1934, as amended. "Exchange Date" has the meaning set forth in Section 5(b) below. "Exchange Notes" means the Company's 12.75% Senior Subordinated Exchange Notes due 2007 issuable in exchange for the Company's Series A Preferred Stock. "Exchange Note Indenture" means that certain indenture under which the Exchange Notes would be issued and which shall be substantially in the form attached as Annex A hereto. 5 "Exchange Note Trustee" means the trustee under the Exchange Note Indenture. "Executive Officer" means any officer of the Company that would be deemed to be an "executive officer" within meaning of the rules and regulations of the Commission. "Existing Indebtedness" means all Indebtedness of the Company and its Subsidiaries in existence on the Closing Date, until such amounts are repaid. "fair market value" means, with respect to assets or aggregate net proceeds having a fair market value (a) of less than $5.0 million, the fair market value of such assets or proceeds determined in good faith by the Board of Directors (including a majority of the Independent Directors thereof) and evidenced by a board resolution and (b) equal to or in excess of $5.0 million, the fair market value of such assets or proceeds as determined by an independent appraisal firm with experience in the valuation of the classes and types of assets in question; provided that the fair market value of the assets purchased in an arms'-length transaction by an Affiliate of the Company (other than a Subsidiary) from a third party that is not also an Affiliate of the Company or of such purchaser and contributed to the Company within five Business Days of the consummation of the acquisition of such assets by such Affiliate shall be deemed to be the aggregate consideration paid by such Affiliate (which may include the fair market value of any non-cash consideration to the extent that the valuation requirements of this definition are complied with as to any such non-cash consideration). "GAAP" means 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 in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Closing Date. "Global Shares" has the meaning set forth in Section 14(a) below. "Global Share Holder" has the meaning set forth in Section 14(a) below. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, co-borrowing arrangements, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Holder" means the record holder of one or more shares of Series A Preferred Stock, as shown on the books and records of the Transfer Agent. "incur" has the meaning set forth in Section 8(b) below. 6 "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing any Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Indebtedness issued with original issue discount is the full amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP. "Indebtedness to Adjusted Operating Cash Flow Ratio" means, as of any date of determination, the ratio of (a) the aggregate principal amount of all outstanding Indebtedness of a Person and its Restricted Subsidiaries as of such date on a consolidated basis, plus the aggregate liquidation preference of all outstanding preferred stock (other than Qualified Subsidiary Stock) of the Restricted Subsidiaries of such Person as of such date (excluding any such preferred stock held by such Person or a Wholly Owned Restricted Subsidiary of such Person), plus the aggregate liquidation preference or redemption amount of all Disqualified Stock of such Person (excluding any Disqualified Stock held by such Person or a Wholly Owned Restricted Subsidiary of such Person) as of such date to (b) Adjusted Operating Cash Flow of such Person and its Restricted Subsidiaries for the most recent four-quarter period for which internal financial statements are available determined on a pro forma basis after giving effect to all acquisitions and dispositions of assets (notwithstanding clause (ii) of the definition of "Consolidated Net Income") (including, without limitation, Asset Swaps) made by such Person and its Restricted Subsidiaries since the beginning of such four-quarter period through such date as if such acquisitions and dispositions had occurred at the beginning of such four-quarter period. "Independent Director" means a member of the Board of Directors who is neither an officer nor an employee of the Company or any of its Affiliates. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including Guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that an acquisition of assets, Equity Interests or other securities by the Company for consideration consisting of common equity securities, or preferred stock which is not Disqualified Stock, of the Company shall not be deemed to be an Investment. "Junior Securities" has the meaning set forth in Section 2(c) below. 7 "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Liquidation Preference" means $1,000 per share of Series A Preferred Stock. "Mandatory Redemption Date" has the meaning set forth in Section 4(a) below. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting, investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness in connection with such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Cash Incentive Compensation" means incentive compensation paid to any officer, employee or director of the Company or any of its Subsidiaries in the form of Class A Common Stock of the Company or options to purchase Class A Common Stock of the Company pursuant to the Pegasus Communications Restricted Stock Plan and the Pegasus Communications 1996 Stock Option Plan. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise) or (c) constitutes the lender; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the 8 lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary, any Assistant Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 10 hereof. "Operating Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period, (a) plus (i) extraordinary net losses and net losses on sales of assets outside the ordinary course of business during such period, to the extent such losses were deducted in computing such Consolidated Net Income, plus (ii) provision for taxes based on income or profits, to the extent such provision for taxes was included in computing such Consolidated Net Income, and any provision for taxes utilized in computing the net losses under clause (i) hereof, plus (iii) consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash charges were deducted in computing such Consolidated Net Income, plus (v) Non-Cash Incentive Compensation to the extent such compensation expense was deducted in computing such Consolidated Net Income and to the extent not included in clause (iv) of this definition and (b) less all non-cash income for such period (excluding any such non-cash income to the extent it represents an accrual of cash income in any future period or amortization of cash income received in a prior period). "Parity Securities" means any class or series of Capital Stock of the Company of the Company ranking on a parity with the Series A Preferred Stock. "Paying Agent" has the meaning set forth in Section 9(c) below. "Payment Default" has the meaning set forth in Section 6(b) below. 9 "Permitted Businesses" means (a) any media or communications business, including but not limited to, any broadcast television station, cable franchise or other business in the television broadcasting, cable or direct-to-home satellite television industries and (b) any business reasonably related or ancillary to any of the foregoing businesses. "Permitted Investments" means (a) any Investments in the Company or in a Wholly Owned Restricted Subsidiary of the Company; (b) any Investments in Cash Equivalents; (c) Investments by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Wholly Owned Restricted Subsidiary of the Company; and (d) other Investments (measured as of the time made and without giving effect to subsequent changes in value) that do not exceed an amount equal to $5.0 million plus, to the extent any such Investments are sold for cash or are otherwise liquidated or repaid for cash, any gains less any losses realized on the disposition of such Investments. "Permitted Refinancing Debt" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that (i) the principal amount of such Permitted Refinancing Debt does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus (a) the amount of reasonable expenses incurred in connection therewith and (b) the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of such refinancing or deemed by the Company or such Restricted Subsidiary necessary to be paid in order to effectuate such refinancing); (ii) such Permitted Refinancing Debt has a final maturity date not earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded would, if the Exchange Notes were outstanding at such time, be subordinated in right of payment to the Exchange Notes, such Permitted Refinancing Debt has a final maturity date later than January 1, 2007 and would, if the Exchange Notes were outstanding at such time, be subordinated in right of payment to the Exchange Notes on terms at least as favorable to the holders of such Exchange Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Principal" means Marshall W. Pagon. "Qualified Subsidiary Stock" means Capital Stock of a Subsidiary of the Company which by its terms (a) does not mature, or is not mandatorily redeemable, pursuant to a sinking fund obligation or otherwise and is not redeemable at the option of the holder thereof, in whole or in part, prior to 10 January 1, 2008 (in each case, whether automatically or upon the happening of any event) (unless, in any such case, the issuer's obligation to pay, purchase or redeem such Capital Stock is expressly conditioned on its ability to do so in compliance with the provisions of Section 8(a) hereof), (b) is automatically exchangeable into shares of Capital Stock of the Company that is not Disqualified Stock upon the earlier to occur of (i) the occurrence of a Voting Rights Triggering Event and (ii) January 1, 2006, (c) has no voting or remedial rights and (d) does not permit the payment of cash dividends prior to January 1, 2007 (unless, in the case of this clause (d), the issuer's ability to pay cash dividends is expressly conditioned on its ability to do so in compliance with the provisions of Section 8(a) hereof). "Record Date" has the meaning set forth in Section 2(a) below. "Redemption Date" has the meaning set forth in Section 4(d) below. "reduction or decrease in capital stock" has the meaning set forth in Section 3 below. "Related Party" with respect to the Principal means (A) any immediate family member of the Principal or (B) any trust, corporation, partnership or other entity, more than 50% of the voting equity interests of which are owned directly or indirectly by, and which is controlled by, the Principal and/or such other Persons referred to in the immediately preceding clause (A). For purposes of this definition, (i) "immediate family member" means spouse, parent, step-parent, child, sibling or step-sibling and (ii) "control" has the meaning specified in the definition of "Affiliate." In addition, the Principal's estate shall be deemed to be a Related Party until such time as such estate is distributed in accordance with the Principal's will or applicable state law. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Payment" has the meaning set forth in Section 8(a) below. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Securities Act" means the Securities Act of 1933, as amended. "Senior Securities" means any class or series of capital stock of the Company ranking senior to the Series A Preferred Stock. "Separation Date" means the earliest to occur of (i) April 3, 1997, (ii) in the event of a Change of Control, the date the Company mails notice thereof and (iii) such other date as may be designated by CIBC Wood Gundy Securities Corp. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the Closing Date. "Split Dollar Agreement" means the Split Dollar Agreement between the Company and Nicholas A. Pagon, Holly T. Pagon and Michael B. Jordan, as trustees of an insurance trust established by Marshall W. Pagon, as in effect on the Closing Date. 11 "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Total Interest Expense" means, with respect to any Person for any period, the sum of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, to the extent such amounts are not included in clause (i) of this definition, and (iii) any interest expense for such period on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets (other than Equity Interests in Unrestricted Subsidiaries securing Indebtedness of Unrestricted Subsidiaries) of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) all cash and non-cash dividend payments during such period on any series of preferred stock of a Restricted Subsidiary of such Person. "Transfer Agent" means the entity designated from time to time by the Company to act as the registrar and transfer agent for the Series A Preferred Stock. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Certificate of Designation and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the provisions of Section 8(b)(i) hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant 12 to such covenant set forth in Section 8(b)(i) hereof), the Company shall be in default of such covenant); provided, however, that in the event an Unrestricted Subsidiary ceases to meet the requirement set forth in clause (e) of this definition, such Unrestricted Subsidiary shall have 60 days to meet such requirement before such Unrestricted Subsidiary shall cease to be an Unrestricted Subsidiary. The Board of Directors may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall be permitted only if (i) such Indebtedness is permitted under Section 8(b)(i) hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant to such covenant set forth in Section 8(b)(i) hereof) and (ii) no Voting Rights Triggering Event would be in existence following such designation. "Voting Stock" means with respect to any specified Person, Capital Stock with voting power, under ordinary circumstances and without regard to the occurrence of any contingency, to elect the directors or other managers or trustees of such Person. "Voting Rights Triggering Event" has the meaning set forth in Section 6(b) below. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock (other than Qualified Subsidiary Stock) or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person and/or by one or more Wholly Owned Restricted Subsidiaries of such Person. 2. Dividends. (a) The Holders of shares of the Series A Preferred Stock shall be entitled to receive, when, as and if dividends are declared by the Board of Directors out of funds of the Company legally available therefor, cumulative preferential dividends from the issue date of the Series A Preferred Stock accruing at the rate of 12.75% per annum, payable semi-annually in arrears on each January 1 and July 1 or, if any such date is not a Business Day, on the next succeeding Business Day (each, a "Dividend Payment Date"), to the Holders of record as of the next preceding December 15 and June 15 (each, a "Record Date"). Dividends shall be payable in cash, except that on each Dividend Payment Date occurring on or prior to January 1, 2002, dividends may be paid, at the Company's option, by the issuance of additional shares of Series A Preferred Stock (including fractional shares) having an aggregate Liquidation Preference equal to the amount of such dividends. The issuance of such additional shares of Series A Preferred Stock shall constitute "payment" of the related dividend for all purposes of this Certificate of Designation. The first dividend payment shall be payable on July 1, 1997. Dividends payable on the Series A Preferred Stock shall be computed on the basis of a 360-day year consisting of twelve 30-day months and shall be deemed to accumulate on a daily basis. 13 (b) Dividends on the Series A Preferred Stock shall accumulate whether or not the Company has earnings or profits, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. Dividends shall accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate. Accumulated unpaid dividends shall bear interest at a per annum rate 200 basis points in excess of the annual dividend rate on the Series A Preferred Stock. The Company shall take all actions required or permitted under the Delaware General Corporation Law (the "DGCL") to permit the payment of dividends on the Series A Preferred Stock, including, without limitation, through the revaluation of its assets in accordance with the DGCL, to make or keep funds legally available for the payment of dividends. (c) No dividend whatsoever shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Series A Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid, or declared and a sufficient sum set apart for the payment of such dividend, upon all outstanding shares of Series A Preferred Stock. Unless full cumulative dividends on all outstanding shares of Series A Preferred Stock for all past dividend periods shall have been declared and paid, or declared and a sufficient sum for the payment thereof set apart, then: (i) no dividend (other than a dividend payable solely in shares of any class of stock ranking junior to the Series A Preferred Stock as to the payment of dividends and as to rights in liquidation, dissolution or winding up of the affairs of the Company ("Junior Securities") shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any shares of Junior Securities; (ii) no other distribution shall be declared or made upon, or any sum set apart for the payment of any distribution upon, any shares of Junior Securities, other than a distribution consisting solely of Junior Securities; (iii) no shares of Junior Securities shall be purchased, redeemed or otherwise acquired or retired for value (excluding an exchange for shares of other Junior Securities) by the Company or any of its Subsidiaries; and (iv) no monies shall be paid into or set apart or made available for a sinking or other like fund for the purchase, redemption or other acquisition or retirement for value of any shares of Junior Securities by the Company or any of its Subsidiaries. Holders of the Series A Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of the full cumulative dividends as herein described. 3. Distributions Upon Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company or reduction or decrease in its capital stock resulting in a distribution of assets to the holders of any class or series of the Company's capital stock (a "reduction or decrease in capital stock"), each Holder of shares of the Series A Preferred Stock shall be entitled to payment out of the assets of the Company available for distribution of an amount equal to the Liquidation Preference per share of Series A Preferred Stock held by such Holder, plus accumulated and unpaid dividends, if any, to the date fixed for liquidation, dissolution, winding up or reduction or decrease in capital stock, before any distribution is made on any Junior Securities, including, without limitation, common stock of the Company. After payment in full of the Liquidation Preference and all accumulated dividends, if any, to which Holders of Series A Preferred Stock are entitled, such Holders shall not be entitled to any further participation in any distribution of assets of the Company. However, neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more corporations shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Company or reduction or decrease in capital stock, unless such sale, conveyance, exchange or 14 transfer shall be in connection with a liquidation, dissolution or winding up of the business of the Company or reduction or decrease in capital stock. 4. Redemption by the Company (a) On January 1, 2007 (the "Mandatory Redemption Date"), the Company shall be required to redeem (subject to the legal availability of funds therefor) all outstanding shares of Series A Preferred Stock at a price in cash equal to the Liquidation Preference thereof, plus accumulated and unpaid dividends, if any, to the date of redemption. The Company shall not be required to make sinking fund payments with respect to the Series A Preferred Stock. The Company shall take all actions required or permitted under the DGCL to permit such redemption. (b) The Series A Preferred Stock may not be redeemed at the option of the Company prior to January 1, 2002. The Series A Preferred Stock may be redeemed, in whole or in part, at the option of the Company on or after January 1, 2002, at the Applicable Redemption Price. Notwithstanding the foregoing sentence, during the first 36 months after the Closing Date, the Company may, on any one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to 25% of the shares of Series A Preferred Stock then outstanding (whether initially issued or issued in lieu of cash dividends) at a redemption price of 112.750% of the Liquidation Preference thereof plus, without duplication, accumulated and unpaid dividends to the date of redemption; provided that, after any such redemption, at least $75.0 million in aggregate Liquidation Preference of Series A Preferred Stock remains outstanding; and provided further, that any such redemption shall occur within 90 days of the date of closing of such offering of Class A Common Stock of the Company. (c) In case of redemption of less than all of the shares of Series A Preferred Stock at the time outstanding, the shares to be redeemed shall be selected pro rata or by lot as determined by the Company in its sole discretion. (d) Notice of any redemption shall be sent by or on behalf of the Company not less than 30 nor more than 60 days prior to the date specified for redemption in such notice (including the Mandatory Redemption Date, the "Redemption Date"), by first class mail, postage prepaid, to all Holders of record of the Series A Preferred Stock at their last addresses as they shall appear on the books of the Company; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series A Preferred Stock except as to the Holder to whom the Company has failed to give notice or except as to the Holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series A Preferred Stock may be listed or admitted to trading, such notice shall state: (i) whether such redemption is being made pursuant to the optional or the mandatory redemption provisions hereof; (ii) the Redemption Date; (iii) the Applicable Redemption Price; (iv) the number of shares of Series A Preferred Stock to be redeemed and, if less than all shares held by such Holder are to be redeemed, the number of such shares to be redeemed; (v) the place or places where certificates for such shares are to be surrendered for payment of the Applicable Redemption Price, including any procedures applicable to redemptions to be accomplished through book-entry transfers; and (vi) that dividends on the shares to be redeemed will cease to accumulate on the Redemption Date. Upon the mailing of any such notice of redemption, the Company shall become obligated to redeem at the time of redemption specified thereon all shares called for redemption. 15 (e) If notice has been mailed in accordance with Section 4(d) above and provided that on or before the Redemption Date specified in such notice, all funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds in trust for the pro rata benefit of the Holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, dividends on the shares of the Series A Preferred Stock so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series A Preferred Stock, and all rights of the Holders thereof as stockholders of the Company (except the right to receive from the Company the Applicable Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Company shall so require and the notice shall so state), such shares shall be redeemed by the Company at the Applicable Redemption Price. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the Holder thereof. (f) Any funds deposited with a bank or trust company for the purpose of redeeming Series A Preferred Stock shall be irrevocable except that: (i) the Company shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the Holders of any shares redeemed shall have no claim to such interest or other earnings; and (ii) any balance of monies so deposited by the Company and unclaimed by the Holders of the Series A Preferred Stock entitled thereto at the expiration of two years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Company, and after any such repayment, the Holders of the shares entitled to the funds so repaid to the Company shall look only to the Company for payment without interest or other earnings. (g) No Series A Preferred Stock may be redeemed except with funds legally available for the purpose. The Company shall take all actions required or permitted under the DGCL to permit any such redemption. (h) Notwithstanding the foregoing provisions of this Section 4, unless the full cumulative dividends on all outstanding shares of Series A Preferred Stock shall have been paid or contemporaneously are declared and paid for all past dividend periods, none of the shares of Series A Preferred Stock shall be redeemed unless all outstanding shares of Series A Preferred Stock are simultaneously redeemed. (i) All shares of Series A Preferred Stock redeemed pursuant to this Section 4 shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series and may thereafter be reissued as shares of any series of preferred stock other than shares of Series A Preferred Stock. 16 5. Exchange. (a) The Company may, at its option, on any Dividend Payment Date occurring after the Separation Date, exchange, in whole, but not in part, the then outstanding shares of Series A Preferred Stock for Exchange Notes; provided, that (i) on the date of such exchange there are no accumulated and unpaid dividends on the Series A Preferred Stock (including the dividend payable on such date) or other contractual impediments to such exchange; (ii) there shall be legally available funds sufficient therefor; (iii) no Voting Rights Triggering Event has occurred and is continuing at the time of such exchange; (iv) immediately after giving effect to such exchange, no Default or Event of Default (each as defined in the Exchange Note Indenture) would exist under the Exchange Note Indenture and no default or event of default would exist under any material instrument governing Indebtedness outstanding at the time, in either case, would be caused thereby; (v) the Exchange Note Indenture has been qualified under the Trust Indenture Act, if such qualification is required at the time of exchange; and (vi) the Company shall have delivered a written opinion to the Exchange Note Trustee to the effect that all conditions to be satisfied prior to such exchange have been satisfied. (b) The Exchange Notes shall be issuable in principal amounts of $1,000 and integral multiples thereof to the extent possible, and shall also be issuable in principal amounts less than $1,000 so that each Holder of Series A Preferred Stock will receive certificates representing the entire amount of Exchange Notes to which such Holder's shares of Series A Preferred Stock entitle such Holder; provided that the Company may pay cash in lieu of issuing an Exchange Note having a principal amount less than $1,000. Notice of the intention to exchange shall be sent by or on behalf of the Company not more than 60 days nor less than 30 days prior to the date fixed for the exchange (the "Exchange Date"), by first class mail, postage prepaid, to each Holder of record of Series A Preferred Stock at its registered address. In addition to any information required by law or by the applicable rules of any exchange upon which the Series A Preferred Stock may be listed or admitted to trading, such notice shall state: (i) the Exchange Date; (ii) the place or places where certificates for such shares are to be surrendered for exchange, including any procedures applicable to exchanges to be accomplished through book-entry transfers; and (iii) that dividends on the shares of Series A Preferred Stock to be exchanged will cease to accumulate on the Exchange Date. (c) A Holder delivering Series A Preferred Stock for exchange shall not be required to pay any taxes or duties in respect of the issue or delivery of Exchange Notes on exchange but shall be required to pay any tax or duty that may be payable in respect of any transfer involved in the issue or delivery of the Exchange Notes in a name other than that of the Holder of the Series A Preferred Stock. Certificates representing Exchange Notes shall not be issued or delivered unless all taxes and duties, if any, payable by the Holder have been paid. (d) If notice of any exchange has been properly given, and if on or before the Exchange Date the Exchange Notes have been duly executed and authenticated and an amount in cash or additional shares of Series A Preferred Stock (as applicable) equal to all accumulated and unpaid dividends, if any, thereon to the Exchange Date has been deposited with the Transfer Agent, then on and after the close of business on the Exchange Date, the shares of Series A Preferred Stock to be exchanged shall no longer be deemed to be outstanding and may thereafter be issued in the same manner as the other authorized but unissued preferred stock, but not as Series A Preferred Stock, and all rights of the Holders thereof as stockholders of the Company shall cease, except the right of the Holders to receive upon 17 surrender of their certificates the Exchange Notes and all accumulated and unpaid dividends, if any, thereon to the Exchange Date. (e) As a condition to the exercise of the exchange rights described in this Section 5, the Company shall deliver an opinion to the Exchange Note Trustee as to the due authorization, execution, delivery and enforceability of both the Exchange Notes and the Exchange Note Indenture and as to the compliance by the Company with the provisions hereof. 6. Voting Rights. (a) The Holders of record of shares of the Series A Preferred Stock shall have no voting rights, except as required by law and as hereinafter provided in this Section 6. (b) Upon: (i) the accumulation of accumulated and unpaid dividends on the outstanding Series A Preferred Stock in an amount equal to three (3) full semi-annual dividends (whether or not consecutive); (ii) the failure of the Company to satisfy any mandatory redemption or repurchase obligation (including, without limitation, pursuant to any required Change of Control Offer) with respect to the Series A Preferred Stock; (iii) the failure of the Company to make a Change of Control Offer on the terms and in accordance with the provisions described below in Section 7 hereof; (iv) the failure of the Company to comply with any of the other covenants or agreements set forth in this Certificate of Designation and the continuance of such failure for 60 consecutive days or more; or (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the Closing Date, which default (1) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (2) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more (each of the events described in clauses (i), (ii), (iii), (iv) and (v) being referred to herein as a "Voting Rights Triggering Event"); then the number of members of the Company's Board of Directors shall be immediately and automatically increased by two, and the Holders of a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, shall be entitled to elect two members to the Board of Directors of the Company. 18 (c) Whenever such voting right shall have vested, such right may be exercised initially either at a special meeting of the Holders of Series A Preferred Stock, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at such annual meetings or by the written consent of the Holders of Series A Preferred Stock. Such right of the Holders of Series A Preferred Stock to elect directors may be exercised until (i) all dividends in arrears shall have been paid in full and (ii) all other Voting Rights Triggering Events have been cured or waived, at which time the right of the Holders of Series A Preferred Stock to elect such number of directors shall cease, the term of such directors previously elected shall thereupon terminate, and the authorized number of directors of the Company shall thereupon return to the number of authorized directors otherwise in effect, but subject always to the same provisions for the renewal and divestment of such special voting rights in the case of any such future dividend arrearage or defaults or any such failure to make redemption payments. (d) At any time when such voting right shall have vested in the Holders of Series A Preferred Stock and if such right shall not already have been initially exercised, a proper officer of the Company shall, upon the written request of Holders of record of 10% or more of the Series A Preferred Stock then outstanding, addressed to the Secretary of the Company, call a special meeting of Holders of Series A Preferred Stock. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Company or, if none, at a place designated by the Secretary of the Company. If such meeting shall not be called by the proper officers of the Company within 30 days after the personal service of such written request upon the Secretary of the Company, or within 30 days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Company at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the Holders of record of 10% of the shares of Series A Preferred Stock then outstanding may designate in writing a Holder of Series A Preferred Stock to call such meeting at the expense of the Company, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the place for holding annual meetings of the Company or, if none, at a place designated by such Holder. Any Holder of Series A Preferred Stock that would be entitled to vote at such meeting shall have access to the stock books of the Company for the purpose of causing a meeting of stockholders to be called pursuant to the provisions of this Section. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called if any such request is received less than 90 days before the date fixed for the next ensuing annual or special meeting of stockholders. (e) If any director so elected by the Holders of Series A Preferred Stock shall cease to serve as a director before his term shall expire, the Holders of Series A Preferred Stock then outstanding may, at a special meeting of the Holders called as provided above, elect a successor to hold office for the unexpired term of the director whose place shall be vacant. (f) The Company shall not, without the affirmative vote or consent of the Holders of a majority of the shares of Series A Preferred Stock then outstanding (with shares held by the Company or any of its Affiliates not being considered to be outstanding for this purpose): (i) authorize, create (by way of reclassification or otherwise) or issue any Parity Securities or any Obligation or security convertible into or evidencing the right to purchase any Parity Securities; 19 (ii) amend or otherwise alter its Certificate of Incorporation in any manner that adversely affects the rights of Holders of Series A Preferred Stock; (iii) amend or otherwise alter this Certificate of Designation (including the provisions of Section 7 hereof) in any manner; or (iv) waive any existing Voting Rights Triggering Event or compliance with any provision of this Certificate of Designation. (g) Without the consent of each Holder affected, an amendment or waiver of the Company's Certificate of Incorporation or of this Certificate of Designation may not (with respect to any shares of Series A Preferred Stock held by a non-consenting Holder): (i) alter the voting rights with respect to the Series A Preferred Stock or reduce the number of shares of Series A Preferred Stock whose Holders must consent to an amendment, supplement or waiver; (ii) reduce the Liquidation Preference of or change the Mandatory Redemption Date of any share of Series A Preferred Stock or alter the provisions with respect to the redemption of the Series A Preferred Stock (except as provided above with respect to Section 7 hereof); (iii) reduce the rate of or change the time for payment of dividends on any share of Series A Preferred Stock; (iv) waive the consequences of any failure to pay dividends on the Series A Preferred Stock; (v) make any share of Series A Preferred Stock payable in any form other than that stated in this Certificate of Designation; (vi) make any change in the provisions of this Certificate of Designation relating to waivers of the rights of Holders of Series A Preferred Stock to receive the Liquidation Preference and dividends on the Series A Preferred Stock; (vii) waive a redemption payment with respect to any share of Series A Preferred Stock (except as provided above with respect to Section 7 hereof); or (viii) make any change in the foregoing amendment and waiver provisions. (h) The Company shall not, without the consent of at least two-thirds of the then outstanding shares of Series A Preferred Stock (with shares held by the Company or its Affiliates not being considered to be outstanding for this purpose), authorize, create (by way of reclassification or otherwise) or issue any Senior Securities or any Obligation or security convertible into or evidencing a right to purchase any Senior Securities. 20 (i) The Company in its sole discretion may without the vote or consent of any Holders of the Series A Preferred Stock amend or supplement this Certificate of Designation: (i) to cure any ambiguity, defect or inconsistency; (ii) to provide for uncertificated Series A Preferred Stock in addition to or in place of certificated Series A Preferred Stock; or (iii) to make any change that would provide any additional rights or benefits to the Holders of the Series A Preferred Stock or that does not adversely affect the legal rights under this Certificate of Designation of any such Holder. 7. Change of Control. (a) Upon the occurrence of a Change of Control, each Holder of shares of Series A Preferred Stock shall have the right to require the Company to repurchase all or any part (but not, in the case of any Holder requiring the Company to purchase less than all of the shares of Series A Preferred Stock held by such Holder, any fractional shares) of such Holder's Series A Preferred Stock pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate Liquidation Preference thereof plus accumulated and unpaid dividends, if any, thereon to the date of purchase (the "Change of Control Payment"). (b) The Change of Control Offer shall include all instructions and materials necessary to enable Holders to tender their shares of Series A Preferred Stock. (c) The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Series A Preferred Stock as a result of a Change of Control. (d) Within 30 days following any Change of Control, the Company shall mail a notice to each Holder stating: (i) that the Change of Control Offer is being made pursuant to this Section 7 and that all shares of Series A Preferred Stock tendered will be accepted for payment; (ii) the purchase price and the purchase date, which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"); (iii) that any share of Series A Preferred Stock not tendered will continue to accumulate dividends; (iv) that, unless the Company fails to pay the Change of Control Payment, all shares of Series A Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accumulate dividends after the Change of Control Payment Date; 21 (v) that Holders electing to have any shares of Series A Preferred Stock purchased pursuant to a Change of Control Offer will be required to surrender the shares of Series A Preferred Stock, with the form entitled "Option of Holder to Elect Purchase" which shall be included with the Notice of Change of Control completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the number of shares of Series A Preferred Stock delivered for purchase, and a statement that such Holder is withdrawing his election to have such shares purchased; and (vii) the circumstances and relevant facts regarding such Change of Control (including, but not limited to, information with respect to pro forma historical financial information after giving effect to such Change of Control and information regarding the Person or Persons acquiring control). (e) On the Change of Control Payment Date, the Company shall, to the extent lawful, (i) accept for payment all shares of Series A Preferred Stock or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all shares of Series A Preferred Stock or portions thereof so tendered and (iii) deliver or cause to be delivered to the Transfer Agent the shares of Series A Preferred Stock so accepted together with an Officers' Certificate stating the aggregate Liquidation Preference of the shares of Series A Preferred Stock or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to each Holder of Series A Preferred Stock so tendered the Change of Control Payment for such Series A Preferred Stock, and the Transfer Agent shall promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new certificate representing the shares of Series A Preferred Stock equal in Liquidation Preference amount to any unpurchased portion of the shares of Series A Preferred Stock surrendered, if any. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (f) Prior to complying with the provisions of this Section 7, but in any event within 90 days following a Change of Control, the Company shall either repay all outstanding Indebtedness or obtain the requisite consents, if any, under all agreements governing outstanding Indebtedness to permit the repurchase of Series A Preferred Stock required by this Section 7. (g) The Company shall not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Section 7 applicable to a Change of Control Offer made by the Company and purchases all shares of Series A Preferred Stock validly tendered and not withdrawn under such Change of Control Offer. 22 8. Certain Covenants. (a) Restricted Payments. (i) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make any payment or distribution on account of the Company's Parity Securities or Junior Securities (including, without limitation, any payment in connection with any merger or consolidation involving the Company) or on account of any Qualified Subsidiary Stock or make any payment or distribution to or for the benefit of the direct or indirect holders of the Company's Parity Securities or Junior Securities or the direct or indirect holders of any Qualified Subsidiary Stock in their capacities as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (b) purchase, redeem or otherwise acquire or retire for value any Parity Securities or Junior Securities of the Company or any direct or indirect parent of the Company or other Affiliate of the Company (other than any such Equity Interests owned by the Company or any of its Restricted Subsidiaries and other than the acquisition of Equity Interests in Subsidiaries of the Company solely in exchange for Equity Interests (other than Disqualified Stock) of the Company); (c) make any payment on, or purchase, redeem, defease or otherwise acquire or retire for value any Junior Securities, except payments of the Liquidation Preference thereof at final maturity; (d) make any loan, advance, capital contribution to or other investment in, or guarantee any obligation of, any Affiliate of the Company other than a Permitted Investment; (e) forgive any loan or advance to or other obligation of any Affiliate of the Company (other than a loan or advance to or other obligation of a Wholly Owned Restricted Subsidiary) which at the time it was made was not a Restricted Payment that was permitted to be made; or (f) make any Restricted Investment (all such payments and other actions set forth in clauses (a) through (f) above being collectively referred to as "Restricted Payments"), unless, at the time of and immediately after giving effect to such Restricted Payment: (1) no Voting Rights Triggering Event shall have occurred and be continuing or would occur as a consequence thereof; and (2) the Company would be permitted to incur $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio described in Section 8(b)(i) hereof; and (3) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the Closing Date, is less than the sum of (A) an amount equal to the Cumulative Operating Cash Flow for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (the "Basket Period") less 1.4 times the Company's Cumulative Total Interest Expense for the Basket Period, plus (B) 100% of the aggregate net cash proceeds and, in the case of proceeds consisting of assets constituting or used in a Permitted Business, 100% of the fair market value of the aggregate net proceeds other than cash received since the Closing Date (i) by the Company as capital contributions to the Company (other than from a Subsidiary) or (ii) from the sale by the Company (other 23 than to a Subsidiary) of its Equity Interests (other than Disqualified Stock), plus (C) without duplication, to the extent that any Restricted Investment that was made after the Closing Date is sold for cash or otherwise liquidated or repaid for cash, the Net Proceeds received by the Company or a Wholly Owned Restricted Subsidiary of the Company upon the sale of such Restricted Investment, plus (D) without duplication, to the extent that any Unrestricted Subsidiary is designated by the Company as a Restricted Subsidiary, an amount equal to the fair market value of such Investment at the time of such designation, plus (E) $2.5 million. (ii) The foregoing Section 8(a)(i) shall not prohibit (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Certificate of Designation; (2) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company in exchange for, or out of the net proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (3)(B) of the preceding paragraph (i); (3) the payment by the Company of advances under the Split Dollar Agreement in an amount not to exceed $250,000 in any four-quarter period; (4) the repurchase or redemption from employees of the Company and its Subsidiaries (other than the Principal) of Capital Stock of the Company in an amount not to exceed an aggregate of $3.0 million; (5) the payment of dividends on the Series A Preferred Stock in accordance with the terms thereof as in effect on the Closing Date; (6) the issuance of Exchange Notes in exchange for shares of the Series A Preferred Stock; provided that such issuance is permitted by Section 8(b) hereof; and (7) in the event that the Company elects to issue Exchange Notes in exchange for Series A Preferred Stock, cash payments made in lieu of the issuance of Exchange Notes having a face amount less than $1,000 and any cash payments representing accumulated and unpaid dividends in respect thereof, not to exceed $100,000 in the aggregate in any fiscal year. (iii) The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or the applicable Restricted Subsidiary, as the case may be, net of any liabilities proposed to be assumed by the transferee and novated pursuant to a written agreement releasing the Company and its Subsidiaries. Not later than the date of making any Restricted Payment, the Company shall deliver to the Board of Directors an Officers' Certificate stating that such Restricted Payment is permitted by the terms hereof and setting forth the basis upon which the calculations required by this Section 8(a) were computed, which calculations may be based upon the Company's latest available financial statements. (iv) The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Voting Rights Triggering Event. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries in the Subsidiary so designated shall be deemed to be Restricted Payments at the time of such designation (valued as set forth below) and shall reduce the amount available for Restricted Payments under Section 8(a)(i) hereof. All such outstanding Investments shall be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation. Such designation shall be permitted only if such Restricted 24 Payment would be permitted at such time and if such Restricted Subsidiary would otherwise meet the definition of an Unrestricted Subsidiary. (b) Incurrence of Indebtedness and Issuance of Preferred Stock. (i) The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and shall not issue any Disqualified Stock and shall not permit any of its Subsidiaries to issue any shares of preferred stock (other than Qualified Subsidiary Stock); provided, however, that (a) the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock and (b) a Restricted Subsidiary of the Company may incur Indebtedness (including Acquired Debt) or issue shares of preferred stock (including Disqualified Stock) if, in each case, the Company's Indebtedness to Adjusted Operating Cash Flow Ratio as of the date on which such Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been 7.0 to 1 or less, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, as of the date of such calculation. The foregoing provisions shall not apply to: (1) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt or the issuance by such Unrestricted Subsidiaries of preferred stock; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary or any such preferred stock becomes preferred stock (other than Qualified Subsidiary Stock) of a Restricted Subsidiary, as the case may be, such event shall be deemed to constitute an incurrence of Indebtedness by or an issuance of preferred stock (other than Qualified Subsidiary Stock) of, as the case may be, a Restricted Subsidiary of the Company; (2) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness pursuant to one or more Bank Facilities, so long as the aggregate principal amount of all Indebtedness outstanding under all Bank Facilities does not, at the time of incurrence, exceed an amount equal to $50.0 million; (3) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (4) the incurrence by the Company of Indebtedness under the Exchange Notes; (5) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Wholly Owned Restricted Subsidiaries; provided, however, that (A) any subsequent issuance or transfer of Equity Interests that result in any such Indebtedness being held by a Person other than the Company or a Wholly Owned Restricted Subsidiary of the 25 Company and (B) any sale or other transfer of such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary of the Company shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (6) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount not to exceed $5.0 million at any time outstanding; (7) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Debt in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by this Certificate of Designation to be incurred; and (8) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any other clause of this paragraph) in an aggregate principal amount at any time outstanding not to exceed $5.0 million. (ii) If an item of Indebtedness is permitted to be incurred on the basis of the first paragraph of Section 8(b)(i) hereof and also on the basis of one or more of clauses (1) through (8) of Section 8(b)(i) hereof, or is permitted to be incurred on the basis of two or more of clauses (1) through (8) of Section 8(b)(i) hereof, then the Company shall classify the basis on which such item of Indebtedness is incurred. If an item of Indebtedness is repaid with the proceeds of an incurrence of other Indebtedness (whether from the same or a different creditor), the Company may classify such other Indebtedness as having been incurred on the same basis as the Indebtedness being repaid or on a different basis permitted under this covenant. For purposes of this Section 8(b)(ii), "Indebtedness" includes Disqualified Stock and preferred stock of Subsidiaries. Accrued interest and accreted discount will not be deemed incurrence of Indebtedness for purposes of this Section 8(b). (c) Merger, Consolidation or Sale of Assets. The Company shall not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Series A Preferred Stock shall be converted into or exchanged for and shall become shares of such successor, transferee or resulting Person, having in respect of such successor, transferee or resulting Person the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the Series A Preferred Stock had with respect to the Company immediately prior to such transaction; (iii) immediately after such transaction no Voting Rights Triggering Event exists; and (iv) the Company or the entity or 26 Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio set forth in Section 8(b)(i) hereof. (d) Transactions with Affiliates. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Holders (1) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and a majority of the Independent Directors and (2) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the Company or such Restricted Subsidiary of such Affiliate Transaction from a financial point of view issued by an investment banking firm of national standing; provided that the Company shall not, and shall not permit any of its Restricted Subsidiaries to, engage in any Affiliate Transaction involving aggregate consideration in excess of $1.0 million at any time that there is not at least one Independent Director on the Company's Board of Directors; and provided further that (A) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (B) transactions between or among the Company and/or its Restricted Subsidiaries, (C) the payment of any dividend on, or the issuance of the Exchange Notes in exchange for, the Series A Preferred Stock, provided that such dividends are paid on a pro rata basis and the Exchange Notes are issued in accordance with this Certificate of Designation, and (D) transactions permitted by the provisions of Section 8(a) hereof, in each case, shall not be deemed Affiliate Transactions. (e) Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(1) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest or participation in, or measured by, its profits, or (2) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (1) the terms of any Indebtedness permitted by this Certificate of Designation to be incurred by any Subsidiary of the Company, (2) Existing Indebtedness as in effect on the Closing Date, (3) applicable law, (4) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in 27 connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person and its Subsidiaries, or the property or assets of the Person and its Subsidiaries, so acquired or (5) by reason of customary non-assignment provisions in leases and other contracts entered into in the ordinary course of business and consistent with past practices. (f) Limitation on Issuance and Sales of Capital Stock of Wholly Owned Restricted Subsidiaries. The Company (i) shall not, and shall not permit any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey, sell or otherwise dispose of any Capital Stock (other than Qualified Subsidiary Stock) of any Wholly Owned Restricted Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (ii) shall not permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity Interests (other than Qualified Subsidiary Stock and, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company. (g) Reports. (i) Whether or not required by the rules and regulations of the Commission, so long as any shares of Series A Preferred Stock are outstanding, the Company shall furnish to the Holders of Series A Preferred Stock (1) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (2) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company shall file a copy of all such information and reports with the Commission for public availability (unless the Commission shall not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition to the financial information required by the Exchange Act, each such quarterly and annual report shall be required to contain "summarized financial information" (as defined in Rule 1-02(aa)(1) of Regulation S-X under the Exchange Act) showing Adjusted Operating Cash Flow for the Company and its Restricted Subsidiaries, on a consolidated basis, where Adjusted Operating Cash Flow for the Company is calculated in a manner consistent with the manner described under the definition of "Adjusted Operating Cash Flow" contained herein. The summarized financial information required pursuant to the preceding sentence may, at the election of the Company, be included in the footnotes to audited consolidated financial statements or unaudited quarterly financial statements of the Company and shall be as of the same dates and for the same periods as the consolidated financial statements of the Company and its Subsidiaries required pursuant to the Exchange Act. (i) The Company shall deliver to the Holders, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing officers with a view to determining whether the Company has kept, observed, performed 28 and fulfilled its obligations under this Certificate of Designation and further stating, as to each such officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Certificate of Designation and is not in default in the performance or observance of any of the terms, provisions and conditions of this Certificate of Designation (or, if any such default shall have occurred, describing all such defaults of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the Liquidation Preference of or dividends, if any, on the Series A Preferred Stock is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. (ii) The Company shall, so long as any of the shares of Series A Preferred Stock are outstanding, deliver to the Holders, forthwith upon any Executive Officer of the Company becoming aware of any default under this Certificate of Designation, an Officers' Certificate specifying such default and what action the Company is taking or proposes to take with respect thereto. (h) Conflicts with By-laws. If any provisions of the Company's By-laws conflict in any way with this Certificate of Designation, the Company shall, so long as any of the shares of Series A Preferred Stock are outstanding, take all necessary actions to amend such By-laws and thereby resolve the conflict. 9. Payment. (a) All amounts payable in cash with respect to the Series A Preferred Stock shall be payable in United States dollars at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of dividends (if any) may be made by check mailed to the Holders of the Series A Preferred Stock at their respective addresses set forth in the register of Holders of Series A Preferred Stock maintained by the Transfer Agent, provided that all cash payments with respect to the Global Shares (as defined below) and shares of Series A Preferred Stock the Holders of which have given wire transfer instructions to the Company shall be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. (b) Any payment on the Series A Preferred Stock due on any day that is not a Business Day need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on such due date. (c) The Company has initially appointed the Transfer Agent to act as the "Paying Agent." The Company may at any time terminate the appointment of any Paying Agent and appoint additional or other Paying Agents, provided that until the Series A Preferred Stock has been delivered to the Company for cancellation, or moneys sufficient to pay the Liquidation Preference and accumulated dividends on the Series A Preferred Stock have been made available for payment and either paid or returned to the Company as provided in this Certificate of Designation, it shall maintain an office or agency in the Borough of Manhattan, The City of New York for surrender of Series A Preferred Stock for conversion. 29 (d) Dividends payable on the Series A Preferred Stock on any redemption date or repurchase date that is a Dividend Payment Date shall be paid to the Holders of record as of the immediately preceding Record Date. (e) All moneys and shares of Series A Preferred Stock deposited with any Paying Agent or then held by the Company in trust for the payment of the Liquidation Preference and dividends on any shares of Series A Preferred Stock which remain unclaimed at the end of two years after such payment has become due and payable shall be repaid to the Company, and the Holder of such shares of Series A Preferred Stock shall thereafter look only to Company for payment thereof. 10. Officers' Certificate. Each Officers' Certificate provided for in this Certificate of Designation shall include: (a) a statement that the officer making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such officer, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such officer, such condition or covenant has been satisfied. 11. Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series A Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Certificate of Designation (as such Certificate of Designation may be amended from time to time) and in the Certificate of Incorporation. The shares of Series A Preferred Stock shall have no preemptive or subscription rights. 12. Headings of Subdivisions. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 13. Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in this Certificate of Designation (as it may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, 30 limitations and restrictions thereof set forth in this Certificate of Designation (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 14. Form of Securities. (a) The Series A Preferred Stock shall initially be issued in the form of one or more Global Preferred Shares (the "Global Shares"). The Global Shares shall be deposited on the Closing Date with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to as the "Global Share Holder"). (b) So long as the Global Share Holder is the registered owner of any Series A Preferred Stock, the Global Share Holder will be considered the sole Holder under this Certificate of Designation of any shares of Series A Preferred Stock evidenced by the Global Shares. Beneficial owners of shares of Series A Preferred Stock evidenced by the Global Shares shall not be considered the owners or Holders thereof under this Certificate of Designation for any purpose. The Company shall not have any responsibility or liability for any aspect of the records of the Depositary relating to the Series A Preferred Stock. (c) Payments in respect of the Liquidation Preference, dividends on any Series A Preferred Stock registered in the name of the Global Share Holder on the applicable record date shall be payable by the Company to or at the direction of the Global Share Holder in its capacity as the registered Holder under this Certificate of Designation. The Company may treat the persons in whose names Series A Preferred Stock, including the Global Shares, are registered as the owners thereof for the purpose of receiving such payments. The Company does not and will not have any responsibility or liability for the payments of such amounts to beneficial holders of Series A Preferred Stock. (d) Any person having a beneficial interest in a Global Share may, upon request to the Company, exchange such beneficial interest for Series A Preferred Stock in the form of registered definitive certificates ("Certificated Securities"). Upon any such issuance, the Company shall register such Certificated Securities in the name of, and cause the same to be delivered to, such person or persons (or the nominee of any thereof). If (i) the Company notifies the Holders in writing that the Depositary is no longer willing or able to act as a depositary and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Holders in writing that it elects to cause the issuance of Series A Preferred Stock in the form of Certificated Securities, then, upon surrender by the Global Share Holder of its Global Shares, Series A Preferred Stock in such form will be issued to each person that the Global Share Holder and the Depositary identify as being the beneficial owner of the related Series A Preferred Stock. 31 IN WITNESS WHEREOF, the Company has caused this certificate to be duly executed by Robert N. Verdecchio, Chief Financial Officer, and attested by Ted S. Lodge, its assistant secretary, this 27th day of January, 1997. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Robert N. Verdecchio ------------------------------ Robert N. Verdecchio Chief Financial Officer ATTEST: By: /s/ Ted S. Lodge ---------------------- Ted S. Lodge Assistant Secretary Annex A - -------------------------------------------------------------------------------- PEGASUS COMMUNICATIONS CORPORATION 12.75% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2007 ----------------- INDENTURE Dated as of ________________ ____________________ _________________ FIRST UNION NATIONAL BANK as Trustee ----------------- - -------------------------------------------------------------------------------- CROSS-REFERENCE TABLE* Trust Indenture Act Section Indenture Section 310 (a)(1)............................................... 7.10 (a)(2).............................................. 7.10 (a)(3) ............................................. N.A. (a)(4).............................................. N.A. (a)(5).............................................. 7.10 (b) ................................................ 7.03;7.10 (c) ................................................ N.A. 311 (a) ................................................. 7.11 (b) ................................................ 7.11 (c) ................................................ N.A. 312 (a).................................................. 2.05 (b)................................................. 11.03 (c) ................................................ 11.03 313 (a).................................................. 7.06 (b)(1) ............................................. N.A. (b)(2) ............................................. 7.06;7.07 (c) ................................................ 7.06;11.02 (d)................................................. 7.06 314 (a) ................................................. 4.03;11.05 (b) ................................................ N.A (c)(1) ............................................. . 11.04 (c)(2) ............................................. 11.04 (c)(3) ............................................. N.A. (d)................................................. N.A. (e) ............................................... 11.05 (f)................................................. N.A. 315 (a).................................................. 7.01 (b)................................................. 7.05,11.02 (c) ............................................... 7.01 (d)................................................. 7.01 (e)................................................. 6.11 316 (a)(last sentence) .................................. 2.09 (a)(1)(A)........................................... 6.05 (a)(1)(B) .......................................... 6.04 (a)(2) ............................................. N.A. (b) ................................................ 6.07 (c) ................................................ N.A. 317 (a)(1) .............................................. 6.08 (a)(2).............................................. 6.09 (b) ................................................ 2.04 318 (a).................................................. 11.01 (b)................................................. N.A. (c)................................................. 11.01 N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. TABLE OF CONTENTS Page No. -------- ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01. Definitions............................................... 1 Section 1.02. Other Definitions......................................... 12 Section 1.03. Incorporation by Reference of Trust Indenture Act......... 13 Section 1.04. Rules of Construction..................................... 13 ARTICLE 2 THE EXCHANGE NOTES Section 2.01. Form and Dating........................................... 14 Section 2.02. Execution and Authentication.............................. 14 Section 2.03. Registrar and Paying Agent................................ 14 Section 2.04. Paying Agent to Hold Money in Trust....................... 15 Section 2.05. Holder Lists.............................................. 15 Section 2.06. Transfer and Exchange..................................... 15 Section 2.07. Replacement Exchange Notes................................ 16 Section 2.08. Outstanding Exchange Notes................................ 16 Section 2.09. Treasury Exchange Notes................................... 16 Section 2.10. Temporary Exchange Notes.................................. 17 Section 2.11. Cancellation.............................................. 17 Section 2.12. Defaulted Interest........................................ 17 ARTICLE 3 REDEMPTION AND PREPAYMENT Section 3.01. Notices to Trustee........................................ 18 Section 3.02. Selection of Exchange Notes to Be Redeemed................ 18 Section 3.03. Notice of Redemption...................................... 18 Section 3.04. Effect of Notice of Redemption............................ 19 Section 3.05. Deposit of Redemption or Purchase Price................... 19 Section 3.06. Exchange Notes Redeemed or Purchased in Part.............. 20 Section 3.07. Optional Redemption....................................... 20 Section 3.08. Mandatory Redemption...................................... 20 Section 3.09. Offer to Purchase by Application of Excess Proceeds....... 20 ARTICLE 4 COVENANTS Section 4.01. Payment of Exchange Notes................................. 22 Section 4.02. Maintenance of Office or Agency........................... 23 i Section 4.03. Reports....................................................... 23 Section 4.04. Compliance Certificate........................................ 24 Section 4.05. Taxes......................................................... 24 Section 4.06. Stay, Extension and Usury Laws................................ 24 Section 4.07. Restricted Payments........................................... 25 Section 4.08. Dividend and Other Payment Restrictions Affecting Subsidiaries.................................................. 26 Section 4.09. Incurrence of Indebtedness and Issuance of Preferred Stock.... 27 Section 4.10. Asset Sales................................................... 29 Section 4.11. Transactions with Affiliates.................................. 30 Section 4.12. Liens......................................................... 30 Section 4.13. Offer to Repurchase Upon Change of Control.................... 31 Section 4.14. Continued Existence........................................... 32 Section 4.15. Limitation on Layering........................................ 32 Section 4.16. Limitation on Issuances and Sales of Capital Stock of Wholly Owned Restricted Subsidiaries................................. 32 ARTICLE 5 SUCCESSORS Section 5.01. Merger, Consolidation, or Sale of Assets...................... 33 Section 5.02. Successor Corporation Substituted............................. 33 ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01. Events of Default............................................. 33 Section 6.02. Acceleration.................................................. 36 Section 6.03. Other Remedies................................................ 36 Section 6.04. Waiver of Past Defaults....................................... 36 Section 6.05. Control by Majority........................................... 36 Section 6.06. Limitation on Suits........................................... 37 Section 6.07. Rights of Holders of Exchange Notes to Receive Payment........ 37 Section 6.08. Collection Suit by Trustee.................................... 37 Section 6.09. Trustee May File Proofs of Claim.............................. 37 Section 6.10. Priorities.................................................... 38 Section 6.11. Undertaking for Costs..........................................38 ARTICLE 7 TRUSTEE Section 7.01. Duties of Trustee............................................. 39 Section 7.02. Rights of Trustee............................................. 40 Section 7.03. Individual Rights of Trustee.................................. 40 Section 7.04. Trustee's Disclaimer.......................................... 40 Section 7.05. Notice of Defaults............................................ 41 Section 7.06. Reports by Trustee to Holders of the Exchange Notes........... 41 Section 7.07. Compensation and Indemnity.................................... 41 Section 7.08. Replacement of Trustee........................................ 42 ii Section 7.09. Successor Trustee by Merger, etc...............................43 Section 7.10. Eligibility; Disqualification................................. 43 Section 7.11. Preferential Collection of Claims Against Company............. 43 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance...... 43 Section 8.02. Legal Defeasance and Discharge................................ 43 Section 8.03. Covenant Defeasance........................................... 44 Section 8.04. Conditions to Legal or Covenant Defeasance.................... 44 Section 8.05. Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions......................... 45 Section 8.06. Repayment to Company.......................................... 46 Section 8.07. Reinstatement................................................. 46 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER Section 9.01. Without Consent of Holders of Exchange Notes.................. 47 Section 9.02. With Consent of Holders of Exchange Notes..................... 47 Section 9.03. Compliance with Trust Indenture Act........................... 49 Section 9.04. Revocation and Effect of Consents............................. 49 Section 9.05. Notation on or Exchange of Exchange Notes..................... 49 Section 9.06. Trustee to Sign Amendments, etc............................... 49 ARTICLE 10 SUBORDINATION Section 10.01. Agreement to Subordinate......................................49 Section 10.02. Certain Definitions...........................................50 Section 10.03. Liquidation; Dissolution; Bankruptcy..........................50 Section 10.04. Default on Designated Senior Debt.............................50 Section 10.05. Acceleration of Exchange Notes................................51 Section 10.06. When Distribution Must Be Paid Over...........................51 Section 10.07. Notice by Company.............................................52 Section 10.08. Subrogation...................................................52 Section 10.09. Relative Rights...............................................52 Section 10.10. Subordination May Not Be Impaired by Company..................53 Section 10.11. Distribution or Notice to Representative......................53 Section 10.12. Rights of Trustee and Paying Agent............................53 Section 10.13. Authorization to Effect Subordination.........................53 Section 10.14. Amendments....................................................53 iii ARTICLE 11 MISCELLANEOUS Section 11.01. Trust Indenture Act Controls............................... 54 Section 11.02. Notices.................................................... 54 Section 11.03. Communication by Holders of Exchange Notes with Other Holders of Exchange Notes............................ 55 Section 11.04. Certificate and Opinion as to Conditions Precedent......... 55 Section 11.05. Statements Required in Certificate or Opinion.............. 55 Section 11.06. Rules by Trustee and Agents................................ 56 Section 11.07. No Personal Liability of Directors, Officers, Employees and Stockholders........................................... 56 Section 11.08. Governing Law.............................................. 56 Section 11.09. No Adverse Interpretation of Other Agreements.............. 56 Section 11.10. Successors................................................. 56 Section 11.11. Severability............................................... 56 Section 11.12. Counterpart Originals...................................... 56 Section 11.13. Table of Contents, Headings, etc........................... 57 Exhibit A..................................................................A-1 iv INDENTURE dated as of __________________ between Pegasus Communications Corporation, a Delaware corporation (the "Company"), and First Union National Bank, a national banking association, as trustee (the "Trustee"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 12.75% Senior Subordinated Exchange Notes due 2007 of the Company: ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Adjusted Operating Cash Flow" means, for the four most recent fiscal quarters for which internal financial statements are available, Operating Cash Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow for the most recent four-quarter period plus DBS Cash Flow for the most recent quarterly period, multiplied by four. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Agent" means any Registrar, Paying Agent or co-registrar. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of a sale and leaseback) other than in the ordinary course of business consistent with past practices (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole will be governed by the provisions described in Section 4.13 hereof and/or the provisions described in Section 5.01 hereof and not by the provision of Section 4.10 hereof) and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the following transactions will not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned Restricted Subsidiary of the Company or by a Wholly Owned Restricted Subsidiary of the Company to the Company or to another Wholly Owned Restricted Subsidiary of the Company, (ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary of the Company to the Company or to another Wholly Owned Restricted Subsidiary of the Company and (iii) a Restricted Payment that is permitted by the provisions of Section 4.07 hereof. "Asset Swap" means an exchange of assets by the Company or a Restricted Subsidiary of the Company for one or more Permitted Businesses or for a controlling equity interest in any Person whose assets consist primarily of one or more Permitted Businesses. "Bank Facilities" means, with respect to the Company or any of its Restricted Subsidiaries, one or more debt facilities or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board" or "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days or on demand for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above and (v) commercial paper having the highest rating at acquisition obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition. "Certificate of Designation" means the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof setting forth the terms of the Series A Preferred Stock. 2 "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principal or his Related Parties, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as defined above) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more of the Class A Common Stock of the Company than is beneficially owned (as defined above) at such time by the Principal and his Related Parties in the aggregate, (B) the Principal and his Related Parties collectively cease to beneficially own (as defined above) Voting Stock of the Company having at least 30% of the combined voting power of all classes of Voting Stock of the Company then outstanding or (C) the Principal and his Affiliates acquire, in the aggregate, beneficial ownership (as defined above) of more than 66 2/3 % of the shares of Class A Common Stock at the time outstanding or (iv) the first day on which a majority of the members of the Board of Directors are not Continuing Directors. "Class A Common Stock" means the Company's Class A Common Stock, par value $.01 per share. "Closing Date" means the date on which shares of Series A Preferred Stock are first issued. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) the cumulative effect of a change in accounting principles shall be excluded and (iv) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Subsidiaries. "Company" means Pegasus Communications Corporation, a Delaware corporation. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors who (i) was a member of such Board of Directors on the Closing Date or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Corporate Trust Office of the Trustee" shall be at the first address of the Trustee specified in Section 11.02 hereof or such other address as to which the Trustee may give notice to the Company. "Cumulative Operating Cash Flow" means, as of any date of determination, Operating Cash Flow for the Company and its Restricted Subsidiaries for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the most recently ended fiscal quarter for which internal financial statements are available at such date of determination, plus all cash dividends received by the Company or a Wholly Owned Restricted 3 Subsidiary of the Company from any Unrestricted Subsidiary of the Company or any Unrestricted Subsidiary of any Wholly Owned Restricted Subsidiary of the Company to the extent that such dividends are not included in the calculation of permitted Restricted Payments under paragraph (C) of Section 4.07(a) hereof by virtue of clause (iii) of such paragraph. "Cumulative Total Interest Expense" means, with respect to the Company and its Restricted Subsidiaries, as of any date of determination, Total Interest Expense for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the most recently ended fiscal quarter for which internal financial statements are available at such date of determination. "DBS Cash Flow" means income from operations (before depreciation, amortization and Non-Cash Incentive Compensation to the extent deducted in arriving at income from operations) for the Satellite Segment determined on a basis consistent with the segment data contained in the Company's consolidated audited financial statements. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Depositary" means, with respect to the Exchange Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Exchange Notes, until a successor shall have been appointed and become such pursuant to the applicable provision of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "Disqualified Stock" means any Capital Stock (other than the Series A Preferred Stock) that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the mandatory redemption date of the Series A Preferred Stock set forth in the Certificate of Designations unless, in any such case, the issuer's obligation to pay, purchase or redeem such Capital Stock is expressly conditioned on its ability to do so in compliance with the provisions of Section 4.07 hereof. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" means the Company's 12.75% Senior Subordinated Exchange Notes due 2007 issuable in exchange for the Company's Series A Preferred Stock. "Existing Indebtedness" means all Indebtedness of the Company and its Subsidiaries in existence on the Closing Date, until such amounts are repaid. "fair market value" means, with respect to assets or aggregate net proceeds having a fair market value (a) of less than $5.0 million, the fair market value of such assets or proceeds determined in good faith by the Board of Directors (including a majority of the Independent Directors thereof) and evidenced by a board resolution and (b) equal to or in excess of $5.0 million, the fair market value of 4 such assets or proceeds as determined by an independent appraisal firm with experience in the valuation of the classes and types of assets in question; provided that the fair market value of the assets purchased in an arms'-length transaction by an Affiliate of the Company (other than a Subsidiary) from a third party that is not also an Affiliate of the Company or of such purchaser and contributed to the Company within five Business Days of the consummation of the acquisition of such assets by such Affiliate shall be deemed to be the aggregate consideration paid by such Affiliate (which may include the fair market value of any non-cash consideration to the extent that the valuation requirements of this definition are complied with as to any such non-cash consideration). "GAAP" means 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 in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Closing Date. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, co-borrowing arrangements, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Holder" means a Person in whose name an Exchange Note is registered. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing any Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Indebtedness issued with original issue discount is the full amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP. "Indebtedness to Adjusted Operating Cash Flow Ratio" means, as of any date of determination, the ratio of (a) the aggregate principal amount of all outstanding Indebtedness of a Person and its 5 Restricted Subsidiaries as of such date on a consolidated basis, plus the aggregate liquidation preference of all outstanding preferred stock (other than Qualified Subsidiary Stock) of the Restricted Subsidiaries of such Person as of such date (excluding any such preferred stock held by such Person or a Wholly Owned Restricted Subsidiary of such Person), plus the aggregate liquidation preference or redemption amount of all Disqualified Stock of such Person (excluding any Disqualified Stock held by such Person or a Wholly Owned Restricted Subsidiary of such Person) as of such date to (b) Adjusted Operating Cash Flow of such Person and its Restricted Subsidiaries for the most recent four-quarter period for which internal financial statements are available determined on a pro forma basis after giving effect to all acquisitions and dispositions of assets (notwithstanding clause (ii) of the definition of "Consolidated Net Income") (including, without limitation, Asset Swaps) made by such Person and its Restricted Subsidiaries since the beginning of such four-quarter period through such date as if such acquisitions and dispositions had occurred at the beginning of such four-quarter period. "Indenture" means this Indenture, as amended or supplemented from time to time. "Independent Director" means a member of the Board of Directors who is neither an officer nor an employee of the Company or any of its Affiliates. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including Guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that an acquisition of assets, Equity Interests or other securities by the Company for consideration consisting of common equity securities, or preferred stock which is not Disqualified Stock, of the Company shall not be deemed to be an Investment. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). 6 "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting, investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness in connection with such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Cash Incentive Compensation" means incentive compensation paid to any officer, employee or director of the Company or any of its Subsidiaries in the form of Class A Common Stock of the Company or options to purchase Class A Common Stock of the Company pursuant to the Pegasus Communications Restricted Stock Plan and the Pegasus Communications 1996 Stock Option Plan. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise) or (c) constitutes the lender; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary, any Assistant Secretary, any Vice-President or any Assistant Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 11.05 hereof. "Operating Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period, (a) plus (i) extraordinary net losses and net losses on sales of assets outside the ordinary course of business during such period, to the extent such losses were deducted in computing such Consolidated Net Income, plus (ii) provision for taxes based on income or profits, to the extent such provision for taxes was included in computing such Consolidated Net Income, and any provision for taxes utilized in computing the net losses under clause (i) hereof, plus (iii) consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts 7 and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash charges were deducted in computing such Consolidated Net Income, plus (v) Non-Cash Incentive Compensation to the extent such compensation expense was deducted in computing such Consolidated Net Income and to the extent not included in clause (iv) of this definition and (b) less all non-cash income for such period (excluding any such non-cash income to the extent it represents an accrual of cash income in any future period or amortization of cash income received in a prior period). "Opinion of Counsel" means an opinion from legal counsel who is not unsatisfactory to the Trustee, that meets the requirements of Section 11.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Pari Passu Debt" means senior subordinated Indebtedness of the Company permitted by Section 4.09 hereof, other than the Exchange Notes, which is pari passu in right of payment with the Exchange Notes. "Permitted Businesses" means (a) any media or communications business, including but not limited to, any broadcast television station, cable franchise or other business in the television broadcasting, cable or direct-to-home satellite television industries and (b) any business reasonably related or ancillary to any of the foregoing businesses. "Permitted Investments" means (a) any Investments in the Company or in a Wholly Owned Restricted Subsidiary of the Company; (b) any Investments in Cash Equivalents; (c) Investments by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Wholly Owned Restricted Subsidiary of the Company; (d) Investments made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the provisions of Section 4.10 hereof; and (e) other Investments (measured as of the time made and without giving effect to subsequent changes in value) that do not exceed an amount equal to $5.0 million plus, to the extent any such Investments are sold for cash or are otherwise liquidated or repaid for cash, any gains less any losses realized on the disposition of such Investments. "Permitted Liens" means (i) Liens securing Senior Debt; (ii) Liens securing Indebtedness of a Subsidiary that was permitted to be incurred under this Indenture, (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Subsidiary of the Company; provided that such Liens were not created in contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company or any Restricted Subsidiary of the Company; (iv) Liens on property existing at the time of acquisition thereof by the Company or any Subsidiary of the Company; provided that such Liens were not created in contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens existing on the Closing Date; (vii) Liens to secure 8 Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations permitted by clause (vi) of Section 4.09(b) hereof, covering only the assets acquired with such Indebtedness; (viii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (ix) Liens incurred in the ordinary course of business of the Company or any Subsidiary of the Company with respect to obligations that do not exceed $1.0 million at any one time outstanding and (x) Liens on assets of or Equity Interests in Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. "Permitted Refinancing Debt" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that (i) the principal amount of such Permitted Refinancing Debt does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus (a) the amount of reasonable expenses incurred in connection therewith and (b) the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of such refinancing or deemed by the Company or such Restricted Subsidiary necessary to be paid in order to effectuate such refinancing); (ii) such Permitted Refinancing Debt has a final maturity date not earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Exchange Notes, such Permitted Refinancing Debt has a final maturity date later than the final maturity date of the Exchange Notes, and is subordinated in right of payment to the Exchange Notes on terms at least as favorable to the Holders of Exchange Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Preferred Stock," of any Person, means Capital Stock of such Person of any class or series (however designated) that ranks prior, as to payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class or series of such Person. "Principal" means Marshall W. Pagon. "Qualified Subsidiary Stock" means Capital Stock of a Subsidiary of the Company which by its terms (a) does not mature, or is not mandatorily redeemable, pursuant to a sinking fund obligation or otherwise and is not redeemable at the option of the Holder thereof, in whole or in part, prior to January 1, 2008 (in each case, whether automatically or upon the happening of any event) (unless, in any such case, the issuer's obligation to pay, purchase or redeem such Capital Stock is expressly conditioned on its ability to do so in compliance with the provisions of Section 4.07 hereof), (b) is automatically exchangeable into shares of Capital Stock of the Company that is not Disqualified Stock upon the earlier to occur of (i) the occurrence of an Event of Default and (ii) January 1, 2006, (c) has 9 no voting or remedial rights and (d) does not permit the payment of cash dividends prior to January 1, 2007 (unless, in the case of this clause (d), the issuer's ability to pay cash dividends is expressly conditioned on its ability to do so in compliance with the provisions of Section 4.07 hereof). "Related Party" with respect to the Principal means (A) any immediate family member of the Principal or (B) any trust, corporation, partnership or other entity, more than 50% of the voting equity interests of which are owned directly or indirectly by, and which is controlled by, the Principal and/or such other Persons referred to in the immediately preceding clause (A). For purposes of this definition, (i) "immediate family member" means spouse, parent, step-parent, child, sibling or step-sibling and (ii) "control" has the meaning specified in the definition of "Affiliate" contained in this Section 1.01. In addition, the Principal's estate shall be deemed to be a Related Party until such time as such estate is distributed in accordance with the Principal's will or applicable state law. "Responsible Officer," when used with respect to the Trustee, means any authorized officer within the Corporate Trust Administration department of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Satellite Segment" means the business involved in the marketing of video and audio programming and data information services through transmission media consisting of space-based satellite broadcasting services, the assets related to the conduct of such business held by the Company and its Restricted Subsidiaries on the Closing Date, plus all other assets acquired by the Company or any of its Restricted Subsidiaries that are directly related to such business (excluding, without limitation, the terrestrial television broadcasting business and the assets related thereto and the cable television business and the assets related thereto); provided that any assets acquired by the Company or any of its Restricted Subsidiaries after the Closing Date that are not directly related to such business shall not be included for purposes of this definition. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Series A Preferred Stock" means the Company's 12.75% Series A Cumulative Exchangeable Preferred Stock. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the Closing Date. "Split Dollar Agreement" means the Split Dollar Agreement between the Company and Nicholas A. Pagon, Holly T. Pagon and Michael B. Jordan, as trustees of an insurance trust established by Marshall W. Pagon, as in effect on the Closing Date. 10 "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as amended as in effect on the date of this Indenture. "Total Interest Expense" means, with respect to any Person for any period, the sum of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, to the extent such amounts are not included in clause (i) of this definition, and (iii) any interest expense for such period on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets (other than Equity Interests in Unrestricted Subsidiaries securing Indebtedness of Unrestricted Subsidiaries) of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) all cash and non-cash dividend payments during such period on any series of preferred stock of a Restricted Subsidiary of such Person. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board resolution; but only to the extent that such Subsidiary (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation made by the Board of Directors at a time when any Exchange Notes are outstanding shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the provisions of Section 4.07 hereof. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not 11 permitted to be incurred as of such date under the provisions of Section 4.09 hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant to such covenant), the Company shall be in default of such covenant); provided, however, that in the event an Unrestricted Subsidiary ceases to meet the requirement set forth in clause (e) of this definition, such Unrestricted Subsidiary shall have 60 days to meet such requirement before such Unrestricted Subsidiary shall cease to be an Unrestricted Subsidiary. The Board of Directors may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall be permitted only if (i) such Indebtedness is permitted under Section 4.09 hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for the period relevant to such covenant) and (ii) no Default or Event of Default would be in existence following such designation. "Voting Stock" means with respect to any specified Person, Capital Stock with voting power, under ordinary circumstances and without regard to the occurrence of any contingency, to elect the directors or other managers or trustees of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock (other than Qualified Subsidiary Stock) or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person and/or by one or more Wholly Owned Restricted Subsidiaries of such Person. SECTION 1.02. OTHER DEFINITIONS. Defined in Term Section "Affiliate Transaction"..................... 4.11 "Asset Sale Offer" ......................... 4.10 "Basket Period"............................. 4.07 "Change of Control Offer"................... 4.13 "Change of Control Payment"................. 4.13 "Change of Control Payment Date"............ 4.13 "Covenant Defeasance"....................... 8.03 "Custodian"................................. 6.01 "Designated Senior Debt".................... 10.02 "distribution".............................. 10.02 "DTC"....................................... 2.03 "Event of Default".......................... 6.01 "Excess Proceeds"........................... 4.10 "incur"..................................... 4.09 "Legal Defeasance" ......................... 8.02 "Notice of Default"......................... 6.01 "Offer Amount" ............................. 3.09 "Offer Period .............................. 3.09 12 "outstanding"............................... 8.02 "Paying Agent".............................. 2.03 "Payment Blockage Notice"................... 10.04 "Payment Default"........................... 6.01 "Purchase Date" ............................ 3.09 "Registrar"................................. 2.03 "Representative" ........................... 10.02 "Restricted Payments"....................... 4.07 "Senior Bank Debt".......................... 10.02 "Senior Debt"............................... 10.02 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Exchange Notes; "indenture security Holder" means a Holder of an Exchange Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Exchange Notes means the Company and any successor obligor upon the Exchange Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement of successor sections or rules adopted by the SEC from time to time. 13 ARTICLE 2 THE EXCHANGE NOTES SECTION 2.01. FORM AND DATING. The Exchange Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Exchange Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Exchange Note shall be dated the date of its authentication. The Exchange Notes shall be in all appropriate denominations. The terms and provisions contained in the Exchange Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. SECTION 2.02. EXECUTION AND AUTHENTICATION. Two Officers shall sign the Exchange Notes for the Company by manual or facsimile signature. If an Officer whose signature is on an Exchange Note no longer holds that office at the time an Exchange Note is authenticated, the Exchange Note shall nevertheless be valid. An Exchange Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Exchange Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by two Officers, authenticate Exchange Notes for original issue up to the aggregate principal amount stated in paragraph 4 of the Exchange Notes. The aggregate principal amount of Exchange Notes outstanding at any time may not exceed such amount except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate the Exchange Notes. An authenticating agent may authenticate Exchange Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Exchange Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Exchange Notes may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Exchange Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name 14 and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Exchange Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium, if any, or interest on the Exchange Notes, and will notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Exchange Notes. SECTION 2.05. HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Exchange Notes and the Company shall otherwise comply with TIA ss. 312(a). SECTION 2.06. TRANSFER AND EXCHANGE. When Exchange Notes are presented by a Holder to the Registrar with a request to register, transfer or exchange them for an equal principal amount of Exchange Notes of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met; provided, however, that any Exchange Note presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar and the Trustee duly executed by the Holder thereof or by his attorney duly authorized in writing. To permit registrations of transfer and exchanges, the Company shall issue and the Trustee shall authenticate Exchange Notes at the Registrar's request, subject to such rules as the Trustee may reasonably require. Neither the Company nor the Registrar shall be required (i) to issue or register the transfer or exchange of Exchange Notes during a period beginning at the opening of business on a Business Day fifteen (15) Business Days before the day of any selection of Exchange Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (ii) to register the transfer of or exchange any Exchange Notes so selected for redemption, in whole or in part, except the 15 unredeemed portion of any Exchange Note being redeemed in part or (iii) to register the transfer or exchange of an Exchange Note between a record date and the next succeeding interest payment date. No service charge shall be made to any Holder for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar governmental charge payable upon exchanges pursuant to Sections 2.10, 3.06 or 9.05 hereof, which shall be paid by the Company). Prior to due presentment for registration of transfer of any Exchange Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Exchange Note is registered as the absolute owner of such Exchange Note for the purpose of receiving payment of principal of, premium, if any, and interest on such Exchange Note and for all other purposes whatsoever, whether or not such Exchange Note is overdue, and neither the Trustee, any Agent, nor the Company shall be affected by notice to the contrary. SECTION 2.07. REPLACEMENT EXCHANGE NOTES. If any mutilated Exchange Note is surrendered to the Trustee, or the Company and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Exchange Note, the Company shall issue and the Trustee, upon the written order of the Company signed by two Officers of the Company, shall authenticate a replacement Exchange Note if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if an Exchange Note is replaced. The Company may charge for its expenses in replacing an Exchange Note. Every replacement Exchange Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Exchange Notes duly issued hereunder. SECTION 2.08. OUTSTANDING EXCHANGE NOTES. The Exchange Notes outstanding at any time are all the Exchange Notes authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.08 as not outstanding. Except as set forth in Section 2.09 hereof, an Exchange Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Exchange Note. If an Exchange Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Exchange Note is held by a bona fide purchaser. If the principal amount of any Exchange Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, by 10:00 a.m. Eastern Time on a redemption date or maturity date, money sufficient to pay the Exchange Notes payable on that date, then on and after that date such Exchange Notes shall be deemed to be no longer outstanding and shall cease to accrue interest, if any. 16 SECTION 2.09. TREASURY EXCHANGE NOTES. In determining whether the Holders of the required principal amount of Exchange Notes have concurred in any direction, waiver or consent, Exchange Notes owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Exchange Notes that the Trustee knows are so owned shall be so disregarded. In connection with any such determination, the Company agrees to notify the Trustee of the existence of any Exchange Notes owned by the Company or any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. SECTION 2.10. TEMPORARY EXCHANGE NOTES. Until definitive Exchange Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Exchange Notes upon a written order of the Company signed by two Officers of the Company. Temporary Exchange Notes shall be substantially in the form of Exchange Notes but may have variations that the Company considers appropriate for temporary Exchange Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Exchange Notes in exchange for temporary Exchange Notes. Holders of temporary Exchange Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. The Company at any time may deliver Exchange Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Exchange Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Exchange Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy cancelled Exchange Notes (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all cancelled Exchange Notes shall be delivered to the Company unless the Company directs the Trustee to return the Exchange Notes to the Company upon written order signed by two Officers of the Company. The Company may not issue new Exchange Notes to replace Exchange Notes that have been paid or that have been delivered to the Trustee for cancellation. SECTION 2.12. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Exchange Notes, they shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Exchange Notes and in Section 4.01 hereof. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Exchange Note and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date, provided that no such special record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. Notwithstanding the foregoing, such interest may be paid at any time in any other lawful manner not inconsistent with the requirements 17 of any securities exchange on which the Exchange Notes may be listed, and upon such notice as may be required by such exchange. ARTICLE 3 REDEMPTION AND PREPAYMENT SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem Exchange Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 45 days (unless a shorter period may be satisfactory to the Trustee) but not more than 60 days before a redemption date, an Officers' Certificate setting forth (i) the clause of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Exchange Notes to be redeemed and (iv) the redemption price. If the Company is required to make an offer to purchase Exchange Notes pursuant to the provisions of Section 4.13 hereof, it shall furnish to the Trustee an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the purchase shall occur, (ii) the purchase date, (iii) the principal amount of Exchange Notes to be purchased, (iv) the purchase price and (v) a statement to the effect that a Change of Control has occurred and the conditions set forth in Section 4.13 hereof have been satisfied, as applicable. SECTION 3.02. SELECTION OF EXCHANGE NOTES TO BE REDEEMED. If less than all of the Exchange Notes are to be redeemed at any time, the Trustee shall select the Exchange Notes to be redeemed among the Holders of the Exchange Notes in compliance with the requirements of the principal national securities exchange, if any, on which the Exchange Notes are listed or, if the Exchange Notes are not so listed, to be redeemed among the Holders of Exchange Notes on a pro rata basis, by lot or by such method as the Trustee deems fair and appropriate. In the event of partial redemption by lot, the particular Exchange Notes to be redeemed shall be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Exchange Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Exchange Notes selected for redemption and, in the case of any Exchange Note selected for partial redemption, the principal amount thereof to be redeemed. Exchange Notes and portions of Exchange Notes selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Exchange Notes of a Holder are to be redeemed, the entire outstanding amount of Exchange Notes held by such Holder, even if not a multiple of $1,000, shall be redeemed. A new Exchange Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Exchange Note. On and after the redemption date, interest ceases to accrue on Exchange Notes or portions of them called for redemption. Except as provided in this Section 3.02, provisions of this Indenture that apply to Exchange Notes called for redemption also apply to portions of Exchange Notes called for redemption. SECTION 3.03. NOTICE OF REDEMPTION. Subject to the provisions of Section 3.09 hereof, at least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Exchange Notes are to be redeemed at its registered address. The notice shall identify the Exchange Notes to be redeemed and shall state: 18 (a) the redemption date; (b) the redemption price; (c) if any Exchange Note is being redeemed in part, the portion of the principal amount of such Exchange Note to be redeemed and that, after the redemption date upon surrender of such Exchange Note, a new Exchange Note or Exchange Notes in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Exchange Note; (d) the name and address of the Paying Agent; (e) that Exchange Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Company defaults in making such redemption payment, interest on Exchange Notes called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Exchange Notes and/or Section of this Indenture pursuant to which the Exchange Notes called for redemption are being redeemed; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Exchange Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least 30 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Exchange Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. SECTION 3.05. DEPOSIT OF REDEMPTION OR PURCHASE PRICE. One Business Day prior to 10:00 a.m. Eastern Time on the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money in immediately available funds sufficient to pay the redemption or purchase price of and accrued interest, if any, on all Exchange Notes to be redeemed or purchased on that date. The Trustee or the Paying Agent shall promptly return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption or purchase price of, and accrued interest on, all Exchange Notes to be redeemed or purchased. If Exchange Notes called for redemption or tendered in a Change of Control Offer are paid or if the Company has deposited with the Trustee or Paying Agent money sufficient to pay the redemption or purchase price of, and unpaid and accrued interest, if any, on all Exchange Notes to be redeemed or purchased, on and after the applicable redemption or purchase date, interest, if any, ceases to accrue on the Exchange Notes or the portions of Exchange Notes called for redemption or tendered and not withdrawn in a Change of Control Offer (regardless of whether certificates for such Exchange Notes are 19 actually surrendered). If an Exchange Note is redeemed or purchased on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest, if any, shall be paid to the Person in whose name such Exchange Note was registered at the close of business on such record date. If any Exchange Note called for redemption or subject to a Change of Control Offer shall not be so paid upon surrender for redemption or purchase because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption or purchase date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case, at the rate provided in the Exchange Notes and in Section 4.01 hereof. SECTION 3.06. EXCHANGE NOTES REDEEMED OR PURCHASED IN PART. Upon surrender of an Exchange Note that is redeemed or purchased in part, the Company shall issue and, upon the Company's written request, the Trustee shall authenticate for the Holder at the expense of the Company a new Exchange Note equal in principal amount to the unredeemed or unpurchased portion of the Exchange Note surrendered. SECTION 3.07. OPTIONAL REDEMPTION. (a) The Exchange Notes are not redeemable, in whole or in part, at the Company's option prior to January 1, 2002. The Exchange Notes may be redeemed, in whole or in part, at the option of the Company on or after January 1, 2002, at the redemption prices specified below (expressed as a percentage of the principal amount thereof), in each case, together with accrued and unpaid interest, if any, thereon to the date of redemption, upon not less than 30 nor more than 60 days' notice, if redeemed during the 12-month period beginning on January 1 of the years indicated below: Redemption Year Rate ---- ---- 2002...................................................... 106.375% 2003...................................................... 104.250% 2004...................................................... 102.125% 2005 and thereafter....................................... 100.000% (b) Notwithstanding the foregoing, during the first 36 months after the Closing Date, the Company may, on any one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to 25% of the aggregate principal amount of the Exchange Notes (whether issued in exchange for Series A Preferred Stock or in lieu of cash interest payments) at the redemption price of 112.750% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption; provided that, after any such redemption, the aggregate principal amount of the Exchange Notes outstanding must equal at least $75.0 million; and provided further, that any such redemption shall occur within 90 days of the date of closing of such offering of Class A Common Stock of the Company. SECTION 3.08. MANDATORY REDEMPTION. Except as set forth under Sections 4.10 and 4.13 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Exchange Notes. 20 SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS. (a) In the event that, pursuant to Section 4.10 hereof, the Company shall be required to commence an Asset Sale Offer, it shall follow the procedures specified below with respect to the Holders of Exchange Notes. (b) The Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), the Company shall purchase the principal amount of Exchange Notes required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Exchange Notes tendered in response to the Asset Sale Offer. Payment for any Exchange Notes so purchased shall be made in the same manner as interest payments are made. (c) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-1, in connection with any offer required to be made by the Company to repurchase the Exchange Notes as a result of an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section 3.09, the Company shall comply with the applicable securities laws or regulations and shall not be deemed to have breached its obligations hereunder by virtue thereof. (d) If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest shall be paid to the Person in whose name an Exchange Note is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender Exchange Notes pursuant to the Asset Sale Offer. (e) Upon the commencement of an Asset Sale Offer, the Company shall send, by first class mail, a notice to the Trustee and each of the Holders, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Exchange Notes pursuant to the Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice, which shall govern the terms of the Asset Sale Offer, shall state: (i) that the Asset Sale Offer is being made pursuant to this Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer shall remain open; (ii) the Offer Amount, the purchase price and the Purchase Date; (iii) that any Exchange Note not tendered or accepted for payment shall continue to accrue interest; (iv) that, unless the Company defaults in making such payment, any Exchange Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Purchase Date; (v) that Holders electing to have an Exchange Note purchased pursuant to an Asset Sale Offer may only elect to have all of such Exchange Note purchased and may not elect to have only a portion of such Exchange Note purchased; (vi) that Holders electing to have an Exchange Note purchased pursuant to any Asset Sale Offer shall be required to surrender the Exchange Note, with the form entitled "Option of Holder 21 to Elect Purchase" on the reverse of the Exchange Note completed, or transfer by book-entry transfer, to the Company, a depositary, if appointed by the Company, or a Paying Agent at the address specified in the notice at least three days before the Purchase Date; (vii) that Holders shall be entitled to withdraw their election if the Company, the Depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Exchange Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Exchange Note purchased; (viii) that, if the aggregate principal amount of Exchange Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Exchange Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Exchange Notes in denominations of $1,000, or integral multiples thereof, shall be purchased, other than in the case of Holders whose Exchange Notes were purchased in whole); and (ix) that Holders whose Exchange Notes were purchased only in part shall be issued new Exchange Notes equal in principal amount to the unpurchased portion of the Exchange Notes surrendered (or transferred by book-entry transfer). (f) On or before the Purchase Date, the Company shall, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Exchange Notes or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Exchange Notes tendered, and shall deliver to the Trustee an Officers' Certificate stating that such Exchange Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Company, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than five days after the Purchase Date) mail or deliver to each tendering Holder of Exchange Notes an amount equal to the purchase price of the Exchange Notes tendered by such Holder of Exchange Notes and accepted by the Company for purchase, and the Company shall promptly issue a new Exchange Note and the Trustee, upon written request from the Company shall authenticate and mail or deliver such new Exchange Note to such Holder of Exchange Notes in a principal amount equal to any unpurchased portion of the Exchange Note surrendered. Any Exchange Note not so accepted shall be promptly mailed or delivered by the Company to the Holder of Exchange Notes thereof. The Company shall publicly announce the results of the Asset Sale Offer on the Purchase Date. (g) Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. No repurchase of Exchange Notes under this Section 3.09 shall be deemed to be a redemption of Exchange Notes. ARTICLE 4 COVENANTS SECTION 4.01. PAYMENT OF EXCHANGE NOTES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Exchange Notes on the dates and in the manner provided in the Exchange Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company, a Subsidiary or an Affiliate of any thereof, holds as of 10:00 a.m. Eastern Time on the due 22 date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Exchange Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Exchange Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Exchange Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Exchange Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03 hereof. The Trustee may resign such agency at any time by giving written notice to the Company no later than 30 days prior to the effective date of such resignation. SECTION 4.03. REPORTS. Whether or not required by the rules and regulations of the SEC, so long as any Exchange Notes are outstanding, the Company shall furnish to the Trustee and to the Holders of Notes (a) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (b) all current reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the SEC, the Company shall file a copy of all such information and reports with the SEC for public availability (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition to the financial information required by the Exchange Act, each such quarterly and annual report shall be required to contain "summarized financial information" (as defined in Rule 1-02(aa)(1) of Regulation S-X under the Exchange Act) showing Adjusted Operating Cash Flow for the Company and its Restricted Subsidiaries, on a consolidated basis, where Adjusted Operating Cash Flow for the Company is calculated in a manner 23 consistent with the manner described under the definition of "Adjusted Operating Cash Flow" contained herein. The summarized financial information required pursuant to the preceding sentence may, at the election of the Company, be included in the footnotes to audited consolidated financial statements or unaudited quarterly financial statements of the Company and shall be as of the same dates and for the same periods as the consolidated financial statements of the Company and its Subsidiaries required pursuant to the Exchange Act. SECTION 4.04. COMPLIANCE CERTIFICATE. (a) The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest on the Exchange Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03 above shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article Four or Article Five hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company shall, so long as any of the Exchange Notes are outstanding, deliver to the Trustee, forthwith upon any Officer of the Company becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.05. TAXES. The Company shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except such as are contested in good faith and by appropriate proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders of the Exchange Notes. SECTION 4.06. STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the 24 covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.07. RESTRICTED PAYMENTS. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any payment or distribution on account of the Company's Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company) or on account of any Qualified Subsidiary Stock or make any payment or distribution (other than compensation paid to, or reimbursement of expenses of, employees in the ordinary course of business) to or for the benefit of the direct or indirect holders of the Company's Equity Interests or the direct or indirect holders of any Qualified Subsidiary Stock in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any direct or indirect parent of the Company or other Affiliate of the Company (other than such Equity Interests owned by the Company or any of its Restricted Subsidiaries and other than the acquisition of Equity Interests in Subsidiaries of the Company solely in exchange for Equity Interests (other than Disqualified Stock) of the Company); (iii) make any payment on, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Exchange Notes, except at final maturity; (iv) make any loan, advance, capital contribution to or other investment in, or guarantee any obligation of, any Affiliate of the Company other than a Permitted Investment; (v) forgive any loan or advance to or other obligation of any Affiliate of the Company (other than a loan or advance to or other obligation of a Wholly Owned Restricted Subsidiary) which at the time it was made was not a Restricted Payment that was permitted to be made; or (vi) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (vi) above being collectively referred to as "Restricted Payments"), unless, at the time of and immediately after giving effect to such Restricted Payment: (A) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (B) the Company would be permitted to incur $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio set forth in Section 4.09(a) hereof; and (C) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the Closing Date (excluding Restricted Payments permitted by clause (iii) of Section 4.07(b)), is less than the sum of (i) an amount equal to the Cumulative Operating Cash Flow for the period (taken as one accounting period) from the beginning of the first full month commencing after the Closing Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (the "Basket Period") less 1.4 times the Company's Cumulative Total Interest Expense for the Basket Period, plus (ii) 100% of the aggregate net cash proceeds and, in the case of proceeds consisting of assets constituting or used in a Permitted Business, 100% of the fair market value of the aggregate net proceeds other than cash received since the Closing Date (1) by the Company as capital contributions to the Company (other than from a Subsidiary) or (2) from the sale by the Company (other than to a Subsidiary) of its Equity Interests (other than Disqualified Stock), plus (iii) without duplication, to the extent that any Restricted Investment that was made after the Closing Date is sold for cash or otherwise liquidated or repaid for cash, the Net Proceeds 25 received by the Company or a Wholly Owned Restricted Subsidiary of the Company upon the sale of such Restricted Investment, plus (iv) without duplication, to the extent that any Unrestricted Subsidiary is designated by the Company as a Restricted Subsidiary, an amount equal to the fair market value of such Investment at the time of such designation, plus (v) $2.5 million. (b) The foregoing provisions shall not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Indenture; (ii) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company in exchange for, or out of the net proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (C)(ii) of the preceding paragraph; (iii) the defeasance, redemption or repurchase of Indebtedness with the proceeds of a substantially concurrent issuance of Permitted Refinancing Debt in accordance with the provisions of Section 4.09 hereof; (iv) the payment by the Company of advances under the Split Dollar Agreement in an amount not to exceed $250,000 in any four-quarter period; (v) the repurchase or redemption from employees of the Company and its Subsidiaries (other than the Principal) of Capital Stock of the Company in an amount not to exceed an aggregate of $3.0 million and (vi) cash payments made in lieu of the issuance of additional Exchange Notes having a face amount less than $1,000 and any cash payments representing accrued and unpaid interest in respect thereof, not to exceed $100,000 in the aggregate in any fiscal year. (c) The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or the applicable Restricted Subsidiary, as the case may be, net of any liabilities proposed to be assumed by the transferee and novated pursuant to a written agreement releasing the Company and its Subsidiaries. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this covenant were computed, which calculations may be based upon the Company's latest available financial statements. (d) The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default or an Event of Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation (valued as set forth below) and will reduce the amount available for Restricted Payments under the first paragraph of this Section 4.07. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation. Such designation will only be permitted only if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits or (b) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted 26 Subsidiaries, except for such encumbrances or restrictions existing under or by reasons of (a) the terms of any Indebtedness permitted by this Indenture to be incurred by any Subsidiary of the Company, (b) Existing Indebtedness as in effect on the Closing Date, (c) this Indenture and the Exchange Notes, (d) applicable law, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in anticipation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person and its Subsidiaries, or the property or assets of the Person and its Subsidiaries, so acquired or (f) by reason of customary non-assignment provisions in leases and other contracts entered into in the ordinary course of business and consistent with past practices. SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. (a) The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and the Company shall not issue any Disqualified Stock and shall not permit any of its Subsidiaries to issue any shares of preferred stock (other than Qualified Subsidiary Stock); provided, however, that (i) the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock and (ii) a Restricted Subsidiary of the Company may incur Indebtedness (including Acquired Debt) or issue shares of preferred stock (including Disqualified Stock) if, in each case, the Company's Indebtedness to Adjusted Operating Cash Flow Ratio as of the date on which such Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been 7.0 to 1 or less, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, as of the date of such calculation. (b) The foregoing provisions shall not apply to: (i) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt or the issuance by such Unrestricted Subsidiaries of preferred stock; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary or any such preferred stock becomes preferred stock (other than Qualified Subsidiary Stock) of a Restricted Subsidiary, as the case may be, such event shall be deemed to constitute an incurrence of Indebtedness by or an issuance of preferred stock (other than Qualified Subsidiary Stock) of, as the case may be, a Restricted Subsidiary of the Company; (ii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness pursuant to one or more Bank Facilities, so long as the aggregate principal amount of all Indebtedness outstanding under all Bank Facilities does not, at the time of incurrence, exceed an amount equal to $50.0 million; (iii) the incurrence by the Company or any of its Restricted Subsidiaries of the Existing Indebtedness; (iv) Indebtedness under the Exchange Notes (including any Exchange Notes issued to pay interest on outstanding Exchange Notes); (v) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Wholly Owned Restricted Subsidiaries; 27 provided, however, that (A) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Exchange Notes and (B)(1) any subsequent issuance or transfer of Equity Interests that result in any such Indebtedness being held by a Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company and (2) any sale or other transfer of such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary of the Company shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount not to exceed $5.0 million at any time outstanding; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Debt in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by this Indenture to be incurred; and (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any other clause of this paragraph) in an aggregate principal amount at any time outstanding not to exceed $5.0 million. If an item of Indebtedness is permitted to be incurred on the basis of Section 4.09(a) and also on the basis of one or more of clauses (i) through (viii) above, or is permitted to be incurred on the basis of two or more of clauses (i) through (viii) above, then the Company shall classify the basis on which such item of Indebtedness is incurred. If an item of Indebtedness is repaid with the proceeds of an incurrence of other Indebtedness (whether from the same of a different creditor), the Company may classify such other Indebtedness as having been incurred on the same basis as the Indebtedness being repaid or on a different basis permitted under this Section 4.09. For purposes of this Section 4.09(b), "Indebtedness" includes Disqualified Stock and preferred stock of Subsidiaries. Accrued interest and accreted discount will not be deemed incurrence of Indebtedness for purposes of this Section 4.09. 28 SECTION 4.10. ASSET SALES. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, engage in an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 85% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in the notes thereto), of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Exchange Notes or any guarantee thereof) that are assumed by the transferee of any such assets and (y) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are immediately converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. (b) Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may engage in Asset Swaps (which shall not be deemed to be Asset Sales for purposes of this Section 4.10); provided that, immediately after giving effect to such Asset Swap, the Company would be permitted to incur at least $1.00 of additional indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow ratio set forth in Section 4.09(a) hereof. (c) Within 180 days after the receipt of any Net Proceeds from an Asset Sale, the Company or the applicable Restricted Subsidiary may, at its option, apply such Net Proceeds (i) to permanently reduce Indebtedness outstanding pursuant to any Senior Debt (and to permanently reduce the commitments thereunder by a corresponding amount), (ii) to permanently reduce Indebtedness of any of the Company's Restricted Subsidiaries or (iii) to the acquisition of another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business; provided, however, that if the Company or the applicable Restricted Subsidiary enters into a binding agreement to reinvest such Net Proceeds in accordance with this clause (iii) within 180 days after the receipt thereof, the provisions of this Section 4.10 will be satisfied so long as such binding agreement is consummated within one year after the receipt of such Net Proceeds. If any such legally binding agreement to reinvest such Net Proceeds is terminated, then the Company may, within 90 days of such termination, or within 180 days of such Asset Sale, whichever is later, apply such Net Proceeds as provided in clauses (i), (ii) or (iii) above (without regard to the proviso contained in clause (iii) above). Pending the final application of any such Net Proceeds, the Company or the applicable Restricted Subsidiary may temporarily reduce Indebtedness pursuant to any Bank Facility or otherwise invest such Net Proceeds in any manner that is not prohibited by this Indenture. A reduction of Indebtedness pursuant to any Bank Facility is not "permanent" for purposes of clause (i) of this Section 4.10(c) if an amount equal to the amount of such reduction is reborrowed and used to make an acquisition described in clause (iii) of this Section 4.10(c) within the time period specified in this Section 4.10(c). Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." (d) Within five days of each date on which the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company shall be required to make an offer to all Holders of Exchange Notes and the holders of Pari Passu Debt, to the extent required by the terms thereof (an "Asset Sale Offer") to purchase the maximum principal amount of Exchange Notes and Pari Passu Debt that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus, in each case, accrued and unpaid interest thereon, if any, to the date of purchase, in 29 accordance with the procedures set forth in Section 3.09 hereof or the agreements governing Pari Passu Debt, as applicable; provided, however, that the Company may only purchase Pari Passu Debt in an asset sale offer that was issued pursuant to an indenture having a provision similar to this Section 4.10. (e) To the extent that the aggregate amount of Exchange Notes and Pari Passu Debt tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. (f) If the aggregate principal amount of Exchange Notes and Pari Passu Debt surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Exchange Notes and Pari Passu Debt to be purchased on a pro rata basis, based upon the principal amount thereof surrendered in such Asset Sale Offer. (g) Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. SECTION 4.11. TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (b) the Company delivers to the Trustee, on behalf of the Holders, (i) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (a) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and a majority of Independent Directors and (ii) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the Company or such Restricted Subsidiary of such Affiliate Transaction from a financial point of view issued by an investment banking firm of national standing; provided that the Company shall not, and shall not permit any of its Restricted Subsidiaries to, engage in any Affiliate Transaction involving aggregate consideration in excess of $1.0 million at any time that there is not at least one Independent Director on the Company's Board of Directors; and provided further that (w) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (x) transactions between or among the Company and/or its Restricted Subsidiaries and (y) transactions permitted by the provisions of Section 4.07 hereof, in each case, shall not be deemed Affiliate Transactions. SECTION 4.12. LIENS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired, or any income or profits therefrom, or assign or convey any right to receive income therefrom, except Permitted Liens. 30 SECTION 4.13. OFFER TO REPURCHASE UPON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of Exchange Notes shall have the right to require the Company to repurchase all or any part (but not, in the case of any Holder requiring the Company to purchase less than all of the Exchange Notes held by such Holder, any Exchange Note in principal amount less than $1,000) of such Holder's Exchange Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of purchase (the "Change of Control Payment"). (b) Within 10 days following any Change of Control, the Company shall mail a notice to each Holder, with a copy to the Trustee, stating: (1) a description of the transaction or transactions that constitute the Change of Control; (2) that the Change of Control Offer is being made pursuant to this Section 4.13 and that all Exchange Notes tendered shall be accepted for payment; (3) the purchase price and the purchase date, which shall be no later than 30 Business Days from the date such notice is mailed (the "Change of Control Payment Date"); (4) that any Exchange Note not tendered shall continue to accrue interest; (5) that, unless the Company defaults in the payment of the Change of Control Payment, all Exchange Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (6) that Holders electing to have any Exchange Notes purchased pursuant to a Change of Control Offer shall be required to surrender the Exchange Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Exchange Notes completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (7) that Holders shall be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile, transmission or letter setting forth the name of the Holder, the principal amount of Exchange Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have the Exchange Notes purchased; and (8) that Holders whose Exchange Notes are being purchased only in part shall be issued new Exchange Notes equal in principal amount to the unpurchased portion of the Exchange Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Exchange Notes in connection with a Change of Control. (c) On or prior to 10:00 a.m. Eastern Time on the Change of Control Payment Date, the Company shall, to the extent lawful, (1) accept for payment all Exchange Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Exchange Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Exchange Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Exchange Notes or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to each Holder of Exchange Notes so tendered the Change of Control Payment for such Exchange Notes, and the Trustee shall promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Exchange Note equal in principal amount to any unpurchased portion of the Exchange Notes surrendered, if any. Prior to complying with the provisions of this Section 4.13, but in any event within 90 days following a Change of Control, the Company shall either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of Exchange Notes required by this Section 4.13. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. 31 (d) The Company shall not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Company, and purchases all Exchange Notes validly tendered and not withdrawn under such Change of Control Offer. SECTION 4.14. CONTINUED EXISTENCE. Subject to Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or other existence of each of its Restricted Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Restricted Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of the Company and any of its Restrictive Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Restricted Subsidiaries, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Exchange Notes. SECTION 4.15. LIMITATION ON LAYERING. Notwithstanding the provisions of Section 4.09 hereof, the Company shall not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the Exchange Notes. SECTION 4.16. LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED SUBSIDIARIES. The Company (a) shall not, and shall not permit any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock (other than Qualified Subsidiary Stock) of any Wholly Owned Restricted Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless (i) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (ii) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with Section 4.10 hereof and (b) shall not permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity Interests (other than, Qualified Subsidiary Stock and, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company. 32 ARTICLE 5 SUCCESSORS SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Company shall not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (a) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (b) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the Obligations of the Company under the Exchange Notes and this Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (c) immediately after such transaction no Default or Event of Default exists; (d) the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made shall, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio set forth in Section 4.09(a) hereof. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, however, that the predecessor Company shall not be relieved from the obligation to pay the principal of and interest on the Exchange Notes except in the case of a sale of all of the Company's assets that meets the requirements of Section 5.01 hereof. 33 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. Each of the following constitutes an "Event of Default": (i) a Default by the Company in the payment of interest on the Exchange Notes when the same becomes due and payable and the Default continues for a period of 30 days (whether or not such payment is prohibited by Article 10 of this Indenture); (ii) default by the Company in the payment of the principal of or premium, if any, on the Exchange Notes when the same becomes due and payable at maturity, upon redemption or otherwise (whether or not such payment is prohibited by Article 10 of this Indenture); (iii) failure by the Company to comply with the provisions described under Sections 3.09, 4.07, 4.09, 4.10, 4.13 or Article 5 hereof; (iv) failure by the Company for 60 days after notice to comply with any of its other agreements in this Indenture or the Exchange Notes; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries), whether such Indebtedness or Guarantee now exists, or shall be created hereafter, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vi) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Company or any Restricted Subsidiary that would be a Significant Subsidiary and such judgment or judgments remain unpaid, undischarged or unstayed for a period of 60 days, provided that the aggregate of all such undischarged judgments exceeds $5.0 million; (vii) the Company, any Restricted Subsidiary that would constitute a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary pursuant to or within the meaning of Bankruptcy Law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, 34 (d) makes a general assignment for the benefit of its creditors, or (e) generally is not paying its debts as they become due; or (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against the Company, any Restricted Subsidiary that would constitute a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary in an involuntary case; (b) appoints a Custodian of the Company, any Restricted Subsidiary that would constitute a Significant Subsidiary, or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary or for all or substantially all of the property of the Company, any Restricted Subsidiary that would constitute a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary; or (c) orders the liquidation of the Company, any of Restricted Subsidiary that would constitute a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. An Event of Default shall not be deemed to have occurred under clause (iii), (v) or (vi) until the Trustee shall have received at the Corporate Trust Office of the Trustee written notice from the Company or any of the Holders or unless a Responsible Officer shall have actual knowledge of such Event of Default. A Default under clause (iv) is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in principal amount of the then outstanding Exchange Notes notify the Company and the Trustee, of the Default and the Company does not cure the Default within 60 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." In the case of any Event of Default pursuant to the provisions of this Section 6.01 occurring by reason of any action (or inaction) willfully taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Exchange Notes pursuant to Section 3.07 hereof, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Exchange Notes, anything in this Indenture or in the Exchange Notes to the contrary notwithstanding; provided that the Trustee shall not be under any duty to collect such premium on behalf of the Holders until such time as Holders of at least 10% in principal amount of the then outstanding Exchange Notes so notify the Trustee. If an Event of Default occurs prior to January 1, 2002 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Exchange Notes prior to January 1, 2002, then the premium payable for purposes of this paragraph for each of the years beginning on January 1 of the years set forth below shall be as set forth in the following table expressed as a percentage of the amount that 35 would otherwise be due but for the provisions of this sentence, plus accrued interest, if any, to the date of payment: Year Percentage ---- ---------- 1997................................................... 117.000% 1998................................................... 114.875% 1999................................................... 112.750% 2000................................................... 110.625% 2001................................................... 108.500% SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event of Default specified in clause (vii) or (viii) of Section 6.01 hereof) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the then outstanding Exchange Notes by written notice to the Company and the Trustee may declare all the Exchange Notes to be due and payable immediately. Upon any such declaration, the Exchange Notes shall become due and payable immediately. Notwithstanding the foregoing, if an Event of Default specified in clause (vii) or (viii) of Section 6.01 hereof occurs with respect to the Company, any Restricted Subsidiary that would constitute a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the then outstanding Exchange Notes by written notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Exchange Notes or to enforce the performance of any provision of the Exchange Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Exchange Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of an Exchange Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. Holders of not less than a majority in aggregate principal amount of the then outstanding Exchange Notes by notice to the Trustee may on behalf of the Holders of all of the Exchange Notes waive an existing Default or Event of Default and its consequences hereunder, except a continuing Default or Event of Default in the payment of the principal of, premium, if any, or interest on, the Exchange Notes (including in connection with an offer to purchase) (provided, however, that the Holders of a majority in aggregate principal amount of the then outstanding Exchange Notes may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising 36 therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.05. CONTROL BY MAJORITY. Holders of a majority in principal amount of the then outstanding Exchange Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders of Exchange Notes or that may involve the Trustee in personal liability. SECTION 6.06. LIMITATION ON SUITS. A Holder of an Exchange Note may pursue a remedy with respect to this Indenture or the Exchange Notes only if: (a) the Holder of an Exchange Note gives to the Trustee written notice of a continuing Event of Default; (b) the Holders of at least 25% in principal amount of the then outstanding Exchange Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of an Exchange Note or Holders of Exchange Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Exchange Notes do not give the Trustee a direction inconsistent with the request. A Holder of an Exchange Note may not use this Indenture to prejudice the rights of another Holder of an Exchange Note or to obtain a preference or priority over another Holder of an Exchange Note. SECTION 6.07. RIGHTS OF HOLDERS OF EXCHANGE NOTES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of an Exchange Note to receive payment of principal, premium, if any, and interest on the Exchange Note, on or after the respective due dates expressed in the Exchange Note (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(i) or (ii) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium, if any, and interest remaining unpaid on the Exchange Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. 37 SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Exchange Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Exchange Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Exchange Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Exchange Notes for amounts due and unpaid on the Exchange Notes for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Exchange Notes for principal, premium, if any, and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Exchange Notes pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder of an Exchange Note 38 pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Exchange Notes. ARTICLE 7 TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proven that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holders shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. 39 (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Exchange Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Exchange Notes, it shall not be accountable for the Company's use of the proceeds from the Exchange Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Exchange Notes or any other document in connection with the sale of the Exchange Notes or pursuant to this Indenture other than its certificate of authentication. 40 SECTION 7.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if a Responsible Officer of the Trustee has actual knowledge of such Default or Event of Default, the Trustee shall mail to Holders of Exchange Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, or interest on, any Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Exchange Notes. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE EXCHANGE NOTES. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Exchange Notes remain outstanding, the Trustee shall mail to the Holders of the Exchange Notes a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to the Holders of Exchange Notes shall be mailed to the Company and filed with the SEC and each stock exchange on which the Exchange Notes are listed in accordance with TIA Section 313(d). The Company shall promptly notify the Trustee when the Exchange Notes are listed on any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time such compensation for its acceptance of this Indenture and services hereunder as the Company and Trustee have separately agreed. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company (including this Section 7.07) and defending itself against any claim (whether asserted by the Company or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. 41 To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Exchange Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Exchange Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(vii) or (viii) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Exchange Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Exchange Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Exchange Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of an Exchange Note who has been a Holder of an Exchange Note for at least six months, fails to comply with Section 7.10, such Holder of an Exchange Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of the Exchange Notes. 42 The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee is subject to TIA Section. 311(a), excluding any creditor relationship listed in TIA Section. 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section. 311(a) to the extent indicated therein. ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Exchange Notes upon compliance with the conditions set forth below in this Article 8. SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Exchange Notes on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Exchange Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all of its other Obligations under such Exchange Notes and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall 43 survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Exchange Notes to receive solely from the trust fund described in Section 8.04 hereof, and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest, if any, on such Exchange Notes when such payments are due, (b) the Company's obligations with respect to such Exchange Notes under Article 2 and Section 4.02 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (d) this Article 8. Subject to compliance with this Article 8, the Company may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof. SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from its obligations under the covenants contained in Sections 3.09, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16 and 5.01 hereof with respect to the outstanding Exchange Notes on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Exchange Notes shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Exchange Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the "outstanding" Exchange Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Exchange Notes shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(iv) through 6.01(viii) hereof shall not constitute Events of Default. SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. The following shall be the conditions to the application of either Section 8.02 or 8.03 hereof to the outstanding Exchange Notes: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Exchange Notes, cash in United States dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding Exchange Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Exchange Notes are being defeased to maturity or to a particular redemption date; (b) in the case of an election under Section 8.02 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this Indenture, there has been a 44 change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Exchange Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of an election under Section 8.03 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Exchange Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Sections 6.01(vii) or (viii) hereof are concerned, at any time in the period ending on the 91st day after the date of deposit (or greater period of time in which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws insofar as those apply to the deposit by the Company); (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (f) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, as of the date of such opinion, (i) the trust funds will not be subject to the rights of holders of Indebtedness other than the Exchange Notes and (ii) assuming no intervening bankruptcy of the Company between the date of deposit and the 91st day (or greater period of time in which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws insofar as those apply to the deposit by the Company) following the deposit and assuming no Holder of Exchange Notes is an insider of the Company, after the 91st day (or later date until which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws insofar as those apply to the deposit by the Company) following the deposit, the trust funds will not be subject to the effects of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally under any applicable United States or state law; (g) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Exchange Notes over the other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (h) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. 45 Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Exchange Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Exchange Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Exchange Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Exchange Notes. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request of the Company any money or non-callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06. REPAYMENT TO COMPANY. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Exchange Note and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Exchange Note shall thereafter, as a secured creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 8.07. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company under this Indenture and the Exchange Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium, if any, or interest on any Exchange Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Exchange Notes to receive such payment from the money held by the Trustee or Paying Agent. 46 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF EXCHANGE NOTES. Notwithstanding Section 9.02 of this Indenture, the Company and the Trustee may amend or supplement this Indenture or the Exchange Notes without the consent of any Holder of an Exchange Note: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Exchange Notes in addition to or in place of certificated Exchange Notes; (c) to provide for the assumption of the Company's obligations to Holders of Exchange Notes in the case of a merger or consolidation pursuant to Article 5 hereof, as applicable; (d) to make any change that would provide any additional rights or benefits to the Holders of Exchange Notes or that does not adversely affect the legal rights hereunder of any such Holder; or (e) to comply with the requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. Upon the request of the Company accompanied by a resolution of the Board of Directors of the Company authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental Indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. WITH CONSENT OF HOLDERS OF EXCHANGE NOTES. Except as provided below in this Section 9.02, the Company and the Trustee may amend or supplement this Indenture and the Exchange Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Exchange Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchange Notes), and, subject to Sections 6.04 and 6.07 hereof, any existing Default or Event of Default (other than a Default or Event of Default in the payment of the principal of, premium, if any, or interest on the Exchange Notes) or compliance with any provision of this Indenture or the Exchange Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Exchange Notes (including consents obtained in connection with a purchase of, or tender offer or exchange offer for the Exchange Notes). Any amendment to the provisions of Article 10 hereof including the related definitions will require the consent of the Holders of at least 75% in aggregate principal amount of the Exchange Notes then outstanding if such amendment would adversely affect the rights of Holders of Exchange Notes. Upon the request of the Company accompanied by a resolution of the Board of Directors of the Company authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Exchange Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the 47 Trustee shall join with the Company in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. It shall not be necessary for the consent of the Holders of Exchange Notes under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of Exchange Notes affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Exchange Notes then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Exchange Notes. However, without the consent of each Holder affected, an amendment or waiver may not (with respect to any Exchange Notes held by a non-consenting Holder): (a) reduce the principal amount of Exchange Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Exchange Note or alter the provisions with respect to the redemption of the Exchange Notes (other than provisions relating to Sections 3.09, 4.10 and 4.13 hereof); (c) reduce the rate of or change the time for payment of interest, including default interest, on any Exchange Note; (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Exchange Notes (except a rescission of acceleration of the Exchange Notes by the Holders of a majority in aggregate principal amount of the Exchange Notes and a waiver of the payment default that resulted from such acceleration); (e) make any Exchange Note payable in money other than that stated in the Exchange Notes; (f) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders of Exchange Notes to receive payments of principal of or premium, if any, or interest on the Exchange Notes; (g) waive a redemption payment with respect to any Exchange Note (other than a payment required by the provisions of Section 3.09, 4.10 or 4.13 hereof); or (h) make any change in Section 6.04 or 6.07 hereof or in the foregoing amendment and waiver provisions. 48 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture or the Exchange Notes shall be set forth in a amended or supplemental Indenture that complies with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of an Exchange Note is a continuing consent by the Holder of an Exchange Note and every subsequent Holder of an Exchange Note or portion of an Exchange Note that evidences the same debt as the consenting Holder's Exchange Notes, even if notation of the consent is not made on any Exchange Notes. However, any such Holder of an Exchange Note or subsequent Holder of an Exchange Note may revoke the consent as to its Exchange Notes if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. SECTION 9.05. NOTATION ON OR EXCHANGE OF EXCHANGE NOTES. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Exchange Notes thereafter authenticated. The Company in exchange for all Exchange Notes may issue and the Trustee shall authenticate new Exchange Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or to issue a new Exchange Notes shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amendment or supplemental Indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or supplemental Indenture until its Board of Directors approves it. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment or supplemental Indenture, the Trustee shall be entitled to receive and, subject to Section 7.01 hereof, shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that such amendment or supplemental Indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. ARTICLE 10 SUBORDINATION SECTION 10.01. AGREEMENT TO SUBORDINATE. The Company agrees, and each Holder by accepting an Exchange Note agrees, that the Indebtedness evidenced by the Exchange Notes is subordinated in right of payment, to the extent and in the manner provided in this Article 10, to the prior payment in full of all Senior Debt, whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed, and that the subordination is for the benefit of the holders of Senior Debt. 49 SECTION 10.02. CERTAIN DEFINITIONS. "Designated Senior Debt" means any Senior Debt permitted under this Indenture, the principal amount of which is $10.0 million or more and that has been designated by the Company as "Designated Senior Debt." A "distribution" may consist of cash, securities or other property, by set-off or otherwise. "Representative" means the indenture trustee or other trustee, agent or representative for any Senior Debt. "Senior Bank Debt" means any Indebtedness of the Company (including letters of credit) outstanding under, and any other Obligations of the Company with respect to, Bank Facilities, to the extent that any such Indebtedness and other Obligations are permitted by this Indenture to be incurred. "Senior Debt" means (a) the Senior Bank Debt (to the extent it constitutes Indebtedness of the Company) and (b) any other Indebtedness of the Company that is permitted to be incurred by the Company under this Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Exchange Notes. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (i) any liability for federal, state, local or other taxes owed or owing by the Company, (ii) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (iii) any trade payables or (iv) any Indebtedness that is incurred in violation of this Indenture. SECTION 10.03. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, or in an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities: (1) holders of Senior Debt shall be entitled to receive payment in full of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt, whether or not an allowable claim) before the Holders shall be entitled to receive any payment with respect to the Exchange Notes (except that Holders may receive (i) securities that are subordinated at least to the same extent as the Exchange Notes to (a) Senior Debt and (b) any securities issued in exchange for Senior Debt and (ii) payments made from any defeasance trust created pursuant to Section 8.01 hereof); and (2) until all Obligations with respect to Senior Debt (as provided in subsection (1) above) are paid in full, any distribution to which the Holders would be entitled but for this Article 10 shall be made to holders of Senior Debt (except that Holders may receive (i) securities that are subordinated at least to the same extent as the Exchange Notes to (a) Senior Debt and (b) any securities issued in exchange for Senior Debt and (ii) payments made from any defeasance trust created pursuant to Section 8.01 hereof), as their interests may appear. SECTION 10.04. DEFAULT ON DESIGNATED SENIOR DEBT. (a) The Company may not make any payment or distribution upon or in respect of the Exchange Notes (other than (1) securities that are subordinated at least to the same extent as the Exchange Notes 50 to (A) Senior Debt and (B) any securities issued in exchange for Senior Debt and (2) payments made from any defeasance trust created pursuant to Section 8.01 hereof) until all principal and other Obligations with respect to the Senior Debt have been paid in full if: (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Debt occurs and is continuing beyond any applicable grace period in the agreement, indenture or other document governing such Designated Senior Debt; or (ii) a default, other than a default specified in Section 10.04(a)(i) hereof, on Designated Senior Debt occurs and is continuing with respect to Designated Senior Debt that then permits holders of the Designated Senior Debt as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Company or the holders of any Designated Senior Debt who may give it pursuant to Section 10.12 hereof. If the Trustee receives any such Payment Blockage Notice, no subsequent Payment Blockage Notice shall be effective for purposes of this Section 10.04 unless and until (I) at least 360 days shall have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (II) all scheduled payments of principal, premium, if any, and interest on the Exchange Notes that have come due (other than by reason of acceleration) have been paid in full in cash. No default described in this paragraph (ii) that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. (b) The Company may and shall resume payments on the Exchange Notes (i) in the case of a default described in Section 10.04(a)(i) hereof, upon the date on which the default is cured or waived and (ii) in the case of a default referred to in Section 10.04(a)(ii) hereof, the earlier of (A) the date on which such default is cured or waived or (B) 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated if this Article 10 otherwise permits the payment, distribution or acquisition at the time of such payment or acquisition. SECTION 10.05. ACCELERATION OF EXCHANGE NOTES. If payment of the Exchange Notes is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Debt of the acceleration. SECTION 10.06. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the Trustee or any Holder receives any payment of any Obligations with respect to the Exchange Notes at a time when a Responsible Officer of the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by Section 10.04 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with 51 their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Company or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 10.07. NOTICE BY COMPANY. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Exchange Notes to violate this Article 10, but failure to give such notice shall not affect the subordination of the Exchange Notes to the Senior Debt as provided in this Article 10. SECTION 10.08. SUBROGATION. After all Senior Debt is paid in full and until the Exchange Notes are paid in full, Holders shall be subrogated (equally and ratably with all other Pari Passu Debt) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt that otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on the Senior Debt. SECTION 10.09. RELATIVE RIGHTS. This Article defines the relative rights of Holders and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Company and Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest on the Exchange Notes in accordance with their terms; (2) affect the relative rights of Holders and creditors of the Company other than their rights in relation to holders of Senior Debt; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders. If the Company fails because of this Article to pay principal of or interest on an Exchange Note on the due date, the failure is still a Default or Event of Default. 52 SECTION 10.10. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY. No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Exchange Notes shall be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or any Holder to comply with this Indenture. SECTION 10.11. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. SECTION 10.12. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the provisions of this Article 10 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Exchange Notes, unless the Trustee shall have received at its Corporate Trust Office at least five Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Exchange Notes to violate this Article. Only the Company or a Representative may give the notice. Nothing in this Article 10 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 10.13. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of an Exchange Note by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes. SECTION 10.14. AMENDMENTS. The provisions of this Article 10 shall not be amended or modified without the written consent of the holders of all Senior Debt. 53 ARTICLE 11 MISCELLANEOUS SECTION 11.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. SECTION 11.02. NOTICES. Any notice or communication by the Company or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company: Pegasus Communications Corporation c/o Pegasus Communications Management Company 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 Telecopier No.: (610) 341-1835 Attention: Marshall W. Pagon With a copy to: Drinker Biddle & Reath PNB Building, 11th Floor 1345 Chestnut Street Philadelphia, PA 19107 Telecopier No.: (215) 988-2757 Attention: Michael B. Jordan, Esq. If to the Trustee: First Union National Bank of North Carolina 230 S. Tryon Street Charlotte, NC 28288-1153 Telecopier No.: (704) 374-6114 Attention: Client Service Group With a copy to: First Union National Bank 123 South Broad Street PA 1249 Philadelphia, PA 19109 Telecopier No.: (215) 985-7290 Attention: Corporate Trust Administration 54 The Company or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 11.03. COMMUNICATION BY HOLDERS OF EXCHANGE NOTES WITH OTHER HOLDERS OF EXCHANGE NOTES. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Exchange Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include: 55 (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. SECTION 11.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 11.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND\ STOCKHOLDERS. No past, present or future director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Exchange Notes, this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Exchange Notes by accepting an Exchange Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Exchange Notes. SECTION 11.08. GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE AND THE EXCHANGE NOTES. SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 11.10. SUCCESSORS. All agreements of the Company in this Indenture and the Exchange Notes shall bind its respective successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.11. SEVERABILITY. In case any provision in this Indenture or in the Exchange Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 56 SECTION 11.12. COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 11.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] 57 SIGNATURES IN WITNESS WHEREOF, the parties have executed this Indenture as of the date first written above. Very truly yours, PEGASUS COMMUNICATIONS CORPORATION By: ________________________________ Name: Title: FIRST UNION NATIONAL BANK By: _______________________________ Name: Title: EXHIBIT A (Face of Note) 12.75% Senior Subordinated Exchange Notes due 2007 CUSIP: No. $______________ Pegasus Communications Corporation promises to pay to ________________ or registered assigns, the principal sum of __________________ Dollars on January 1, 2007. Interest Payment Dates: January 1 and July 1 Record Dates: December 15 and June 15 Dated: PEGASUS COMMUNICATIONS CORPORATION By:______________________________ Name: Title: This is one of the Exchange Notes referred to in the within-mentioned Indenture: FIRST UNION NATIONAL BANK, as Trustee By: __________________________________ Authorized Officer A-1 (Back of Note) 121.75% Senior Subordinated Exchange Notes due 2007 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. The terms of the Exchange Notes set forth below are not complete and are qualified in their entirety by reference to the Indenture. 1. INTEREST. Pegasus Communications Corporation, a Delaware corporation (the "Company") promises to pay interest on the principal amount of this Exchange Note at 12.75% per annum from the date hereof until maturity. The Company will pay interest semi-annually on January 1 and July 1 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest will be payable in cash, except that on each Interest Payment Date occurring on or prior to January 1, 2002, interest may be paid, at the Company's option, by the issuance of additional Exchange Notes having an aggregate principal amount equal to the amount of such interest. The issuance of such additional Exchange Notes will constitute "payment" of the related interest for all purposes of the Indenture. Interest on the Exchange Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default in the payment of interest, and if this Exchange Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Exchange Notes (except defaulted interest) to the Persons who are registered Holders of Exchange Notes at the close of business on the December 15 or June 15 next preceding the Interest Payment Date, even if such Exchange Notes are cancelled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered Holders on such Interest Payment Date, and may be paid to the registered Holders at the close of business on a special interest payment date to be fixed by the Company for the payment of such defaulted interest, notice whereof shall be given to the registered Holders not less than 15 days prior to such special interest payment date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Exchange Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. The Exchange Notes will be payable as to principal, premium, interest, if any, at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest, if any, may be made by check mailed to the Holders at their addresses set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest and premium, if any, on, all global Exchange Notes and all other Exchange Notes the Holders of which shall have provided wire transfer instructions to the Company or the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. A-2 3. PAYING AGENT AND REGISTRAR. Initially, First Union National Bank, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company may act in any such capacity. 4. INDENTURE. The Company issued the Exchange Notes under an Indenture dated as of ______________ (the "Indenture") between the Company and the Trustee. The terms of the Exchange Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"). The Exchange Notes are subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of such terms. The Exchange Notes are general obligations of the Company limited to $100,000,000 in aggregate principal amount, on outstanding Exchange Notes as set forth in Paragraph 2 hereof. 5. OPTIONAL REDEMPTION. The Exchange Notes are not redeemable at the Company's option prior to January 1, 2002. Thereafter, the Exchange Notes will be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on January 1 of the years indicated below: Year Redemption Rate ---- --------------- 2002...................................................... 106.375% 2003...................................................... 104.250% 2004...................................................... 102.125% 2005 and thereafter........................................ 100.00% (b) Notwithstanding the foregoing, during the first 36 months after the Closing Date, the Company may, on any one or more occasions, use the net proceeds of one or more offerings of its Class A Common Stock to redeem up to 25% of the aggregate principal amount of the Exchange Notes (whether issued in exchange for Series A Preferred Stock or in lieu of cash interest payments) at the redemption price of 112.750% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption; provided that, after any such redemption, the aggregate principal amount of the Exchange Notes outstanding must equal at least $75.0 million; and provided further, that any such redemption shall occur within 90 days of the date of closing of such offering of Class A Common Stock of the Company. 6. MANDATORY REDEMPTION. Except as set forth in Paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Exchange Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Exchange Notes shall have the right to require the Company to repurchase all or any part (but not, in the case of any Holder requiring the Company to purchase less than all of the Exchange Notes held by such Holder, any Exchange Note in principal amount less than $1,000) of such Holder's Exchange Notes pursuant to an offer (the "Change of Control Offer") at an offer price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of purchase (the "Change of Control A-3 Payment"). Within 10 days following any Change of Control, the Company shall mail a notice to each Holder setting forth the procedures governing the Change of Control Offer as required by the Indenture. (b) If the Company or any Restricted Subsidiary consummates any Asset Sale, within five days of each date on which the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company shall make an offer to all Holders of Exchange Notes and the holders of Pari Passu Debt, to the extent required by the terms thereof (an "Asset Sale Offer"), to purchase the maximum principal amount of Exchange Notes and Pari Passu Debt that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus, in each case, accrued and unpaid interest thereon, if any, to the date of purchase, in accordance with the procedures set forth in Section 3.09 of the Indenture or the agreements governing Pari Passu Debt, as applicable; provided, however, that the Company may only purchase Pari Passu Debt in an Asset Sale Offer that was issued pursuant to an indenture having a provision substantially similar to the Asset Sale Offer provision contained in the Indenture. To the extent that the aggregate amount of Exchange Notes and Pari Passu Debt tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Exchange Notes and Pari Passu Debt surrendered exceeds the amount of Excess Proceeds, the Trustee shall select the Exchange Notes and Pari Passu Debt to be purchased on a pro rata basis, based upon the principal amount thereof tendered in such Asset Sale Offer. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. Holders of Notes that are the subject of an Asset Sale Offer will receive notice of the Asset Sale Offer from the Company prior to any related purchase date setting forth the procedures relating to the offer as required by the Indenture and may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Exchange Notes. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Exchange Notes are to be redeemed at its registered address. Exchange Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Exchange Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Exchange Notes or portions thereof called for redemption. 9. SUBORDINATION. Each Holder by accepting an Exchange Note agrees that the payment of principal of, premium, if any, and interest on the Exchange Notes is subordinated in right of payment, to the extent and in the manner provided in Article 10 of the Indenture, to the prior payment in full of all Senior Debt (whether outstanding on the date of the Indenture or thereafter incurred), and that the subordination is for the benefit of the holders of Senior Debt. 10. DENOMINATIONS, TRANSFER, EXCHANGE. The Exchange Notes are in registered form without coupons in all appropriate denominations. The transfer of Exchange Notes may be registered and Exchange Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not transfer or exchange any Exchange Note selected for redemption, except for the unredeemed portion of any Exchange Note being redeemed in part. Also, it need not transfer or exchange any Exchange Note for a period of 15 Business Days before a selection of Exchange Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. A-4 11. PERSONS DEEMED OWNERS. The registered Holder of an Exchange Note may be treated as its owner for all purposes. 12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Exchange Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Exchange Notes, and, subject to Sections 6.04 and 6.07 of the Indenture, any existing default or compliance with any provision of the Indenture or the Exchange Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Exchange Notes. Without the consent of any Holder of an Exchange Note, the Indenture or the Exchange Notes may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Exchange Notes in addition to or in place of certificated Exchange Notes, to provide for the assumption of the Company's obligations to Holders of the Exchange Notes in case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Exchange Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, or to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA. Any amendment to the provisions of Article 10 of the Indenture including, the related definitions will require the consent of the Holders of at least 75% in aggregate principal amount of the Exchange Notes then outstanding if such amendment would adversely affect the rights of Holders of Exchange Notes. 13. DEFAULTS AND REMEDIES. Events of Default include: (i) a default by the Company in the payment of interest on the Exchange Notes when the same becomes due and payable and the Default continues for a period of 30 days (whether or not such payment is prohibited by Article 10 of the Indenture); (ii) default by the Company in the payment of the principal of or premium, if any, on the Exchange Notes when the same becomes due and payable at maturity, upon redemption or otherwise (whether or not such payment is prohibited by Article 10 of the Indenture); (iii) failure by the Company to comply with the provisions described under Sections 3.09, 4.07, 4.09, 4.10, 4.13 or Article 5 of the Indenture; (iv) failure by the Company for 60 days after notice to comply with any of its other agreements in the Indenture or the Exchange Notes; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries), whether such Indebtedness or Guarantee now exists, or shall be created hereafter, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vi) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Company or any Restricted Subsidiary that would be a Significant Subsidiary and such judgment or judgments remain unpaid, undischarged or unstayed for a period of 60 days; provided that the aggregate of all such undischarged judgments exceeds $5.0 million; (vii) certain events of bankruptcy or insolvency with respect to the Company, any Restricted Subsidiary that would constitute a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Exchange Notes may declare all the Exchange Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Exchange Notes will become due and payable without further action or notice. Holders may not enforce the Indenture or the Exchange Notes except as provided in the Indenture. Subject to certain limitations, A-5 Holders of a majority in principal amount of the then outstanding Exchange Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Exchange Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. The Holders of a majority in aggregate principal amount of the Exchange Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Exchange Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest and premium, if any, on, or the principal of, the Exchange Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. 15. TRUSTEE DEALINGS WITH THE COMPANY. Subject to Section 7.03 of the Indenture, the Trustee, in its individual or any other capacity, may become the owner or pledgee of Exchange Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. 16. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Exchange Notes, the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Exchange Notes by accepting an Exchange Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Exchange Notes. 17. AUTHENTICATION. This Exchange Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 18. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 19. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Exchange Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Exchange Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Pegasus Communications Corporation c/o Pegasus Communications Management Company 5 Radnor Corporate Center Suite 454 100 Matsonford Road Radnor, Pennsylvania 19087 Attention: Marshall W. Pagon A-6 ASSIGNMENT FORM To assign this Exchange Note, fill in the form below: (I) or (we) assign and transfer this Exchange Note to ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint _______________________________________________________ to transfer this Exchange Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:_______________________ Your Signature: _______________________________ (Sign exactly as your name appears on the face of this Exchange Note) Signature Guarantee:___________________________ A-7 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Exchange Note purchased by the Company pursuant to Section 4.10 or 4.13 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.13 If you want to elect to have only part of the Exchange Note purchased by the Company pursuant to Section 4.10 or Section 4.13 of the Indenture, state the amount you elect to have purchased: $____________ Date:_______________________ Your Signature:____________________________ (Sign exactly as your name appears on the Exchange Note) Tax Identification No.:____________________ Signature Guarantee:_______________________ A-8 CERTIFICATE OF AMENDMENT OF 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 ------------------------- Pegasus Communications Corporation (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "DGCL"), DOES HEREBY CERTIFY THAT: FIRST: Pursuant to the authority vested in the Pricing Committee of the Board of Directors by resolutions duly adopted by the Board of Directors on November 21, 1996, the Pricing Committee of the Board of Directors designated, created, authorized and provided for the issuance of 12.75% Series A Cumulative Exchangeable Preferred Stock due January 1, 2007 (the "Series A Preferred Stock"), par value $0.01 per share, having the voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions as more fully described in 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 (the "Certificate of Designation"). SECOND: Pursuant to the authority contained in Article Fourth of the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the DGCL, the Pricing Committee of the Board of Directors of the Company, acting within the scope of the authority delegated to it by the Board of Directors, by unanimous written consent dated January 22, 1997 duly approved and adopted the foregoing designation of the Series A Preferred Stock, and in connection therewith, the Company filed the Certificate of Designation with the Secretary of State of the State of Delaware on January 24, 1997. THIRD: Pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation, and pursuant to the provisions of Section 242 of the DGCL, the Board of Directors adopted the following resolutions providing for the amendment to the Certificate of Designation (the "Amendment") at a meeting held on February 17, 1998: RESOLVED, that the definition of "Change of Control" in Section 1, Certain Definitions, of 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 ("Certificate of Designation"), and the amendment to the definition of "Change of Control" in Section 1.01, Definitions, of the form of Indenture attached as Annex A to the Certificate or Designation, to read in their entirety as follows, are hereby proposed and declared to be advisable and in the best interests of the Company: "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principal or his Related Parties, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as defined above) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more of the Voting Stock of the Company (measured by voting power rather than number of shares) than is beneficially owned (as defined above) at such time by the Principal and his Related Parties in the aggregate, (B) the Principal and his Related Parties collectively cease to beneficially own (as defined above) Voting Stock of the Company having at least 30% of the combined voting power of all classes of Voting Stock of the Company then outstanding or (C) the Principal and his Affiliates acquire, in the aggregate, beneficial ownership (as defined above) of more than 66 2/3 % of the shares of Class A Common Stock at the time outstanding or (iv) the first day on which a majority of the members of the Board of Directors are not Continuing Directors. FURTHER RESOLVED, that the amendment to Section 8(b)(i)(2) of the Certificate of Designation, and the amendment to Section 4.09(b)(ii) of the form of Indenture attached as Annex A to the Certificate of Designation, to read in their entirety as follows, are hereby proposed and declared to be advisable and in the best interests of the Company: (2) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness pursuant to one or more Bank Facilities, so long as the aggregate principal amount at any time outstanding of Indebtedness incurred pursuant to this clause (2) ["clause (ii)", in the case of the form of Indenture attached as Annex A to the Certificate of Designation] does not exceed $50.0 million; FOURTH: The holders of the Company's Class A and Class B Common Stock having a majority of the voting power of all shares of Class A and Class B Common Stock, at a special meeting of the Common Stockholders held on April 27, 1998, duly adopted the Amendment in accordance with the provisions of the DGCL. FIFTH: The holders of a majority of the Series A Preferred Stock duly adopted the Amendment by written consent in accordance with the provisions of the DGCL. SIXTH: The Amendment has been duly adopted in accordance with the provisions of Section 242 of the DGCL. IN WITNESS WHEREOF, the Company has caused this certificate to be duly executed by Ted S. Lodge, its Senior Vice President, and attested by Michael B. Jordan, its Assistant Secretary, this 20th day of May, 1998. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Ted S. Lodge --------------------- Ted S. Lodge, Senior Vice President ATTEST: By: /s/ Michael B. Jordan ----------------------------- Michael B. Jordan, Assistant Secretary EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF PEGASUS COMMUNICATION CORPORATION AS OF DECEMBER 31, 1997 AND JUNE 30, 1998 (UNAUDITED) AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND JUNE 30, 1998 (UNAUDITED). THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001015629 PEGASUS COMMUNICATION CORPORATION 1 U.S. DOLLAR 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 JUN-30-1998 JUN-30-1998 1 1 37,218,433 37,218,433 0 0 17,597,509 17,597,509 405,000 405,000 2,481,545 2,481,545 82,846,074 82,846,074 59,963,040 59,963,040 28,593,635 28,593,635 806,621,407 806,621,407 60,449,550 60,449,550 350,236,223 350,236,223 118,418,130 118,418,130 3,000,000 3,000,000 158,961 158,961 110,163,295 110,163,295 806,621,407 806,621,407 46,739,357 75,523,049 46,739,357 75,523,049 0 0 55,616,801 90,702,655 (39,878) (33,171) 0 0 10,339,353 16,315,091 (19,176,919) (31,461,526) 50,000 125,000 (19,226,919) (31,586,526) 0 0 0 0 0 0 (19,226,919) (31,586,526) (1.59) (3.14) (1.59) (3.14)
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