-----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, NCHCu5QOLM8l/7qY0np2CosXlWDq868MUSw7IXAfzk2cLm96+elyCQWxOCyPztim WmolFDI+wMQBGg43AoOJ7w== 0000950116-97-001978.txt : 19971103 0000950116-97-001978.hdr.sgml : 19971103 ACCESSION NUMBER: 0000950116-97-001978 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970908 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971031 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-21389 FILM NUMBER: 97705527 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 8-K/A 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 8-K/A Amendment No. 1 Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): September 8, 1997 PEGASUS COMMUNICATIONS CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) Delaware 0-21389 51-0374669 - ----------------- -------------- -------------------- (State or other (Commission (I.R.S. Employer jurisdiction of File Number) Identification No.) incorporation) c/o Pegasus Communications Management Company, 100 Matsonford Road, 5 Radnor Corporate Center, Suite 454, Radnor, Pennsylvania 19087 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 610-341-1801 Not Applicable - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) =============================================================================== Item 5. Other Events. (a) Completed DBS Acquisitions. From January 1, 1997 to an effective date as of October 8, 1997, Pegasus Communications Corporation ("Pegasus" and together with its direct and indirect subsidiaries, the "Company") acquired from 21 independent DIRECTV(R) ("DIRECTV") providers the rights to provide DIRECTV programming in certain rural areas of 22 states and related assets (the "Completed DBS Acquisitions"). Total consideration for the acquisitions was approximately $142.0 million, which, depending upon the particular transaction, consisted of cash, promissory notes, shares of Class A Common Stock, warrants to purchase Class A Common Stock, preferred stock of a subsidiary and/or assumed liabilities. (b) Senior Notes Offering. On October 21, 1997, the Company consummated a private offering (the "Senior Notes Offering") of $115.0 million aggregate principal amount of senior notes, bearing interest at 9 5/8% per annum (the "Senior Notes"). The Senior Notes Offering was made in reliance on Rule 144A and other registration exemptions under the Securities Act of 1933, as amended (the "Act"). The Company used the net proceeds of the Senior Notes Offering to repay in full and terminate all commitments under the existing credit facility of Pegasus Satellite Holdings, Inc. ("PSH"). The Company anticipates using the remaining net proceeds of approximately $17.1 million to finance direct broadcast satellite television ("DBS") acquisitions. The entire text of the Company's press releases, dated October 8, 1997 and October 17, 1997, relating to the Senior Notes, are incorporated by reference herein and a copy of each press release has been filed as an exhibit to this report. (c) Pending DBS Acquisitions. As of October 20, 1997, the Company had entered into letters of intent or definitive agreements to acquire DIRECTV distribution rights and related assets from eight independent providers of DIRECTV services (the "Pending DBS Acquisitions"), which have exclusive DIRECTV service territories in certain rural areas of Georgia, Illinois, Minnesota, Nebraska, Texas, Utah and Wyoming and whose territories include, in the aggregate, approximately 278,500 television households (including 13,300 seasonal residences), 29,400 business locations and 17,900 subscribers. The Pending DBS Acquisitions range in consideration from $500,000 to $13.1 million. In the aggregate, the consideration for the Pending DBS Acquisitions is $36.1 million and consists of $28.4 million of cash, $975,000 in promissory notes and $6.7 million in shares of Class A Common Stock. When negotiating the price of the Pending DBS Acquisitions, the Company takes into account such factors as the number of subscribers, the mix between cabled and uncabled households in the service territory, competition, current DBS penetration rates, the structure of the acquisition, and the form of consideration. The cash portion of certain of the Pending DBS Acquisitions will be paid from proceeds of the Senior Notes Offering. The largest Pending DBS Acquisition involves the acquisition of territories and related assets from an entity controlled by Donald W. Weber, a director of Pegasus. The total consideration for this acquisition will be approximately $13.1 million (subject to certain adjustments) and will consist of approximately $6.4 million in cash and $6.7 million in shares of Class A Common Stock. As of August 31, 1997, the territories to be acquired in this acquisition consisted of approximately 115,700 television households (including 2,700 seasonal residences), 11,000 business locations and 5,800 subscribers. Each of the Pending DBS Acquisitions for which there is only a letter of intent is subject to negotiation of a definitive agreement, and all of the Pending DBS Acquisitions are subject, if not already obtained, to the prior approval of Hughes Electronics Corporation or one of its subsidiaries ("Hughes") and the National Rural Telecommunications Cooperative ("NRTC"). In addition to these conditions, each of the Pending DBS Acquisitions will be subject to conditions typical in acquisitions of this nature, certain of which conditions, like the Hughes and NRTC consents, may be beyond the Company's control. There can be no assurance that definitive agreements will be entered into with respect to all of the Pending DBS Acquisitions or, if entered into, that all or any of the Pending DBS Acquisitions will be completed. (d) Subsidiaries Combination. Prior to October 21, 1997, the Company had two principal operating subsidiaries: Pegasus Media & Communications, Inc. ("PM&C") and PSH. Upon consummation of the Senior Notes Offering, PM&C acquired the assets of PSH (the "Subsidiaries Combination"), which assets consisted of the stock of its subsidiaries that hold the rights to all of the Company's DBS territories. As a result of the Subsidiaries Combination, PM&C is the direct or indirect parent of all of the Company's subsidiaries that operate the Company's TV, DBS and cable businesses. 2 (e) New Credit Facility. By the end of 1997, PM&C will enter into a $180.0 million six-year, secured, reducing revolving credit facility (the "New Credit Facility"). Borrowings under the New Credit Facility are available for acquisitions, subject to the approval of the lenders in certain circumstances, working capital and general corporate purposes. Concurrently with the closing of the New Credit Facility, PM&C's existing credit facility will be repaid in full and the commitments thereunder will be terminated. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Acquired or to be Acquired Businesses. Historical financial statements for the following acquired or to be acquired businesses are attached hereto:
Page ----- (i) Clearvision, Inc. (an acquired business) Report of Poole Cunningham & Reitano, P.A. ....................................... F-1 Balance Sheet as of January 16, 1997 ............................................. F-2 Statement of Operations for the fiscal year ended January 16, 1997 ............... F-3 Statement of Stockholders' Equity for the fiscal year ended January 16, 1997 ...... F-4 Statement of Cash Flows for the fiscal year ended January 16, 1997 ............... F-5 Notes to Financial Statements ................................................... F-6 (ii) Southeastern Communication Systems, Inc. (an acquired business) Report of Greenway, Smith & Haisten, P.C. ....................................... F-8 Statements of Net Assets to be Sold as of December 31, 1996 and March 31, 1997 (unaudited)....................................................................... F-9 Statements of Operations of Assets to be Sold for the year ended December 31, 1996 and the three months ended March 31, 1996 (unaudited) and 1997 (unaudited) ...... F-10 Statements of Cash Flows for the year ended December 31, 1996 and the three months ended March 31, 1996 (unaudited) and 1997 (unaudited) ............................ F-11 Notes to Financial Statements ................................................... F-12 (iii) Northern Electric Service Corporation (an acquired business) Report of Larson, Allen, Weishair & Co., LLP .................................... F-14 Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ............ F-15 Statements of Operations and Accumulated Deficit for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ..... F-16 Statements of Cash Flows for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-17 Notes to Financial Statements ................................................... F-18 (iv) Direct Broadcast Satellites (an acquired business) Report of Ernst & Young LLP ...................................................... F-22 Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ............ F-23 Statements of Operations for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................. F-24 Statement of Changes in Division Equity for the year ended December 31, 1996 and the six months ended June 30, 1997 (unaudited) ................................. F-25 Statements of Cash Flows for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-26 Notes to Financial Statements ................................................... F-27 (v) Suwannee Valley Satellite, Inc. (an acquired business) Report of Bolinger, Segars, Gilbert & Moss, L.L.P. .............................. F-30 Balance Sheets as of December 31, 1996 and April 30, 1997 (unaudited) ............ F-31 Statements of Income and Retained Earnings for the year ended December 31, 1996 and the four months ended April 30, 1996 (unaudited) and 1997 (unaudited) .......... F-32 Statements of Cash Flows for the year ended December 31, 1996 and the four months ended April 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-33 Notes to Financial Statements ................................................... F-34
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Page ----- (vi) View Star Entertainment Services, Inc. (a proposed acquisition) Report of Arthur Andersen, LLP ................................................... F-37 Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ............ F-38 Statements of Operations for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-39 Statement of Stockholders' Equity for the year ended December 31, 1996 and the six months ended June 30, 1997 (unaudited) ........................................... F-40 Statements of Cash Flows for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-41 Notes to Financial Statements ................................................... F-42 (vii) Midwest Minnesota DBS, LLC (an acquired business) Report of Bradley R. Helmeke, Ltd................................................... F-51 Statements of Net Assets to be Sold as of December 31, 1996 and June 30, 1996 (unaudited) and 1997 (unaudited) ................................................. F-52 Statements of Operations of Assets to be Sold for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ......... F-53 Statements of Cash Flows for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-54 Notes to Financial Statements ................................................... F-55 (viii) DBS Operations of Turner-Vision, Inc. (an acquired business) Report of Grigoraci, Trainer, Wright & Paterno .................................... F-57 Statement of Net Assets to be Sold as of December 31, 1996 ........................ F-58 Statement of Operations for the year ended December 31, 1996 ..................... F-59 Statement of Cash Flows for the year ended December 31, 1996 ..................... F-60 Notes to Financial Statements ................................................... F-61 (ix) DBS Operations of Pioneer Services Corporation (a proposed acquisition) Report of Jackson, Thornton & Co., P.C. .......................................... F-64 Balance Sheets as of September 30, 1996 and June 30, 1997 (unaudited) ............ F-65 Statements of Operations and Division Deficiency for the fiscal year ended September 30, 1996 and the nine months ended June 30, 1996 (unaudited) and 1997 (unaudited) ...................................................................... F-66 Statements of Cash Flows for the fiscal year ended September 30, 1996 and the nine months ended June 30, 1996 (unaudited) and 1997 (unaudited) ...................... F-67 Notes to Financial Statements ................................................... F-68
Page ----- (b) Pro Forma Consolidated Financial Information. (i) Basis of Presentation ............................................................ F-71 (ii) Pro Forma Consolidated Balance Sheet ........................................... F-72 (iii) Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1996............................................................................. F-73 (iv) Pro Forma Consolidated Statement of Operations for the Six Months Ended June 30, 1997............................................................................. F-74 (v) Pro Forma Consolidated Statement of Operations for the Twelve Months Ended June 30, 1997 ............................................................................ F-75 (vi) Notes to Pro Forma Consolidated Statements of Operations ........................ F-76
(c) Exhibits. 4.1 Indenture, dated as of October 21, 1997, by and between Pegasus and First Union National Bank, as trustee, relating to the Senior Notes. 4.2 Registration Rights Agreement, dated as of October 21, 1997, by and between Pegasus and CIBC Wood Gundy Securities Corp. 99.1 Press release dated October 8, 1997 99.2 Press release dated October 17, 1997 4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEGASUS COMMUNICATIONS CORPORATION By /s/ Robert N. Verdecchio ------------------------------------ Robert N. Verdecchio, Senior Vice President and Chief Financial Officer October 29, 1997 5 INDEPENDENT AUDITORS' REPORT The Stockholders of ClearVision, Inc.: We have audited the accompanying balance sheet of ClearVision, Inc. as of January 16, 1997, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ClearVision, Inc. as of January 16, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary data is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. Poole Cunningham & Reitano, P.A. Jackson, Mississippi March 20, 1997 F-1 CLEARVISION, INC. Balance Sheet January 16, 1997 ASSETS Current assets: Cash ........................................................................... $ 62,971 Accounts receivable, net of $10,283 allowance ................................. 332,488 Notes receivable, net of $200,112 allowance .................................... 1,026,783 Inventories .................................................................. 99,282 Prepaid assets ............................................................... 8,012 ---------- Total current assets ...................................................... 1,529,536 ---------- Property and equipment ............................................................ 150,877 Less: accumulated depreciation ................................................ (45,563) ---------- Property and equipment, net ................................................ 105,314 ---------- Other assets: TV rights, net ............................................................... 1,251,596 Organization costs, net ...................................................... 599 ---------- Total other assets, net ................................................... 1,252,195 ---------- $2,887,045 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Current liabilities: Accounts payable -- trade ................................................... $ 192,130 Accrued expenses ............................................................ 46,031 Line of credit with bank ...................................................... 1,041,356 Deferred revenue ............................................................ 226,427 ---------- Total current liabilities ................................................... 1,505,944 Long-term liabilities -- Loans from stockholders ...................................................... 750,000 ---------- Total liabilities ......................................................... 2,255,944 Stockholders' equity: Common stock-$1 par value, authorized 1,500,000 shares; 900,000 shares issued and outstanding .................................................................. 900,000 Accumulated deficit ............................................................ (268,899) ---------- Total stockholders' equity ................................................ 631,101 ---------- $2,887,045 ==========
See accompanying notes to financial statements. F-2 CLEARVISION, INC. Statement of Operations For the Year Ended January 16, 1997 Revenue: Programming ............................................... $3,352,207 Hardware .................................................. 940,077 Installation ............................................... 337,901 ---------- Total revenue ............................................ 4,630,185 ---------- Cost of sales: Programming ............................................... 2,160,202 Hardware .................................................. 882,379 Installation ............................................... 159,506 ---------- Total cost of sales ...................................... 3,202,087 ---------- Gross profit ......................................... 1,428,098 General and administrative expenses .......................... 1,730,546 ---------- Operating loss ...................................... (302,448) Other income (expense): Interest income ............................................ 331,616 Other income ............................................... 39,071 ---------- Total other income (expense) ............................. 370,687 ---------- Net earnings ......................................... $ 68,239 ========== See accompanying notes to financial statements. F-3 CLEARVISION, INC. Statement of Stockholders' Equity For the Year Ended January 16, 1997
Common Accumulated Stock Deficit Total ---------- ------------ --------- Stockholders' Equity -- January 17, 1996 ...... $900,000 $(337,138) $562,862 Net earnings .................................... -- 68,239 68,239 --------- ---------- --------- Stockholders' Equity -- January 16, 1997 ...... $900,000 $(268,899) $631,101 ========= ========== =========
See accompanying notes to financial statements F-4 CLEARVISION, INC. Statement of Cash Flows For the Year Ended January 16, 1997 Cash flows used in operating activities: Net earnings .......................................... $ 68,239 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ..................... 179,797 Increase in accounts receivable .................. (262,245) Increase in prepaid expenses ..................... (3,507) Decrease in inventories ........................... 205,093 Decrease in deposits .............................. 320 Decrease in accounts payable ..................... (195,854) Decrease in accrued expenses ..................... (39,622) Decrease in deferred revenues ..................... (161,390) ---------- Total adjustments .............................. (277,408) ---------- Net cash used in operating activities ......... (209,169) Cash flows used in investing activities: Purchase of property and equipment ............... (60,286) ---------- Cash flows used in financing activities: Increase in notes receivable ..................... 494,705 Decrease in line of credit with bank ............... (201,061) Repayment of loans to stockholders ............... (150,000) ---------- Net cash provided by financing activities ...... 143,644 ---------- Net decrease in cash and cash equivalents ......... (125,811) Cash and cash equivalents at January 17, 1996 ......... 188,782 ---------- Cash and cash equivalents at January 16, 1997 ......... $ 62,971 ========== Supplemental disclosures of cash flow information: Cash paid during the year for interest ............ $ 101,295 ========== See accompanying notes to financial statements. F-5 CLEARVISION, INC. Notes to Financial Statements January 16, 1997 (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ClearVision, Inc. (the Company) was organized as an S corporation formed under the laws of Mississippi on September 2, 1993. It is located in Madison, Mississippi. The Company offers satellite programming services to certain cities and counties in Mississippi. (a) Basis of Accounting The financial statements have been prepared using the accrual method of accounting in accordance with generally accepted accounting principles. (b) Year End The company operates on a 52-53 week fiscal year with a year end date at or near January 16. (c) Cash Equivalents For purposes of the statement of cash flows, the Company considers all short-term investments maturing within the normal operating cycle to be cash equivalents. (d) Concentration of Credit Risk The Company has two sources of revenue: programming services and equipment sales. Receivables are primarily due from residents in ClearVision's territory. Customers' services are disconnected upon past due over sixty days. Receivables from equipment sales result from customers financing the purchase price of their equipment. Receivables are secured by a lien on the equipment sold to the customers. (e) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). (f) Property and Equipment Property and equipment are stated at cost. Capital additions, improvements and major renewals which increase asset values or extend useful lives, are capitalized as property and equipment. Maintenance and repairs are charged to operations as incurred. The Company generally provides for depreciation of its assets under the straight-line method for financial reporting purposes and on the modified accelerated cost recovery system for income tax purposes. (g) Intangibles The Company amortizes TV rights using the straight-line method over the estimated economic life of the satellite which is projected to be twelve years. Organizational costs are being amortized over sixty months using the straight-line method. Total amortization for TV rights and organizational costs for the period ended January 16, 1997, were $151,159 and $382, respectively. (h) Revenue Recognition The Company derives revenue primarily from programming services, sales of equipment and installations. Programming revenue is received monthly based on the date service originated. Interest on financed equipment sales is recognized when earned. (i) Income Taxes The Company, with the consent of its stockholders, has elected under the Internal Revenue Code to be taxed as an S corporation. In lieu of corporation income taxes, the stockholders of an S corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for Federal income taxes has been included in the financial statements. (2) NOTES RECEIVABLE Notes receivable consist of customer financing of satellite systems through various repayment plans. At January 16, 1997, the net notes receivable balance was $1,226,985. Deferred revenue represents unearned F-6 CLEARVISION, INC. Notes to Financial Statements -- (Continued) January 16, 1997 (2) NOTES RECEIVABLE -- (Continued) interest on the uncollected notes receivable balance. The balance of deferred revenue at January 16, 1997 was $226,427. Management's allowances for doubtful accounts are based upon collection practices of ClearVision, Inc. Results may vary significantly should Pegasus (see note 7) employ collection practices different from ClearVision, Inc. (3) PROPERTY AND EQUIPMENT A summary of property and equipment follows: Depreciable Description Lives Amount ----------- ----- ------ Vehicles 5 yrs $ 72,773 Leasehold improvements 3 yrs 27,889 Furniture and fixtures 3 - 7 yrs 50,215 --------- Property and equipment 150,877 Less accumulated depreciation (45,563) --------- Property and equipment, net $ 105,314 ========= (4) ACCRUED LIABILITIES The following is an analysis of accrued liabilities: Description Amount ----------- -------- Accrued payroll taxes ............... $ 7,579 Accrued sales tax ..................... 22,887 Other accrued expenses ............... 15,565 -------- Total .............................. $46,031 ======== (5) SHORT-TERM BORROWINGS -- LINE-OF-CREDIT The Company has entered into a line-of-credit agreement with Deposit Guaranty National Bank whereby funds may be advanced to the Company up to a maximum of $1,600,000. Interest on the line-of-credit is at the bank's current prime rate plus one-half percent ( 1/2%). This line-of-credit is collateralized by accounts receivable, inventories and company notes receivable. At January 16, 1997, there were $1,041,356 of advances outstanding under the agreement. (6) LONG-TERM DEBT The Company has non-interest bearing notes payable due to the stockholders at January 16, 1997, in the amount of $750,000. (7) SUBSEQUENT EVENT The Company sold substantially all of its assets to Pegasus Communications Corporation on February 14, 1997, pursuant to an asset purchase agreement dated January 25, 1997. F-7 INDEPENDENT AUDITOR'S REPORT To Southeastern Communication Systems, Inc. We have audited the accompanying statement of net assets to be sold of Southeastern Communication Systems, Inc. (an "S" Corporation) as of December 31, 1996 and the related statements of operations and cash flows for the year then ended. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements referred to above are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the statements. We believe that our audit provide a reasonable basis for our opinion. The accompanying statement of net assets to be sold was prepared to present the net assets of Southeastern Communication Systems, Inc. to be acquired by Pegasus Communications Corporation pursuant to the purchase agreement described in Note 4, and is not intended to be a complete presentation of Southeastern Communication Systems, Inc. assets and liabilities. In our opinion, the statements referred to above present fairly, in all material respects, the net assets to be sold of Southeastern Communication System, Inc. as of December 31, 1996 and the results of operations and cash flows for the year then ended pursuant to the purchase agreement referred to in Note 4, in conformity with generally accepted accounting principles. Greenway, Smith & Haisten, P.C. Griffin, Georgia September 25, 1997 F-8 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. STATEMENTS OF NET ASSETS TO BE SOLD
December 31, March 31, 1996 1997 -------------- ------------ (unaudited) CURRENT ASSETS: Subscriber accounts receivable, less allowance for doubtful accounts of $3,314 at December 31, 1996 and March 31, 1997 .......................................... $ 62,960 $ 65,985 ---------- --------- Total current assets ......................................................... 62,960 65,985 ---------- --------- DIRECT BROADCAST SATELLITE FRANCHISE, NET OF ACCUMULATED AMORTIZATION ...................................................... 178,429 171,738 ---------- --------- Total assets .................................................................. 241,389 237,723 ---------- --------- CURRENT LIABILITIES: Unearned revenue ............................................................... 128,567 164,184 ---------- --------- Total current liabilities ................................................... 128,567 164,184 ---------- --------- NET ASSETS TO BE SOLD ......................................................... $ 112,822 $ 73,539 ========== =========
See Independent Auditor's Report and accompanying footnotes. F-9 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. STATEMENTS OF OPERATIONS OF ASSETS TO BE SOLD
Three months ended Year ended --------------------------- December 31, March 31, March 31, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) Operating Revenues Subscriber revenue (Programming) ...... $ 552,386 $112,381 $204,463 ---------- -------- --------- Total Operating Revenue ............... 552,386 112,381 204,463 ---------- -------- --------- Operating Expenses Programming ........................... 377,851 62,161 130,430 Payroll and related expenses ......... 155,244 43,017 35,287 Advertising ........................... 1,985 548 134 Amortization ........................... 26,764 6,691 6,691 Commissions ........................... 30,087 2,258 8,208 Legal and Professional ............... 213 -- -- Miscellaneous ........................ 81 13 -- Rent ................................. 1,340 256 16 Supplies .............................. 4,278 919 373 Travel ................................. 3,359 784 457 Utilities and Telephone ............... 8,250 2,250 2,385 ---------- -------- --------- Total Operating Expenses ............ 609,452 118,897 183,981 ---------- -------- --------- Operating Income (Loss) ............ ($ 57,066) ($ 6,516) $ 20,482 ========== ======== =========
See Independent Auditor's Report and accompanying footnotes. F-10 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. STATEMENTS OF CASH FLOWS
Three months ended ---------------------------- December 31, March 31, March 31, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) Cash flows from operating activities: Operating income (loss) ................................. ($ 57,066) ($ 6,516) $ 20,482 Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Amortization ............................................. 26,764 6,691 6,691 Change in assets and liabilities: (Increase) decrease in accounts receivable ............... (37,646) (3,854) (3,025) Increase (decrease) in unearned revenue .................. 99,553 (6,474) 35,617 --------- --------- --------- Net cash provided (used) by operating activities ......... 31,605 (10,153) 59,765 --------- --------- --------- Net increase (decrease) in shareholders' equity ............ (31,605) 10,153 (59,765) --------- --------- --------- Net change in cash ....................................... -- -- -- Cash at beginning of period .............................. -- -- -- --------- --------- --------- Cash at end of period .................................... $ -- $ -- $ -- ========= ========= =========
See Independent Auditor's Report and accompanying footnotes. F-11 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of operations Southeastern Communication Systems, Inc. markets and distributes direct broadcast satellite (DBS) services to cable and noncable television subscribers residing within Henry County, Georgia. Southeastern Communication System, Inc. obtained these exclusive rights to its service territory by investment with the National Rural Telecommunications Cooperative (NRTC). Accounts Receivable Subscriber accounts receivable represents amounts due from customers for satellite television services and includes amounts billed, but unearned at year-end. Revenue Recognition Southeastern Communication Systems, Inc. recognizes revenues monthly for DBS services which have been earned through the end of the month. The unearned portion of billed services is recorded as unearned revenue. Advertising Costs Advertising costs are expensed as incurred. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes Southeastern Communication Systems, Inc. has made the election to be treated as a "Small Business Corporation" for income tax purposes. S Corporations are generally exempt from federal and state income tax. The shareholders of an S Corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for federal or state income taxes has been included in the financial statements. Concentrations of Credit Risk Financial instruments that potentially subject Southeastern Communication Systems, Inc. to concentrations of credit risk consist principally of trade accounts receivable. The risk is limited due to the large number of individuals comprising the Southeastern Communication Systems, Inc. customer base. Exposure to losses on receivables is principally dependent on each customer's financial condition. Southeastern Communication Systems, Inc. monitors the exposure for credit losses and maintains an allowance for anticipated losses. F-12 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) AS OF DECEMBER 31, 1996 (2) DIRECT BROADCAST SATELLITE FRANCHISE In September of 1993 and 1994 Southeastern Communication System, Inc. invested $253,685 with NRTC acquiring exclusive franchise right to market direct broadcast satellite service to cable and noncable television subscribers residing within the Henry County area. This investment is in an agreement with NRTC for the rights to provide broadcast services to this service territory for a period of approximately ten years, which is the expected life of the satellite. The satellite was launched in late 1993 and became available for use by Southeastern Communication System, Inc. in 1994. Amortization expense for these rights for the year ended December 31, 1996 was $26,764. (3) CONTINGENCY Southeastern Communication Systems, Inc. relies on NRTC as its sole provider of programming via Direct broadcast satellite services. (4) SUBSEQUENT EVENTS On March 28, 1997, Pegasus entered into an Asset Purchase Agreement with Southeastern Communication Systems, Inc. Pursuant to the terms of the agreement, Pegasus purchased certain net assets of Southeastern Communication Systems, Inc. for $3,900,000 minus certain current liabilities and adjustments on April 9, 1997. F-13 INDEPENDENT AUDITOR'S REPORT Board of Directors Northern Electric Service Corporation DBA: Northern Horizons (A wholly owned subsidiary Of Northern Electric Cooperative Association) Virginia, Minnesota We have audited the accompanying balance sheet of Northern Electric Service Corporation, DBA: Northern Horizons (a wholly owned subsidiary Of Northern Electric Cooperative Association) as of December 31, 1996, and the related statements of operations and retained deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northern Electric Service Corporation, DBA: Northern Horizons (a wholly owned subsidiary Of Northern Electric Cooperative Association) as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO., LLP Brainerd, Minnesota August 5, 1997 F-14 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) BALANCE SHEETS
December 31, June 30, 1996 1997 -------------- ------------ (unaudited) ASSETS CURRENT ASSETS Cash and Cash Equivalents .......................................... $ -- $ 54,648 Accounts Receivable ................................................ 137,869 103,853 Inventory ......................................................... 90,598 3,168 Prepaid Expenses ................................................... 1,004 109 ---------- ---------- Total Current Assets .......................................... 229,471 161,778 ---------- ---------- PROPERTY AND EQUIPMENT (At Cost) Furniture and Equipment ............................................. 15,139 15,139 Less: Accumulated Depreciation .................................... (4,163) (5,777) ---------- ---------- Total Property and Equipment (At Depreciated Cost) ............ 10,976 9,362 ---------- ---------- OTHER ASSETS Franchise Fees, Net of Accumulated Amortization of $96,917 and $117,902 at December 31, 1996 and June 30, 1997, respectively ...... 532,649 511,664 Investments in Associated Organizations ........................... 13,481 30,057 Organization Costs, Net of Accumulated Amortizations of $1,452 and $1,767 at December 31, 1996 and June 30, 1997, respectively......... 7,981 7,666 ---------- ---------- Total Other Assets ............................................. 554,111 549,387 ---------- ---------- Total Assets ................................................... $ 794,558 $ 720,527 ========== ========== LIABILITIES AND STOCKHOLDER'S DEFICIT CURRENT LIABILITIES Current Portion of Long-Term Debt ................................. $ 568,860 $ 538,257 Checks Written in Excess of Bank ................................. 3,916 -- Accounts Payable ................................................... 50,962 163,596 Unearned Revenue ................................................... 211,237 182,252 Taxes Payable Other Than Income Taxes .............................. 34,969 4,868 Other Current Liabilities .......................................... 34,298 18,462 ---------- ---------- Total Current Liabilities ....................................... 904,242 907,435 ---------- ---------- LONG-TERM DEBT (Net of Current Portion Shown Above) .................. 150,476 134,246 ---------- ---------- Total Liabilities ................................................ 1,054,718 1,041,681 ---------- ---------- STOCKHOLDER'S DEFICIT Common Stock -- $1.00 Par Value 100,000 and 250,000 Shares Authorized at December 31, 1996 and June 30, 1997, respectively; 100,000 Shares Issued and Outstanding ........................... 100,000 100,000 Additional Paid-In Capital .......................................... 9,433 9,433 Accumulated Deficit ................................................ (369,593) (430,587) ---------- ---------- Total Stockholder's Deficit .................................... (260,160) (321,154) ---------- ---------- Total Liabilities and Stockholder's Deficit ..................... $ 794,558 $ 720,527 ========== ==========
See accompanying Notes to Financial Statements. F-15 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHEN ELECTRIC COOPERATIVE ASSOCIATION) STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) REVENUES Merchandising Sales ........................... $ 339,948 $ 148,777 $ 81,399 Television Programming Sales .................. 958,551 359,910 616,174 ---------- ---------- ---------- Total Operating Revenues .................. 1,298,499 508,687 697,573 ---------- ---------- ---------- COST OF SALES Cost of Merchandising Sales .................. 338,456 147,278 84,428 Cost of Television Programming Sales ......... 623,532 225,822 396,342 ---------- ---------- ---------- Total Cost of Sales ........................ 961,988 373,100 480,770 ---------- ---------- ---------- GROSS PROFIT .................................... 336,511 135,587 216,803 ---------- ---------- ---------- OPERATING EXPENSES Management Services ........................... 76,258 36,000 36,000 Advertising and Promotion ..................... 194,326 26,672 82,521 Other Administrative and General Expense ...... 27,066 801 2,392 Depreciation and Amortization Expense ......... 48,167 22,958 22,814 Interest ....................................... 44,582 19,481 26,019 Bad Debts .................................... 8,316 1,573 2,562 Billing and Collections ........................ 22,239 12,297 16,712 Postage ....................................... 10,204 2,160 3,415 Outside Services .............................. 14,720 13,870 1,741 Meetings ....................................... 11,332 6,452 20,831 Security System Labor ........................ 97,266 33,229 70,573 Pension ....................................... 6,620 2,172 8,027 Telephone .................................... 44,930 19,796 7,871 ---------- ---------- ---------- Total Operating Expenses .................. 606,026 197,461 301,478 ---------- ---------- ---------- OPERATING LOSS .................................... (269,515) (61,874) (84,675) OTHER INCOME Capital Credit Income ........................ 14,987 14,987 23,681 ---------- ---------- ---------- NET LOSS .......................................... (254,528) (46,887) (60,994) ---------- ---------- ---------- ACCUMULATED DEFICIT, BEGINNING .................. (115,065) (115,065) (369,593) ---------- ---------- ---------- ACCUMULATED DEFICIT, ENDING ..................... $ (369,593) $ (161,952) $(430,587) ========== ========== ==========
See accompanying Notes to Financial Statements. F-16 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHEN ELECTRIC COOPERATIVE ASSOCIATION) STATEMENTS OF CASH FLOWS
For the six months ended --------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers ........................... $ 1,350,053 $ 494,941 $ 702,605 Cash Paid to Suppliers and Employees ..................... (1,436,120) (541,974) (587,442) Interest Paid .......................................... (54,453) (29,352) (16,870) ------------ ---------- ---------- Net Cash Provided (Used) by Operating Activities ...... (140,520) (76,385) 98,293 ------------ ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Furniture and Equipment .................. (6,251) (5,357) -- Proceeds from Sale of Fixed Assets ..................... -- 627 -- Proceeds from Investments in Association Organizations ... 2,997 2,997 7,104 ------------ ---------- ---------- Net Cash Provided (Used) by Investing Activities ...... (3,254) (1,733) 7,104 ------------ ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in Checks Written in Excess of Cash ............ 3,216 -- (3,916) Proceeds from Issuance of Long-Term Debt ............... 180,000 100,000 -- Principal Payments on Long-Term Debt ..................... (90,664) (45,239) (46,833) ------------ ---------- ---------- Net Cash Provided (Used) by Financing Activities ...... 92,552 54,761 (50,749) ------------ ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................................ (51,222) (23,357) 54,648 CASH AND CASH EQUIVALENTS -- BEGINNING ..................... 51,222 51,222 -- ------------ ---------- ---------- CASH AND CASH EQUIVALENTS -- ENDING ........................ $ -- $ 27,865 $ 54,648 ============ ========== ========== RECONCILIATON OF NET LOSS TO CASH FLOWS FROM OPERATING ACTIVITIES Net Loss ................................................ $ (222,128) $ (46,887) $ (60,994) Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities: Depreciation and Amortization ........................... 48,167 22,958 22,914 Gain on Sale of Fixed Assets ........................... -- (285) -- Capital Credit Income ................................. (14,987) (14,987) (23,681) (Increase) Decrease in Accounts Receivable ............ (99,069) (23,696) 34,016 (Increase) Decrease in Resale Merchandise ............... (43,013) (554) 87,431 (Increase) Decrease in Prepayments ..................... (638) (415) 896 Increase (Decrease) in Accounts Payable ............... (11,234) (4,392) 118,294 Increase (Decrease) in Unearned Revenue ............... 185,423 9,950 (28,984) Increase (Decrease) in Other Current Liabilities ...... 16,959 (18,077) (51,599) ------------ ---------- ---------- Net Cash Provided (Used) by Operating Activities ...... $ (140,520) $ (76,385) $ 98,293 ============ ========== ==========
See accompanying Notes to Financial Statements. F-17 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization In October 1994, Northern Electric Service Corporation (NESCO) was established as a separate legal entity from Northern Electric Cooperative Association (the Parent). NESCO, d.b.a. Northern Horizons, is a for-profit Minnesota corporation. The Corporation is governed by a nine member board of directors elected by the shareholders to serve three year terms. Northern Electric Cooperative Association is the sole shareholder and is the only voting member of the corporation. As the sole shareholder the Cooperative owns 100,000 shares of NESCO stock at $1.00 per share. The Cooperative established the Corporation for the purpose of promoting the sale of Direct Broadcast Service systems and programming to members of the parent cooperative and non-members in the NESCO franchise area, which generally coincides with the parent cooperative's electric distribution territory. Basis of Accounting The Corporation prepares its financial statements on the accrual method of accounting, recognizing income when earned and expenses when incurred. Cash and Cash Equivalents Cash and cash equivalents consist of deposits held primarily in two financial institutions, as well as investments with maturities of less than three months. Concentration of Credit Risk The Company's programming services are provided primarily to customers in the geographical area covered by the parent cooperative's electric service territory. The Company does not perform credit evaluations of its customers and does not require collateral on the accounts. The Company does follow the practice of disconnecting service to those customers with balances more than forty-five days old. Historically, credit losses have not been significant; therefore, currently, no allowance for doubtful accounts is deemed necessary by management. Furniture and Equipment Furniture and equipment are recorded at original cost. Maintenance and repairs are expensed, and additions, improvements or major renewals are capitalized. Depreciation expense for 1996 was $2,346. Depreciation is computed using the straight-line method over its estimated useful life as follows: Furniture and Equipment 5 - 10 Years Inventories Inventories are stated at the lower of moving average cost or market. Advertising Advertising costs are charged to operations when incurred. Advertising expense was $52,141 for the year ended December 31, 1996. F-18 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Income Taxes Northern Electric Service Corporation files a corporate tax return including only it own operating activity. The Parent is organized under the IRS rules allowing tax-exempt cooperatives and therefore is a non-taxable entity. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments The carrying amounts for all financial instruments approximate fair values. The carrying amounts for cash and cash equivalents, investments, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities. Interim Financial Data The interim financial data is unaudited; however, in management's opinion, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for the interim periods. NOTE 2 -- OTHER ASSETS Franchise Fee During 1994, the Corporation began participating, through National Rural Telecommunications Cooperative (NRTC), in Direct Broadcast Service (DBS), a program to sell direct TV programming. This technology allows subscribers to receive television programming on a small satellite dish. The franchise agreement required the Corporation to pay NRTC a committed member payment of thirty-eight dollars for each non-cabled residence and nine dollars for each cabled residence in the counties served by Northern Electric Cooperative Association (the Parent) for a total of $629,566. The franchise fees are being amortized on a straight-line basis over a fifteen year period. Accumulated amortization totaled $96,917 at December 31, 1996. Intangible Assets The Corporation incurred costs related to incorporation during its formation. The Corporation is accounting for these costs as intangible assets and is amortizing them over a fifteen year period from the date the DBS program was officially in place. Organization costs and accumulated amortization were $9,433 and $1,452, respectively, at December 31, 1996. F-19 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 NOTE 2 -- OTHER ASSETS -- (Continued) Investments in Associated Organizations The Company is a member of NRTC, which obtained the rights to distribute Direct Broadcast Service (DBS) through its members. The members or owners share margins realized by NRTC, on the cooperative principle, based on programming purchased. A summary of investments in associated organizations at December 31, 1996, is as follows: Membership Investment in NRTC ............ $ 1,000 Patronage Capital Allocation in NRTC ...... 12,481 -------- Total Investment in NRTC ............... $13,481 -------- NOTE 3 -- LONG-TERM DEBT
Description Secured By 1996 - ----------------------------------------- ------------------------------------- --------- Note Payable -- National Cooperative All Personal Property, Tangible and $539,336 Services Corporation, variable interest Intangible, including Inventory, currently at 6.25%, quarterly principal Receivables and Equipment and interest payments of approximately Guaranteed by Parent. $23,000; due December 2001 Note Payable -- Northern Electric Furniture, Fixtures, Equipment, 180,000 Cooperative Association (Parent), Inventory, Accounts Receivble, variable interest at prime rate plus Contract Rights, General 2%, monthly principal and interest Intangibles, and Motor Vehicles. payments of approximately $3,780; due December 2001. Total Long-Term Debt ................................................... $719,336 Current Maturities ...................................................... 568,860 --------- Long-Term Debt -- Net of Current Maturities .............................. $150,476 =========
Maturity requirements by year on long-term debt are as follows: Years Ending December 31, Amount ------------------------- --------- 1997 ................................... $568,860 1998 ................................... 32,460 1999 ................................... 35,680 2000 ................................... 39,220 2001 ................................... 43,116 --------- Total ................................... $719,336 --------- F-20 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 NOTE 4 -- INCOME TAXES The Company has available at December 31, 1996, approximately $366,350 of unused operating loss carryforwards that may be applied against future taxable income and that will expire in various years from 2009 to 2011. The $114,360 deferred tax asset that would have been recognized related to the net operating loss carryforward has been fully offset by a valuation allowance to reflect the estimated amount of deferred tax benefits which may not be utilized due to the expiration of the Company's net operating loss carryforwards. The valuation allowance increased approximately $85,800 during 1996 as the result of net operating losses generated during 1996 which may not be utilized. NOTE 5 -- RELATED PARTY TRANSACTIONS The Company paid its parent, Northern Electric Cooperative Association, $72,000 in management fees for 1996. The Company also leased a vehicle from the Parent on a month-to-month lease for $679 per month, for a total paid during 1996 of approximately $5,575. NOTE 6 -- SUBSEQUENT EVENTS At the date of the report on these financial statements, the Company's Board of Directors has voted to accept an offer to purchase the stock of the Company. As a result of this sale, the Company's general manager will receive a severance payment of $100,000 at the termination of his employment contract. F-21 Report of Independent Auditors Management Advanced Tel-Com Systems Corporation We have audited the accompanying balance sheet of Direct Broadcast Satellites (a division of Advanced Tel-Com Systems Corporation) (DBS) as of December 31, 1996, and the related statements of operations, changes in division equity, and cash flows for the year then ended. These financial statements are the responsibility of DBS' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Direct Broadcast Satellites at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Ernst & Young LLP San Antonio, Texas July 16, 1997 F-22 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Balance Sheets
December 31, June 30, 1996 1997 -------------- ------------ (unaudited) Assets Current assets: Cash .................................................................. $ 22,238 $ 46,390 Accounts receivable, net of allowance of $10,000 at December 31, 1996 and June 30, 1997, respectively .......................................... 349,473 303,030 Inventory ............................................................ 111,279 5,959 Customer acquisition costs ............................................. 192,369 231,119 ----------- ----------- Total current assets ...................................................... 675,359 586,498 Equipment, at cost ...................................................... 541,836 534,790 Less accumulated depreciation ............................................. 85,969 138,842 ----------- ----------- 455,867 395,948 Contract costs, net of accumulated amortization of $303,917 and $364,700 at December 31, 1996 and June 30, 1997, respectively ........................ 911,750 850,967 Patronage dividend receivable ............................................. 47,789 80,408 Deferred federal income taxes, net ....................................... 29,788 38,033 Deferred charge, net ...................................................... 2,630 2,067 ----------- ----------- 991,957 971,475 ----------- ----------- Total assets ............................................................ $2,123,183 $1,953,921 =========== =========== Liabilities and Division Equity Current liabilities: Current maturities of long-term debt ................................. $ 183,333 $ 183,333 Accounts payable ...................................................... 395,510 470,741 Accrued taxes ......................................................... 39,704 34,635 Accrued interest ...................................................... 8,259 5,423 Advance billings ...................................................... 406,450 431,397 Deferred federal income taxes .......................................... 65,405 78,506 ----------- ----------- Total current liabilities ................................................ 1,098,661 1,204,035 Long-term debt, net of current maturities ................................. 366,667 183,334 Division equity ......................................................... 657,855 566,552 ----------- ----------- Total liabilities and division equity .................................... $2,123,183 $1,953,921 =========== ===========
See accompanying notes. F-23 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Statements of Operations
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) Operating revenues: Lease and maintenance revenue ............... $ 117,358 $ 46,164 $ 66,136 Satellite sales and installation ............ 473,642 140,314 329,485 Programming ................................. 2,444,796 1,021,162 1,670,696 Uncollectible revenues ..................... (76,201) (23,855) (25,958) ---------- ---------- ---------- Total operating revenues ........................ 2,959,595 1,183,785 2,040,359 Operating expenses: Cost of goods sold ........................... 408,238 126,506 275,435 Plant-specific operations .................. 20,938 6,966 8,097 Plant-nonspecific operations ............... 250,274 102,964 153,288 Customer operations ........................ 537,940 188,508 575,032 Corporate operations ........................ 112,624 53,568 66,739 Programming ................................. 1,557,993 611,933 1,086,092 Operating taxes .............................. 2,180 -- 3,000 ---------- ---------- ---------- Total operating expenses ........................ 2,890,187 1,090,445 2,167,683 ---------- ---------- ---------- Income (loss) from operations .................. 69,408 93,340 (127,324) Other expenses (income): Interest expense ........................... 50,676 27,652 19,937 Other, net ................................. (39,787) (46,268) (46,328) ---------- ---------- ---------- Income (loss) before federal income taxes ...... 58,519 111,956 (100,933) Federal income tax provision (benefit): Current .................................... (36,386) 38,059 (39,173) Deferred .................................... 56,282 -- 4,856 ---------- ---------- ---------- 19,896 38,059 (34,317) ---------- ---------- ---------- Net income (loss) ........................... $ 38,623 $ 73,897 $ (66,616) ========== ========== ==========
See accompanying notes. F-24 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Statement of Changes in Division Equity Balance at December 31, 1995 ................................. $ 552,864 Net income ................................................ 38,623 Equity contributions, net ................................. 66,368 --------- Balance at December 31, 1996 ................................. 657,855 Net loss (unaudited) ....................................... (66,616) Return of equity, net (unaudited) ........................... (24,687) --------- Balance at June 30, 1997 (unaudited) ........................... $ 566,552 ========= See accompanying notes. F-25 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Statements of Cash Flows
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) Operating Activities Net income (loss) .......................................... $ 38,623 $ 73,897 $ (66,616) Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of equipment .............................. -- -- 7,420 Depreciation and amortization ........................... 194,811 89,743 319,185 Deferred federal income tax provision .................. 56,282 -- 4,856 Provision for bad debts ................................. 76,201 -- 25,958 Changes in current assets and current liabilities ...... 91,084 30,683 (26,201) Changes in other assets ................................. (35,662) (36,789) (32,056) ---------- ---------- ---------- Net cash provided by operating activities .................. 421,339 157,534 232,546 Investing Activities Cash proceeds from sale of equipment ........................ -- -- 2,679 Additions to equipment, net .............................. (333,965) (167,742) (3,053) ---------- ---------- ---------- Net cash used in investing activities ..................... (333,965) (167,742) (374) Financing Activities Payments on long-term debt ................................. (183,333) (183,333) (183,333) Equity contributions (return), net ........................ 66,368 189,714 (24,687) ---------- ---------- ---------- Net cash provided by (used in) financing activities ...... (116,965) 6,381 (208,020) ---------- ---------- ---------- Net increase (decrease) in cash ........................... (29,591) (3,827) 24,152 Cash at beginning of period .............................. 51,829 51,829 22,238 ---------- ---------- ---------- Cash at end of period .................................... $ 22,238 $ 48,002 $ 46,390 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................ $ 53,400 $ 30,531 $ 22,773 Income taxes .......................................... 34,200 17,117 --
See accompanying notes. F-26 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Notes to Financial Statements December 31, 1996 1. Organization and Significant Accounting Policies Basis of Presentation Direct Broadcast Satellites (DBS) is an operating division of Advanced Tel-Com Systems Corporation (Advanced), a Texas corporation. Advanced is a wholly owned subsidiary of Kerrville Communications Corporation, Inc. (Communications). DBS provides direct broadcast satellite television services in Kerrville, Texas and its surrounding area. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Equipment Equipment consists primarily of satellite equipment available for leasing. These satellites are depreciated using the straight-line method over the satellites' estimated useful lives of five years. These satellites are leased to customers on a month-to-month basis. Inventory Inventory consists primarily of satellite equipment and is carried at the lower of cost or market, with costs determined on an average cost method. Customer Acquisition Costs DBS incurs certain costs to obtain new subscribers to its direct satellite television system. These costs are commissions paid to agents and employees for acquiring new customers and selling equipment, and promotional coupons redeemed by customers. The deferred costs are amortized over a one-year period. Advertising Costs DBS expenses advertising costs as incurred. Advertising expense was approximately $107,000 for 1996. Contract Costs Contract costs consist of the amount paid to the National Rural Telephone Cooperative, Inc. (NRTC) for DBS' participation in NRTC's program to provide satellite feed television programming. Under the terms of the NRTC contract, DBS acquired the rights to distribute such television services to 16 rural Texas counties. The services began in July 1994, at which time these contract costs began to be amortized over the agreement's term of ten years. Federal Income Taxes Advanced is a member of an affiliated group electing to file on a consolidated basis as defined by federal income tax regulations and, as such, the taxable income of Advanced is included in the consolidated tax return of Communications. Under an informal tax sharing agreement, members of the Communications consolidated group with taxable income are charged with the amount of income taxes as if they filed separate federal income tax returns, and members providing deductions and credits which result in income tax savings are allocated credits for such savings. These financial statements include DBS' share of the Advanced federal income taxes allocated based on DBS' operating results. F-27 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Notes to Financial Statements -- (Continued) December 31, 1996 1. Organization and Significant Accounting Policies -- (Continued) Federal Income Taxes -- (continued): The provision for federal income taxes includes taxes currently payable and those deferred due to temporary differences between the financial statement and tax bases of assets and liabilities. These differences result from the use of different accounting methods for financial and tax reporting purposes with respect principally to depreciation and amortization of intangibles. Statement of Cash Flows In order to determine net cash provided by operating activities, net income has been adjusted by, among other things, changes in current assets and current liabilities, excluding changes in cash and current maturities of long-term debt. Those changes, shown as an (increase) decrease in current assets and an increase (decrease) in current liabilities for the year ended December 31, 1996, are as follows: Receivables ............................................. $ (248,341) Inventory ............................................. 36,381 Payables and accrued liabilities ........................ 184,413 Advance billings ....................................... 311,000 Customer acquisition costs .............................. (192,369) ----------- Changes in current assets and current liabilities ...... $ 91,084 =========== 2. Related Party Transactions Advanced and Kerrville Telephone Company (Kerrville), a wholly owned subsidiary of Communications, have a service agreement whereby Kerrville provides general management, financial, selling, maintenance, installation, and other services to Advanced. Charges under this agreement allocated to DBS were approximately $313,200 during 1996. 3. Long-Term Debt Long-term debt of Advanced relating to DBS at December 31, 1996 is summarized below: Note payable due Norwest Bank, 8.19%, due in annual principal installments of $183,333 and quarterly interest payments to April 1999, secured by property, equipment, future contracts, and accounts receivable related thereto ................................. $ 550,000 Less current maturities ............................................................ 183,333 ---------- Long-term debt, net of current maturities .......................................... $ 366,667 ==========
Scheduled maturities of long-term debt for the years ending December 31, 1997 through 1999 are $183,333 annually. Under its loan agreements, Advanced is restricted from paying cash dividends in excess of 50% of prior year's net income. The agreements also contain covenants restricting additional borrowings, mergers, transfer of stock, transactions with affiliates, and sale or transfer of substantial parts of its assets. F-28 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Notes to Financial Statements -- (Continued) December 31, 1996 4. Income Taxes The components of DBS' net deferred tax liability are as follows at December 31, 1996: Gross deferred tax liabilities ............................... $ 70,059 Gross deferred tax assets ..................................... 34,442 --------- Net deferred tax liability .................................. $ 35,617 ========= 5. Principal Supplier The NRTC is the principal supplier of satellite programming services and equipment. 6. Subsequent Event In July 1997, Communications sold the assets of DBS to Pegasus Communications Corporation for approximately $14.9 million in cash. F-29 INDEPENDENT AUDITORS'REPORT Board of Trustees Suwannee Valley Satellite, Inc. Live Oak, Florida We have audited the accompanying balance sheet of Suwannee Valley Satellite, Inc. as of December 31, 1996, and the related statements of income and retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Suwannee Valley Satellite, Inc. as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying balance sheet of Suwannee Valley Satellite, Inc. as of April 30, 1997, and the related statements of income and retained earnings, and cash flows for the four months ended April 30, 1997, and April 30, 1996, were not audited by us and, accordingly, we do not express an opinion on them. Bolinger, Segars, Gilbert & Moss, L.L.P. Certified Public Accountants Lubbock, Texas February 7, 1997 F-30 SUWANNEE VALLEY SATELLITE, INC. BALANCE SHEETS
December 31, April 30, 1996 1997 -------------- ------------ (unaudited) ASSETS PLANT AT COST Property, Plant, & Equipment .............................. $ 78,056 $ 76,739 ----------- ---------- 78,056 76,739 Less: Accumulated Provision for Depreciation ............... 41,664 44,444 ----------- ---------- 36,392 32,295 ----------- ---------- OTHER PROPERTY AND INVESTMENTS - AT COST OR STATED VALUE Patronage Capital From Associated Coop. .................. 29,262 29,262 Start Up & Organizational Cost (Net of Amortization) ...... 64,042 55,779 Franchise Costs (Net of Amortization) ..................... 563,585 544,629 ----------- ---------- 656,889 629,670 ----------- ---------- CURRENT ASSETS Cash - General ............................................. 152,170 131,582 Accounts Receivable ....................................... 99,350 85,967 Materials and Supplies .................................... 81,246 25,518 Other Current and Accrued Assets ........................... 429 787 ----------- ---------- 333,195 243,854 ----------- ---------- DEFERRED CHARGES ............................................. 24,383 30,217 ----------- ---------- $ 1,050,859 $ 936,036 =========== ========== EQUITIES AND LIABILITIES EQUITIES Common Stock ............................................. $ 1,000 $ 1,000 Retained Earnings .......................................... (209,603) (282,957) ----------- ---------- (208,603) (281,957) ----------- ---------- LONG-TERM DEBT Notes Payable - SVEC ....................................... 800,000 -- Notes Payable - CoBank .................................... -- 825,104 ----------- ---------- 800,000 825,104 ----------- ---------- POSTRETIREMENT BENEFIT OBLIGATION ........................... 1,900 1,644 ----------- ---------- CURRENT LIABILITIES Accounts Payable - SVEC .................................... 107,132 124,236 Accounts Payable - Other ................................. 131,281 84,496 Accrued Interest .......................................... 41,419 14,896 Consumer Deposits .......................................... 2,250 3,750 Other Current Liabilities ................................. 42,415 32,315 Accrued Employee Compensated Absences ..................... 10,553 1,344 ----------- ---------- 335,050 261,037 ----------- ---------- DEFERRED CREDITS ............................................. 122,512 130,208 ----------- ---------- $ 1,050,859 $ 936,036 =========== ==========
See accompanying notes to financial statements. F-31 SUWANNEE VALLEY SATELLITE, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
Four months ended Year ended ---------------------------- December 31, April 30, April 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) OPERATING REVENUES Sales of Programming .............................. $ 1,108,563 $ 302,814 $ 470,941 Sales of Dishes and Installation Fees ............ 90,235 59,743 45,071 Sales of Materials & Magazines ..................... 25,874 8,599 8,567 Service Fees ....................................... 3,600 -- 1,305 Other Satellite Revenue ........................... 2,711 -- 1,391 ----------- ---------- ---------- Total Operating Revenue ........................ 1,230,983 371,156 527,275 ----------- ---------- ---------- COST OF SALES Cost of Programming .............................. 555,334 140,184 240,225 Cost of Dishes and Installations .................. 141,612 56,921 90,869 Cost of Materials & Magazines ..................... 19,467 6,699 6,797 Cost of Service Calls .............................. 4,902 482 650 ----------- ---------- ---------- Total Cost of Sales ........................... 721,315 204,286 338,541 ----------- ---------- ---------- GROSS PROFIT .......................................... 509,668 166,870 188,734 ----------- ---------- ---------- OPERATING EXPENSES Operations ....................................... 10,045 4,135 4,885 Consumer Accounts ................................. 223,631 37,059 113,703 Selling Expense .................................... 46,838 18,983 14,586 Administrative and General ........................ 98,887 19,088 62,063 Depreciation and Amortization ..................... 94,022 30,856 30,602 Taxes ............................................. 2,662 -- 6,411 Other Interest .................................... 27 -- -- ----------- ---------- ---------- Total Operating Expenses ........................ 476,112 110,121 232,250 ----------- ---------- ---------- OPERATING MARGINS - BEFORE FIXED CHARGES ............ 33,556 56,749 (43,516) FIXED CHARGES Interest on Long-Term Debt ........................ 41,419 -- 29,345 ----------- ---------- ---------- OPERATING MARGINS (DEFICIT) - AFTER FIXED CHARGES (7,863) 56,749 (72,861) Capital Credits .................................... 20,795 -- -- ----------- ---------- ---------- NET OPERATING MARGINS ................................. 12,932 56,749 (72,861) ----------- ---------- ---------- NONOPERATING MARGINS Gain (Loss) from Disposition of Property ......... (192) -- (493) ----------- ---------- ---------- NET MARGINS .......................................... 12,740 56,749 (73,354) RETAINED EARNINGS (DEFICIT) - BEGINNING OF PERIOD . (222,343) (222,343) (209,603) ----------- ---------- ---------- RETAINED EARNINGS (DEFICIT) - END OF PERIOD ............ $ (209,603) $ (165,594) $(282,957) =========== ========== ==========
See accompanying notes to financial statements. F-32 SUWANNEE VALLEY SATELLITE, INC STATEMENTS OF CASH FLOWS
Four months ended Year ended ---------------------------- December 31, April 30, April 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Margins ............................................. $ 12,740 $ 56,749 $ (73,354) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities Depreciation and Amortization ........................ 97,230 33,845 30,602 Capital Credits - Non-cash ........................... (20,795) -- -- Accounts Receivable ................................. (43,545) (19,863) 13,383 Materials and Supplies .............................. (7,443) 54,340 55,728 Other Current Assets ................................. 26 260 (358) Deferred Charges .................................... (23,101) 1,282 (5,834) Accounts Payable and Other Current Liabilities ...... 267,033 17,109 (74,013) Accumulated Provision - Pensions & Benefits ......... 1,900 -- (1,352) Deferred Credits .................................... 86,305 19,828 7,696 ------------ ---------- ---------- Net Cash Provided (Used) by Operating Activities .... 370,350 163,550 (47,502) ------------ ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant .............................. (10,621) 1,030 1,317 Salvage Value of Retirements and Other Credits ......... 400 -- -- Net Loss on Retirement of Plant ........................ 193 -- 493 Other Property and Investments ........................... 4,159 -- -- ------------ ---------- ---------- Net Cash Provided by (Used in) Investing Activities (5,869) 1,030 1,810 ------------ ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Advances on Line of Credit .............................. 800,000 -- (800,000) Proceeds From Long-Term Debt, Net ........................ -- -- 825,104 Other Equities .......................................... (1,144,713) (185,264) -- ------------ ---------- ---------- Net Cash Provided by (Used in) Financing Activities (344,713) (185,264) 25,104 ------------ ---------- ---------- INCREASE (DECREASE) IN CASH ................................. 19,768 (20,684) (20,588) CASH - BEGINNING OF PERIOD ................................. 132,402 132,402 152,170 ------------ ---------- ---------- CASH - END OF PERIOD ....................................... $ 152,170 $ 111,718 $ 131,582 ============ ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest on Long-Term Debt ........................... $ 0 $ 0 $ 55,868 ============ ========== ========== Income Taxes .......................................... $ 0 $ 0 $ 0 ============ ========== ==========
See accompanying notes to financial statements. F-33 SUWANNEE VALLEY SATELLITE, INC. NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Suwannee Valley Satellite, Inc. (SVS), is a for-profit corporation which distributes direct broadcast television services to subscribers in its franchised television geographical service area in north central Florida, headquartered in Live Oak, Florida. Suwannee Valley Electric Cooperative, Inc. owns all the issued and outstanding stock of the company. Inventories Materials and supplies inventories are valued at average unit cost. Recognition of Income Direct television programming revenues are billed in advance and are recognized when earned. Unearned amounts are classified as deferred credits in these financial statements. Group Concentration of Credit Risk The company's headquarters facility is located in Live Oak, Florida. The service area includes members located in an area which extends around the city of Live Oak, Florida. SVS records a receivable for revenues as billed on a monthly basis. SVS requires a deposit from most of its members, which is applied to unpaid bills and fees in the event of default. The deposit accrues interest and is returned periodically. As of December 31, 1996, deposits on hand totaled $2,250. The cash balances maintained by the company are insured by the Federal Deposit Insurance Corporation up to $100,000 per each banking institution where deposits are held. At December 31, 1996, the cash balances exceeded insured limits. Patronage Capital Certificates Patronage capital from associated companies are recorded at the stated amount of the certificate. Income Taxes SVS is a for-profit taxable corporation. Due to net operating loss carryforwards, the current provision for income taxes is $0. Tax assets or liabilities are not significant. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Assets Pledged All assets are pledged as security for the long-term debt due RUS and the National Rural Utilities Cooperative Finance Corporation (CFC). F-34 SUWANNEE VALLEY SATELLITE, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 3. Property and Equipment The major classes of plant in service are as follows: Structures and Improvements $ 34,627 Computer Equipment 7,064 Transportation Equipment 16,487 Communication Equipment 19,878 --------- $ 78,056 ========= Provision for depreciation on nonelectric plant, property and equipment is computed using the double-declining balance method as follows: Structures and Improvements 5 years Computer Equipment 7 years Transportation Equipment 5 years Communication Equipment 7 years Depreciation for the year ended December 31, 1996 was $15,572, of which $12,364 was charged to depreciation expense, and $3,208 allocated to other accounts. 4. Other Property and Investments Other property and investments consisted of the following at December 31, 1996: Investments in Associated Organizations NRTC - Patronage Capital $ 29,262 ---------- Start Up and Organizational Cost Original Cost $ 123,953 Amortization (59,911) ---------- $ 64,042 ---------- Franchise Cost Original Cost $ 701,014 Amortization (137,429) ---------- $ 563,585 ---------- $ 656,889 ========== The company expensed amortization costs of $81,658 in 1996. 5. Deferred Charges Deferred charges consist of installation rebates totaling $24,383 at December 31, 1996. 6. Deferred Credits Deferred credits represent direct television revenues billed in advance totaling $122,512 at December 31, 1996. 7. Pension Benefits Pension benefits for substantially all employees of the company are provided through the National Rural Electric Cooperative Association (NRECA) Retirement and Security Program, a defined benefit plan qualified under section 401 and tax-exempt under section 501(a) of the Internal Revenue Code. F-35 SUWANNEE VALLEY SATELLITE, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 7. Pension Benefits -- (Continued) The company makes contributions to the plan equal to the amounts accrued for pension expense. In this multi-employer plan, which is available to all member cooperatives of NRECA, the accumulated benefits and plan assets are not determined or allocated separately by individual employers. Effective, July 1, 1987, NRECA declared a moratorium which suspended employer contributions due to the plan's funding limitations. In November, 1994, the moratorium was lifted and contributions were required to April 1995 when the moratorium was reinstated. The moratorium was once again lifted in October 1996. The NRECA Savings Plan, a defined contribution plan, has also been made available to employees of the company. Contributions by the company match employee contributions up to 3 percent. The cost to the company for these plans for the year ended December 31, 1996 was $502. 8. Benefits to Retirees Retirees between the age of 62 and 65 are allowed to continue in the company's group health insurance plan and are required to reimburse the company for one-half of the premium. Upon reaching age 65, retirees are responsible for the entire premium if they continue to participate in the plan. Effective in 1995, the company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pension." Adoption of this statement does not materially affect the financial statements. Statement 106 requires that the cost of postretirement medical benefits be recognized on the accrual basis as employees render service to earn the benefit. The company elected to recognize the net transition obligation of $1,600 in 1995. Annual service and interest cost for 1996 was $300. 9. Related Party Transactions During 1996, the company executed a note payable to Suwannee Valley Electric Cooperative, Inc. totaling $800,000 payable upon demand. The note bears interest at a variable rate based on the National Rural Utilities Cooperative Finance Corporation's 30-day commercial paper rates. This rate was 5.55% at December 31, 1996. The company intends to refinance the note with CoBank in 1997. F-36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of ViewStar Entertainment Services, Inc.: We have audited the accompanying balance sheet of VIEWSTAR ENTERTAINMENT SERVICES, INC. (a Georgia corporation) as of December 31, 1996 and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ViewStar Entertainment Services, Inc. as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Atlanta, Georgia April 18, 1997 (except with respect to Note 10, as to which the date is September 15, 1997) F-37 VIEWSTAR ENTERTAINMENT SERVICES, INC. BALANCE SHEETS
December 31, June 30, 1996 1997 -------------- --------------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents .................................... $ 182,181 $ 186,960 Accounts receivable: Trade, net of allowance for doubtful accounts of $8,666 and $7,496 at December 31, 1996 and June 30, 1997, respectively . 207,800 185,370 Other ......................................................... 11,987 7,860 Deferred promotional costs .................................... 68,984 104,804 Prepaid expenses and other .................................... 51,530 9,077 Inventory ...................................................... 27,938 55,604 ------------ ------------ Total current assets ....................................... 550,420 549,675 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Furniture and equipment ....................................... 129,478 131,717 Rental satellite systems equipment ........................... 42,651 40,092 Service vehicles ............................................. 28,913 28,913 Leasehold improvements ....................................... 17,260 17,260 ------------ ------------ 218,302 217,982 Less accumulated depreciation ................................. (99,102) (128,073) ------------ ------------ Property and equipment, net ................................. 119,200 89,909 ------------ ------------ CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ........................ 1,512,298 1,453,142 ------------ ------------ Total assets ................................................ $ 2,181,918 $ 2,092,726 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable ................................................ $ 493,963 $ 434,061 Accounts payable ............................................. 166,420 254,020 Accrued liabilities .......................................... 147,714 104,640 Unearned revenue ............................................. 299,505 330,685 Other ......................................................... 88,844 40,498 ------------ ------------ Total liabilities .......................................... 1,196,446 1,163,904 ------------ ------------ DEFERRED CREDITS ................................................ 43,007 67,291 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY: Common stock, no par value; 1,000,000 shares authorized and 641,680 shares issued and outstanding ........................ 2,037,525 2,037,525 Retained deficit ................................................ (1,095,060) (1,175,994) ------------ ------------ Total stockholders' equity ................................. 942,465 861,531 ------------ ------------ Total liabilities and stockholders' equity .................. $ 2,181,918 $ 2,092,726 ============ ============
The accompanying notes are an integral part of this balance sheet. F-38 VIEWSTAR ENTERTAINMENT SERVICES, INC. STATEMENTS OF OPERATIONS
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) REVENUES: Programming ........................ $ 2,100,927 $ 939,128 $1,372,248 Equipment and installation ......... 308,082 160,059 151,702 Other .............................. 14,779 11,081 2,684 ----------- ---------- ---------- Total revenues .................. 2,423,788 1,110,268 1,526,634 ----------- ---------- ---------- COST OF REVENUES: Programming ........................ 987,379 416,209 614,872 Equipment and installation ......... 250,347 124,360 143,660 Service fees ........................ 280,771 139,395 183,718 ----------- ---------- ---------- Total cost of revenues ......... 1,518,497 679,964 942,250 ----------- ---------- ---------- GROSS PROFIT ........................... 905,291 430,304 584,384 ----------- ---------- ---------- OPERATING EXPENSES: General and administrative ......... 694,718 309,450 240,323 Sales and marketing ............... 255,540 81,407 297,227 Depreciation and amortization ...... 226,963 112,160 112,411 ----------- ---------- ---------- Total operating expenses ......... 1,177,221 503,017 649,961 ----------- ---------- ---------- OPERATING LOSS ........................ (271,930) (72,713) (65,577) ----------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense .................. (76,848) (39,784) (24,750) Loss on sale of rental units ...... (36,339) -- (1,281) Other .............................. 9,246 37,615 10,674 ----------- ---------- ---------- (103,941) (2,169) (15,357) ----------- ---------- ---------- NET LOSS .............................. $ (375,871) $ (74,882) $ (80,934) =========== ========== ==========
The accompanying notes are an integral part of this statement. F-39 VIEWSTAR ENTERTAINMENT SERVICES, INC. STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock ------------------------ Retained Shares Amount Earnings Total --------- ------------ --------------- ------------- BALANCE, December 31, 1995 ............... 508,340 $1,537,525 $ (719,189) $ 818,336 Conversion of note (Note 3) ............ 133,340 500,000 0 500,000 Net loss .............................. 0 0 (375,871) (375,871) -------- ----------- ------------ ---------- BALANCE, December 31, 1996 ............... 641,680 2,037,525 (1,095,060) 942,465 Net loss (unaudited) .................. 0 0 (80,934) (80,934) -------- ----------- ------------ ---------- BALANCE, June 30, 1997 (unaudited) ...... 641,680 $2,037,525 $ (1,175,994) $ 861,531 ======== =========== ============ ==========
The accompanying notes are an integral part of this statement. F-40 VIEWSTAR ENTERTAINMENT SERVICES, INC. STATEMENTS OF CASH FLOWS
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ......................................................... $ (375,871) $ (74,882) $ (80,934) ---------- --------- --------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ................................. 226,963 112,160 112,411 Loss on sale of rental units ................................. 36,339 -- 1,281 Changes in operating assets and liabilities: Accounts receivable, net .................................... (103,090) (43,556) 22,430 Inventory ................................................... 96,767 80,463 (27,666) Other current assets .......................................... (46,371) 4,818 10,760 Accounts payable ............................................. 135,759 41,742 87,600 Accrued liabilities and other ................................. (6,329) (23,977) (93,342) Unearned revenue ............................................. 199,405 3,667 31,180 ---------- --------- --------- Total adjustments .......................................... 539,443 175,317 144,654 ---------- --------- --------- Net cash provided by operating activities .................. 163,572 100,435 63,720 ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment .............................. (44,485) (30,135) 961 ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long term debt .................................... (17,464) -- (59,902) ---------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................ 101,623 70,300 4,779 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................................................... 80,558 80,558 182,181 ---------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................ $ 182,181 $ 150,858 $ 186,960 ========== ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest .......................................... $ 51,308 $ 27,901 $ 25,831 ========== ========= ========= Cash paid for taxes ............................................. $ 500 $ 500 $ 750 ========== ========= ========= NONCASH TRANSACTIONS: Conversion of note (Note 3) .................................... $ 500,000 $ -- $ -- ========== ========= ========= Noncash patronage dividend (Note 2) .............................. $ 29,856 $ 29,856 $ 24,284 ========== ========= =========
The accompanying notes are an integral part of this statement. F-41 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. THE COMPANY ViewStar Entertainment Services, Inc. ("ViewStar" or the "Company") is a full-service provider of direct broadcast satellite ("DBS") service to approximately 4,900 customers in eight counties in North Georgia. The Company was incorporated in Georgia on August 12, 1993 and began marketing its services in July 1994. Through a contracted agreement with the National Rural Telecommunications Cooperative ("NRTC"), ViewStar has the exclusive right to market and distribute DirecTv's (a subsidiary of Hughes Aircraft) satellite programming services to the eight-county area for a period of ten years or the life of the DirecTv satellite, whichever is longer. The life of the satellite is currently estimated to be 15 years. The Company has experienced operating losses since its inception as a result of efforts to build its customer base and develop its operations. The Company expects to continue to focus on developing its operations while continuing to expand its market penetration. While the Company has achieved positive cash flows from operations during 1996, there are risks associated with the Company's growth plans and its ability to continue to generate positive cash flows from operations and achieve or sustain profitability. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Estimates and Assumptions The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Source of Supplies As a distributor of DirecTv services, the Company relies on DirecTv for programming services. Further, the NRTC provides its members certain services, such as billing, centralized payment processing, and promotions. Any disruption of these services could have an adverse effect on the operating results of the Company. Concentration of Credit Risk Concentration of credit risk with respect to accounts receivable is limited due to the large number of subscribers comprising the customer base. The Company's risk of loss is also limited due to advance billings to customers for monthly programming services. As a result, at December 31, 1996, management does not believe that any significant concentration of credit risk exists. Inventories The Company maintains inventories consisting of Digital Satellite Systems ("DSS(R)") equipment and related accessories. The inventories are stated at the lower of cost or market, determined generally by the average cost method, which approximates the first-in, first-out ("FIFO") method. Deferred Promotional Costs Deferred promotional costs consist of costs related to a subscriber rebate program sponsored by DirecTv. Effective September 1, 1996, DirecTv introduced a national marketing program offering new purchasers of DSS(R) equipment a $200 cash rebate, called the cash back offer rebate. To be eligible, a buyer must subscribe to and pay for one year's worth of programming in advance. The Company has elected to defer these costs and is amortizing these expenses over the life of the buyer's one-year contract. F-42 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Deferred Promotional Costs (continued) ViewStar had 407 of these customers, with gross rebate costs of $81,400, of which $12,416 was amortized during the year. In addition, as a part of this program, ViewStar receives $1 per month for up to five years from the NRTC for each subscriber whose account remains active. These amounts are included as a reduction of sales and marketing expense in the accompanying statement of operations when earned. Property and Equipment Property and equipment are stated at cost. ViewStar capitalizes major property additions and expenses maintenance and repairs which do not extend the useful lives of these assets. Depreciation for property and equipment is provided using the straight-line method over the estimated useful lives of the respective assets, ranging from three to five years. Depreciation expense for the year was $59,893. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in current earnings. Depreciation is computed for financial reporting purposes based on the following lives: Furniture and equipment Three to five years Rental satellite systems equipment Five years Service vehicles Three years Leasehold improvements Three years Contract Rights and Other Assets Contract rights and other assets consist of the following at December 31, 1996: Contract rights ............... $1,573,409 Organization costs ............ 309,930 ---------- 1,883,339 Accumulated amortization ...... (417,200) ---------- 1,466,139 NRTC patronage capital ......... 43,007 Other ........................ 3,152 ---------- $1,512,298 ========== Contract Rights In 1993, the Company acquired from the NRTC the exclusive right to market and distribute DirecTv services to households and commercial establishments in the following eight counties located in northern Georgia: Banks, Bartow, Dawson, Gordon, Hall, Habersham, Lumpkin, and Pickens. The Company acquired these rights for a purchase price of $1,573,409 and for a period of ten years or the life of the current satellite, whichever is longer. Contract rights are being amortized over 15 years, the estimated useful life of the satellite (Note 1) operated by DirecTv which provides service under the related contracts. Amortization expense, included in depreciation and amortization in the accompanying statement of operations, for the year ended December 31, 1996 was $104,894. Organization Costs All costs incurred prior to the commencement of operations on July 1, 1994 have been capitalized on the balance sheet as organization costs and are being amortized over five years. Amortization expense, included in depreciation and amortization in the accompanying statement of operations, for the year ended December 31, 1996 was $62,176. F-43 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) NRTC Patronage Capital ViewStar is an affiliate member of the NRTC (Note 9). While affiliate members have no vote, they do have an ownership interest in the NRTC in proportion to their prior patronage. NRTC patronage capital represents the noncash portion of NRTC patronage income. Under its bylaws, the NRTC declares a patronage dividend of its excess of revenues over expenses each year. Of the total patronage dividend, 20% is paid in cash and the remaining 80% is distributed in the form of noncash patronage capital, which will be redeemed in cash only at the discretion of the NRTC. Noncash patronage capital is included in other assets. The Company has also deferred the recognition of income from the noncash portion of the patronage dividend until it is realized. Accordingly, this amount is recorded in deferred credits in the accompanying balance sheet. Long-Lived Assets Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management believes that the long-lived assets in the accompanying balance sheet are appropriately valued. Income Taxes Deferred income taxes are recorded using enacted tax laws and rates for the years in which the taxes are expected to be paid. Deferred income taxes are provided for items when there is a temporary difference in recording such items for financial reporting and income tax reporting. Stock-Based Compensation Plans The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). In 1996, the Company adopted the disclosure option of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 requires that companies which do not choose to account for stock-based compensation as prescribed by this statement shall disclose the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. Advertising Costs The Company expenses all advertising costs as incurred. Revenue Recognition ViewStar earns programming revenue by providing DirecTv services to its subscribers. Programming revenue includes DirecTv services purchased by subscribers in monthly or annual subscriptions; additional premium programming available on an a la carte basis; sports programming available under monthly, annual, or seasonal subscriptions; and movies and events programming available on a pay-per-view basis. Programming purchased on a monthly, annual, or seasonal basis, including premium programming, is billed in advance and is recorded as unearned revenue. All programming revenue is recognized when earned. Equipment and installation revenues primarily consist of the sale of DSS(R) equipment and accessories and related installation charges. Equipment sales revenue is recognized upon delivery of the equipment to the customer. Installation revenue is recognized when the equipment is installed. F-44 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Cost of Revenues Cost of revenues includes the cost associated with providing DirecTv services to the Company's subscribers. These costs include the direct wholesale cost of purchasing related programming from DirecTv through the NRTC, the royalty fee paid to DirecTv, and monthly subscriber maintenance fees charged by DirecTv, such as security fees, ground service fees, system authorization fees, and fees for subscriber billings. Cost of equipment and installation includes the wholesale cost of the equipment, fees paid to independent contractor installers, and service department costs. 3. STOCKHOLDERS' EQUITY The Company has authorized 1,000,000 shares of no par value common stock. On August 24, 1993, the Company issued 18,750 shares of common stock for total proceeds of $1,037,500 to the following three individuals: Donald W. Weber--15,000 shares (80%) (the "majority stockholder"), Steven D. Weber--1,875 shares (10%), and Woodrow W. Griffin, Jr.--1,875 shares (10%). Under a stockholder agreement dated August 24, 1993, the majority stockholder or the Company possesses the right of first refusal to purchase shares owned by minority stockholders before any transfer of these shares may occur. On March 30, 1994, the Company issued 6,667 shares of common stock at $75 per share to ITC Holding Company for total proceeds of $500,025. Under a stockholder agreement dated March 30, 1994, the majority stockholder or the Company possesses the right of first refusal to purchase shares owned by ITC Holding Company before any transfer of these shares may occur. On March 30, 1994, the board of directors and stockholders approved a restatement of the $500,000 note payable to Donald W. Weber to include the option to convert the note to common stock at a rate of $75 per share. On December 31, 1996, this note was converted to 133,340 shares of common stock. Interest of $88,844 accrued on the note during the period that it was outstanding but has not been paid. On June 30, 1995, the board of directors and stockholders approved a 20-for-1 stock split by way of a 19-share dividend or 482,923 shares to current stockholders on a pro rata basis. The following table summarizes stock ownership as of December 31, 1996: Number Percentage Total of of Consideration Shares Shares Paid --------- ------------ -------------- Donald W. Weber ............... 433,340 67.54% $1,500,000 ITC Holding Company ......... 133,340 20.78 500,025 Woodrow W. Griffin, Jr. ...... 37,500 5.84 18,750 Steven D. Weber ............... 37,500 5.84 18,750 -------- ----------- Total ........................ 641,680 $2,037,525 ======== =========== 4. STOCK-BASED COMPENSATION PLANS Employee Stock Option Plan Under the Company's 1995 stock option plan (the "Stock Option Plan"), as adopted by the board of directors and approved by the stockholders on June 30, 1995, 75,000 shares of common stock are reserved and authorized for issuance over a nine-year period. All permanent employees of the Company are eligible to receive options under the Stock Option Plan. The Stock Option Plan is administered by the board of directors. The plan is intended to provide for incentive stock options ("ISOs") under Section 422 of the Internal F-45 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 4. STOCK-BASED COMPENSATION PLANS -- (Continued) Employee Stock Option Plan (continued) Revenue Code of 1986, as amended, and for options which do not qualify as ISOs. Options were granted at an exercise price of at least 100% of the estimated fair value of the common stock at the dates of grant, as determined by the board of directors based on previous equity transactions, historical financial condition and results of operations, and other analyses. Options are generally granted at a price (established by the board of directors) equal to at least 100% of the estimated fair market value of the common stock on the option grant date. Options granted become exercisable pro rata over four years from the date of grant. The options expire on December 31, 2004. Statement of Financial Accounting Standards No. 123 During 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair value-based method of accounting for an employee stock option or similar equity instrument and which encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting methodology required by APB No. 25 must make pro forma disclosures of net income as if the fair value-based method of accounting defined in SFAS No. 123 was used. The Company has elected to account for its Stock Option Plan under APB No. 25; however, the Company has computed for pro forma disclosure purposes the value of all options granted during 1995 and 1996 using the minimum value option pricing model as prescribed by SFAS No. 123 using the following assumptions: 1995 1996 ------------ -------------- Risk-free interest rate ...... 5.95% 6.5% Expected dividend yield ...... 0 0 Expected lives ............... Five years Five years Volatility .................. 0 % 0 % Using these assumptions, the total fair value of the stock options granted in 1996 and 1995 is $45,920 and $31,322, respectively, which would be amortized as compensation expense over the four-year vesting period of the options. Had compensation cost been determined consistent with the provisions of SFAS No. 123, the Company's net loss and pro forma net loss per share for 1996 would have been as follows: As Pro Reported Forma -------------- ------------ Net loss ............... $ (375,871) $387,844 Net loss per share ...... $ (.59) $ (.60) F-46 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 4. STOCK-BASED COMPENSATION PLANS -- (Continued) The following table summarizes stock option transactions under the Stock Option Plan during 1996 and 1995: Weighted Number Average of Price Shares Per Share ----------- ---------- Granted .............................. 20,800 $ 6.00 Forfeited ........................... (1,000) 6.00 ------- Outstanding at December 31, 1995 ...... 19,800 6.00 Granted .............................. 21,250 8.00 Forfeited ........................... (2,500) 8.00 ------- Outstanding at December 31, 1996 ...... 38,550 6.97 ======= The following table sets forth the exercise price range, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price and grant date: Number Weighted Outstanding Average Weighted Actual at Remaining Average Exercise December 31, Contractual Exercise Prices 1996 Life Price - ------------------- -------------- ------------- --------- $6.00 19,800 2.50 $ 6.00 8.00 18,750 3.42 8.00 ------ ---- ------- 38,550 2.96 6.97 ====== There were 4,950 options exercisable at a weighted average exercise price of $6 per share at December 31, 1996. 5. RELATED-PARTY TRANSACTIONS During 1996, the Company shared administrative, executive, and accounting functions and incurred certain costs on behalf of DBS Depot, a company which is owned by certain common stockholders of the Company. The Company was reimbursed by DBS Depot for all expenses at full cost. The amount due from DBS Depot as of December 31, 1996 was $4,165. As of December 31, 1996, the Company had outstanding a demand note payable in the amount of $100,000 and an equipment loan payable in the amount of $14,061 due to the principal stockholder. See Note 6 for discussion of notes payable terms. 6. DEBT The Company's debt obligations at December 31, 1996 are as follows: Note payable to First Community Bank of Dawsonville, due March 31, 1997, interest at prime plus 2%, secured by certain assets of the Company ........................ $375,000 Note payable to majority stockholder, due on demand, interest at prime plus 2% ... 100,000 Equipment loans from majority stockholder, due on demand, interest at 5% ......... 14,061 --------- Total outstanding ............................................................ $489,061 =========
F-47 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 6. DEBT -- (Continued) As all of the Company's debt at December 31, 1996 matures in 1997 or is due on demand, these amounts are classified as current in the accompanying balance sheet. 7. COMMITMENTS AND CONTINGENCIES Leases ViewStar leases office space and equipment. Rent expense for the year ended December 31, 1996 was $53,878. The operating leases expire at various dates through 2000. At December 31, 1996, the Company's minimum rental commitments under noncancelable operating leases with initial or remaining terms of more than one year were as follows: 1997 ....................................... $50,000 1998 ....................................... 24,000 1999 ....................................... 5,000 2000 ....................................... 5,000 -------- Total future minimum lease payments ...... $84,000 ======== Legal Proceedings The Company is subject to legal proceedings and claims which arise in the ordinary course of business. There are no pending legal proceedings to which the Company is a party. 8. INCOME TAXES Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 are as follows: Deferred tax assets: Net operating loss carryforwards ............... $ 288,000 Unearned revenue ................................. 110,000 Accrued interest ................................. 34,000 Depreciation .................................... 15,000 ---------- Total deferred tax assets ..................... 447,000 Deferred tax liabilities: Other .......................................... (3,000) ---------- Net deferred tax assets ........................ 444,000 Valuation allowance for deferred tax assets ...... (444,000) ---------- Net deferred taxes ........................... $ 0 ========== The Company's net operating loss carryforwards will expire between 2008 and 2011 unless utilized. Due to the fact that the Company has incurred losses since inception, the Company has not recognized the income tax benefit of the net operating loss carryforwards. Management has provided a 100% valuation reserve against its net deferred tax asset, consisting primarily of net operating loss carryforwards. In addition, the Company's ability to recognize the benefit from the net operating loss carryforwards could be limited under Section 382 of the Internal Revenue Code if ownership of the Company changes by more than 50%, as defined. F-48 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 8. INCOME TAXES -- (Continued) A reconciliation of the income tax provision computed at statutory tax rates to the income tax provision for the year ended December 31, 1996 is as follows: Income tax benefit at statutory rate ............ 34% State income taxes, net of federal benefit ...... 4 Deferred tax asset valuation allowance ......... (38) Effective tax rate .............................. 0% 9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS The NRTC has contracted with third parties to provide the NRTC members with certain services, including billing services and centralized remittance processing services. The NRTC bills the Company for these services on a monthly basis. These fees are recorded as service fees in the accompanying statement of operations. The NRTC also sells DSS(R) equipment to its members. Because the Company is, through the NRTC, a distributor of DirecTv Services, the Company would be adversely affected by any material adverse changes in the assets, financial condition, programming, technological capabilities, or services of DirecTv or its parent corporation, Hughes Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or renew its Federal Communications Commission ("FCC") licenses to transmit radio frequency signals from the orbital slots occupied by its satellites. The NRTC is a cooperative organization whose members are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States. Pursuant to an agreement between the NRTC and Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating NRTC members acquired the exclusive rights to provide DirecTv services to residential and commercial subscribers in certain rural DirecTv markets. In general, upon default by the NRTC under the Hughes Agreement, the Company would have the right to acquire DirecTv Services directly from DirecTv. The NRTC has contracted with third parties to provide the NRTC members with certain services, including billing services and centralized remittance processing services. If the NRTC is unable to provide these services for whatever reason, the Company would be required to acquire the services from other sources. There can be no assurance that the cost to the Company to obtain these services elsewhere would not exceed the amounts currently payable to the NRTC. The Company would also be adversely affected by the termination of the NRTC Member Agreements by the NRTC prior to the expiration of their respective terms. If the NRTC Member Agreements are terminated by the NRTC, the Company would no longer have the right to provide DirecTv Services. There can be no assurance that the Company would be able to obtain similar DBS services from other sources. Both the Hughes Agreement and the NRTC Member Agreements expire when Hughes removes its current satellites from their assigned orbital locations. Although, according to Hughes, the three DirecTv satellites have estimated orbital lives of approximately 15 years from their respective launches in December 1993 and 1994, there can be no assurance as to the longevity of the satellites and thus no assurance as to how long the Company will be able to continue to acquire DBS services pursuant to the NRTC Member Agreements. While the Company believes it will have access to DirecTv Services following the expiration of the current Hughes Agreement by virtue of the NRTC's right of first refusal in the Hughes Agreement and the Company's existing contractual and membership relationship with the NRTC, there can be no assurance that such services will be available to the Company from Hughes or the NRTC, and if available, there can be no assurance with regard to the financial and other terms under which the Company could acquire the services. F-49 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS -- (Continued) The Company's DBS business is a new business with a limited operating history. There are numerous risks associated with satellite transmission technology. There can be no assurance as to the longevity of the satellites or that loss, damage, or changes in the satellites will not occur and have a material adverse effect on DirecTv and the Company's DBS business. DirecTv and, therefore, the Company are dependent on third parties to provide high-quality programming that appeals to mass audiences. DirecTv's programming agreements have terms which expire on various dates and have different renewal and cancellation provisions. There can be no assurance that any such agreements will be renewed or will not be canceled prior to expiration of their original terms. DBS operators, such as DirecTv, are free to set prices and serve subscribers according to their business judgment without rate of return and other regulation. However, DirecTv is subject to the regulatory jurisdiction of the FCC. 10. SUBSEQUENT EVENT In September 1997, the Company entered into a non-binding letter of intent with Pegagus Communications Corporation ("Pegasus") to sell the stock of the Company to Pegasus in exchange for a combination of cash and stock. F-50 INDEPENDENT AUDITOR'S REPORT To the Members Midwest Minnesota DBS, LLC Perham, Minnesota I have audited the accompanying statement of net assets to be sold of Midwest Minnesota DBS, LLC, as of December 31, 1996, and the related statements of operations and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. The accompanying statement of net assets to be sold was prepared to present the net assets of Midwest Minnesota DBS, LLC to be acquired by Pegasus Communications Corporation pursuant to the purchase agreement described in Note 5, and is not intended to be a complete presentation of Midwest Minnesota DBS, LLC's assets and liabilities. In my opinion, the statements referred to above present fairly, in all material respects, the net assets to be sold of Midwest Minnesota DBS, LLC, as of December 31, 1996 and the results of operations and cash flows for the year then ended pursuant to the purchase agreement referred to in Note 6, in conformity with generally accepted accounting principles. Bradley R. Helmeke, Ltd. Perham, Minnesota July 18, 1997 F-51 MIDWEST MINNESOTA DBS, LLC STATEMENTS OF NETS ASSETS TO BE SOLD December 31, June 30, 1996 1997 -------------- ------------ (unaudited) ASSETS CURRENT ASSETS Accounts Receivable .................. $135,270 $102,495 Inventory ........................... 31,255 56,916 --------- --------- TOTAL CURRENT ASSETS ..................... 166,525 159,411 --------- --------- PROPERTY AND EQUIPMENT .................. 36,953 31,833 --------- --------- OTHER ASSETS Investment in NRTC .................. 37,705 51,058 Franchise Cost ........................ 472,810 441,292 Organization and Start-up Costs ...... 7,635 6,108 Cashback and Access Cards ............ 72,847 97,941 --------- --------- TOTAL OTHER ASSETS ..................... 590,997 596,399 --------- --------- TOTAL ASSETS ........................... 794,475 787,643 CURRENT LIABILITIES Customer Deposits ..................... 1,140 1,960 Deferred Revenue ..................... 177,270 140,156 --------- --------- TOTAL CURRENT LIABILITIES ............... 178,410 142,116 --------- --------- NET ASSETS TO BE SOLD ..................... $616,065 $645,527 ========= ========= See accompanying notes to the financial statements. F-52 MIDWEST MINNESOTA DBS, LLC STATEMENTS OF OPERATIONS OF ASSETS TO BE SOLD
Six months ended Year ended --------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) REVENUE Programming Revenue ..................... $ 833,231 $ 348,714 $ 597,408 Equipment Sales ........................ 426,169 179,169 103,052 ---------- --------- --------- TOTAL REVENUE ........................ 1,259,400 527,883 700,460 COST OF REVENUE Programming Costs ..................... 400,231 165,354 266,783 Programming Fees ..................... 131,313 53,461 86,627 Equipment Costs ........................ 345,412 146,275 93,997 Selling Commissions .................. 131,316 38,540 55,542 Installation Costs .................. 29,027 10,335 18,070 Patronage Dividend ..................... (21,956) (21,956) (19,077) ---------- --------- --------- TOTAL COSTS OF REVENUE .................. 1,015,343 392,009 501,942 ---------- --------- --------- GROSS PROFIT ........................... 244,057 135,874 198,518 ---------- --------- --------- OPERATING EXPENSES Salaries and Wages ..................... 84,652 44,113 46,790 Employee Benefits and Taxes ............ 9,604 4,742 7,788 Insurance ........................... 3,032 1,478 1,817 Advertising ........................... 15,992 8,226 12,725 Marketing .............................. 14,071 7,527 4,364 Depreciation and Amortization ......... 88,600 41,199 61,179 Travel and Entertainment ............... 4,853 2,092 901 Training and Development ............ 3,979 1,949 2,104 Rent ................................. 5,400 2,700 2,700 Telephone ........................... 22,300 9,782 14,055 Supplies .............................. 5,737 3,688 2,081 Postage .............................. 5,550 2,169 3,357 Accounting and Legal .................. 910 850 6,928 Bank and Finance Charges ............ 3,697 1,884 933 Bad Debts .............................. 11,484 3,591 4,441 Miscellaneous Expenses ............... 4,792 2,045 4,738 ---------- --------- --------- 284,653 138,035 176,901 NET INCOME (LOSS) FROM OPERATIONS ...... $ (40,596) $ (2,161) $ 21,617 ========== ========= =========
See accompanying notes to the financial statements. F-53 MIDWEST MINNESOTA DBS, LLC STATEMENTS OF CASH FLOWS
Six months ended Year ended --------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) from Operations .............................. $ (40,596) $ (2,161) $ 21,617 Adjustments to Reconcile Net Income (Loss) from Operations to Net Cash Provided by Operating Activities: Depreciation and Amortization ................................. 88,600 41,199 61,179 Changes in: Accounts Receivable .......................................... (56,833) 2,506 32,775 Inventory ................................................... 20,421 17,636 25,661 Customer Deposits .......................................... (160) (140) 820 Deferred Revenue ............................................. 153,172 8,414 (37,114) ---------- --------- --------- Net Cash Provided by Operating Activities ..................... 164,604 67,454 104,938 ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of Property and Equipment ........................... (20,122) (4,404) (23,198) Purchases of Cash Back Offer ................................. (74,200) -- (25,000) Purchases of Access Card Changeouts ........................... (4,110) -- -- Equity from NRTC Patronage .................................... (17,565) (17,565) (13,353) Proceeds from Sale of Property and Equipment .................. 6,740 -- -- ---------- --------- --------- Net Cash Used in Investing Activities ........................... (109,257) (21,969) (61,551) ---------- --------- --------- NET DECREASE IN MEMBERS' EQUITY ................................. (55,347) (45,485) (43,387) NET CHANGE IN CASH ............................................. -- -- -- CASH -- BEGINNING OF PERIOD .................................... -- -- -- ---------- --------- --------- CASH -- END OF PERIOD .......................................... $ -- $ -- $ -- ========== ========= =========
See accompanying notes to the financial statements. F-54 MIDWEST MINNESOTA DBS, LLC NOTES TO FINANCIAL STATEMENTS December 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: This summary of significant accounting policies of Midwest Minnesota DBS, LLC is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Business Activity -- The Company is primarily engaged in the programming service of Direct TV via satellite. They also retail satellite dish systems to the general public. Property and Equipment -- Property and equipment are carried at cost. Depreciation is calculated on the straight-line or accelerated methods over the estimated useful lives of the assets. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories -- Inventories consist primarily of digital satellite systems (DSS) and are stated at the lower of cost (first-in, first-out) or market value. Amortization of Other Assets -- The cost of organizing, starting up, acquiring franchises, and selling DSS systems is being amortized over 5-15 years on a straight line basis. Income Taxes -- The Company is organized as an LLC partnership and all respective income and loss items are taxed to the respective partners. NOTE 2 -- PROPERTY AND EQUIPMENT Property and equipment are summarized by major classifications as follows: Computer Equipment .................. $ 17,708 Demo Equipment ..................... 22,136 Vehicle .............................. 18,293 Leasehold Improvements ............ 2,276 --------- 60,413 Less Accumulated Depreciation ...... (23,460) --------- $ 36,953 ========= NOTE 3 -- OTHER ASSETS Other assets are summarized by major classifications as follows: Investment in NRTC .................. $ 37,705 Franchise Cost ..................... 630,400 Marketing and Development ......... 72,905 Organization Costs .................. 2,163 Start-Up Costs ..................... 15,274 Cash Back Offer ..................... 74,200 Access Card Change-Out ............ 4,110 ---------- 836,757 Less Accumulated Amortization ...... (245,760) ---------- $ 590,997 ========== F-55 MIDWEST MINNESOTA DBS, LLC NOTES TO FINANCIAL STATEMENTS -- (Continued) December 31, 1996 NOTE 3 -- OTHER ASSETS -- (Continued) The Company co-operates with NRTC in administering the DSS programming services. The investment in NRTC is this Company's equity in NRTC from their participation with them for the years 1994 and 1995. This investment is not being amortized. The remaining other assets are being amortized according to their estimated years of value. NOTE 4 -- TRANSACTIONS WITH RELATED PARTIES The Company leases office space from a company that is substantially owned by a partner of Midwest Minnesota DBS, LLC. The lease is a five-year lease starting on August 1, 1995. The lease calls for payments of $450 per month. Total lease payments for the year ended December 31, 1996, were $5,400. NOTE 5 -- SEP PENSION PLAN The Company sponsors a simplified employee pension plan (SEP) for all of its employees. The Company will match contributions by its employees of 50% of their contribution, up to 4%. The Company's pension contribution for the year ended December 31, 1996, was $1,472. The Company raised the matching percentage up to 6% at January 1, 1997. NOTE 6 -- SUBSEQUENT EVENT The Company has entered into an agreement to sell all of the assets and business operations to an unrelated party. The sale is scheduled to close on August 8, 1997. F-56 INDEPENDENT AUDITOR'S REPORT To the Shareholders Turner-Vision, Inc. Bluefield, West Virginia We have audited the accompanying statement of net assets to be sold of Turner-Vision, Inc. (an S-Corporation) DBS Operations as of December 31, 1996 and the related statements of operations and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of net assets to be sold was prepared to present the net assets of Turner-Vision, Inc. DBS Operations to be acquired by Pegasus Communications Corporation (Pegasus) pursuant to the purchase agreement described in Note 7, and is not intended to be a complete presentation of the assets and liabilities of Turner-Vision, Inc. and its DBS Operation. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets to be sold of Turner-Vision, Inc. DBS Operations as of December 31, 1996 and the results of operations and cash flows for the year then ended pursuant to the purchase agreement referred to in Note 7, in conformity with generally accepted accounting principles. Grigoraci, Trainer, Wright & Paterno Charleston, West Virginia June 6, 1997 F-57 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS STATEMENT OF NET ASSETS TO BE SOLD AS OF DECEMBER 31, 1996 CURRENT ASSETS: Subscriber accounts receivable, less allowance for doubtful accounts of $3,813 $ 171,265 Equipment held for resale ................................................... 92,574 --------- TOTAL CURRENT ASSETS ...................................................... 263,839 --------- DIRECT BROADCAST SATELLITE FRANCHISE, net of accumulated amortization ......... 623,179 --------- PROPERTY AND EQUIPMENT, at cost: Property and equipment ...................................................... 1,855 Less: accumulated depreciation ............................................. (719) --------- PROPERTY AND EQUIPMENT, NET ................................................ 1,136 --------- TOTAL ASSETS ............................................................... 888,154 --------- CURRENT LIABILITIES: Accrued liabilities ......................................................... 84,372 Customer advance payments ................................................... 15,076 Unearned revenue ............................................................ 176,139 --------- TOTAL CURRENT LIABILITIES ................................................ 275,587 --------- NET ASSETS TO BE SOLD ...................................................... $ 612,567 =========
The accompanying notes are an integral part of the financial statements F-58 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 OPERATING REVENUES: Programming and equipment sales, net ........................ $ 2,368,081 Uncollectible operating revenues ........................... (26,570) Other operating revenues .................................... 16,934 ----------- TOTAL OPERATING REVENUES ................................. 2,358,445 ----------- OPERATING EXPENSES: Programming ................................................ 1,074,320 Cost of equipment sold .................................... 997,545 Payroll and payroll related expenses ........................ 183,854 Advertising, maintenance and other operating expenses ...... 762,505 Depreciation and amortization .............................. 85,576 Allocated costs (Note 5) .................................... 103,360 ----------- TOTAL OPERATING EXPENSES ................................. 3,207,160 ----------- OPERATING LOSS .......................................... $ (848,715) ===========
The accompanying notes are an integral part of the financial statements F-59 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Operating loss ....................................... $ (848,715) ADJUSTMENT TO RECONCILE OPERATING LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization ........................ 85,576 Change in assets and liabilities: Increase in accounts receivable ..................... (95,656) Decrease in equipment held for resale ............... 68,793 Increase in accounts payable ........................ 159,327 Increase in accrued liabilities ..................... 45,282 Increase in customer advance payments ............... 8,286 Increase in unearned revenue ........................ 124,354 Increase in amount due to Turner-Vision, Inc. ...... 537,585 ----------- Total adjustments ................................. 933,547 ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 84,832 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ................................. (2,226) ----------- NET CHANGE IN CASH ................................. $ 82,606 =========== The accompanying notes are an integral part of the financial statements F-60 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Turner-Vision, Inc. (the Company), through its DBS operations, markets and distributes direct broadcast satellite services to cable and noncable television subscribers residing within a five county area in southern West Virginia and southwestern Virginia. The Company obtained these exclusive rights to its service territory by investment with the National Rural Telecommunications Cooperative (NRTC). Subscriber Accounts Receivable Subscriber accounts receivable represents amounts due from customers for satellite television services and includes amounts billed, but unearned at each year-end. Equipment Held for Resale The Company's DBS operations sells direct broadcast satellite receivers and dishes, and supplies and materials commonly used for satellite installations. At December 31, 1996, the equipment is carried at the lower of cost or market, on a specific identification method. Property and Equipment Property and equipment are stated at original cost and include display equipment and various tools, equipment and supplies for installation and maintenance of DirectTV systems. Depreciation expense for the year ended December 31, 1996 was $3,398. Subsequent to December 31, 1996, the Company's DBS operations acquired five vehicles from another company controlled by the Company's shareholders. Since the vehicles were not acquired until after December 31, 1996, they are not included in the accompanying financial statements. The vehicles were included in the personal property sold to Pegasus under a Contribution Agreement between Pegasus and the Company, dated March 10, 1997. Revenue Recognition The Company's DBS operations recognizes revenues monthly for DBS services which have been earned through the end of the month. The unearned portion of billed services is recorded as unearned revenue. The Company's DBS operations recognized revenues from DBS equipment sales at the time of sale. Advertising Costs Advertising costs are expensed as incurred. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-61 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS NOTES TO FINANCIAL STATEMENTS -- (Continued) AS OF DECEMBER 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Concentration of Credit Risk Financial instruments that potentially subject the Company's DBS operations to concentration of credit risk consist principally of trade accounts receivable. The risk is limited due to the large number of individuals comprising the Company's DBS customer base. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company's DBS operations monitors the exposure for credit losses and maintains an allowance for anticipated losses. NOTE 2 -- DIRECT BROADCAST SATELLITE FRANCHISE During 1993, the Company invested $821,775 with NRTC, acquiring exclusive franchise rights to market direct broadcast satellite services to cable and noncable television subscribers residing within a five county area in southern West Virginia and southwestern Virginia. This investment is in an agreement with NRTC for the rights to provide broadcast services to this service territory for a period of approximately ten years, which is the expected life of the satellite. The satellite was launched in late 1993 and became available for use by the Company in July 1994. Amortization expense for these rights for the year ended December 31, 1996 was $82,178. NOTE 3 -- INCOME TAXES Effective July 1, 1988, the Company elected by unanimous consent of its shareholders to be taxed under the provision of Subchapter S of the Internal Revenue Code. Under such election, the Company's federal and state income or loss is passed through to the individual shareholders. Therefore, no provision or liability for income tax has been included in these financial statements. NOTE 4 -- CONTINGENCY The Company's DBS operations relies on NRTC as its sole provider of programming via direct broadcast satellite services. NOTE 5 -- ALLOCATED COSTS The accompanying statements of operations include costs allocated from the Company to the Company's DBS operations for use of common property and services. The costs were allocated on a proportional cost basis. The Company's management believes its method of allocation is reasonable. NOTE 6 -- RELATED PARTY TRANSACTIONS The Company's DBS operations purchased customer satellite installation services from another company that is controlled by the Company's shareholders. For the year ended December 31, 1996, charges paid by the Company's DBS operations for installation services totaled $425,310. NOTE 7 -- SUBSEQUENT EVENTS Acquisition of DBS Operations Pegasus Communications Corporation entered into a Contribution Agreement with the Company. The effective closing date of this transaction was March 10, 1997. Pursuant to the terms of the agreement, Pegasus purchased certain net assets of the Company's DBS operations for $7 million, plus $1,400 for each excess subscriber over 4,800 subscribers plus or minus, as applicable, the estimated operating adjustments. The total cash consideration paid to the Company by Pegasus at the closing totaled $8,189,267. In addition, Pegasus issued to the Company 3,000 shares of Pegasus Satellite Television of Virginia, Inc., Series A preferred stock, F-62 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS NOTES TO FINANCIAL STATEMENTS -- (Continued) AS OF DECEMBER 31, 1996 NOTE 7 -- SUBSEQUENT EVENTS -- (Continued) and assigned and transferred to the Company Pegasus warrants to purchase 283,969 shares of Pegasus Communications Corporation, Class A Common Stock. The Series A preferred stock has a stated price of $1,000 per share and is subject to certain transfer restrictions. The warrants have an exercise price of $11.81 per share. The historic statements herein include the net assets to be sold and the related results of operations and cash flows for the Company's DBS operations as of and for the year ended December 31, 1996. The Company was notified by Pegasus by a letter dated May 28, 1997 asserting indemnification claims pursuant to the Contribution Agreement, dated as of March 10, 1997 for an alleged overstatement in the number of active DirectTV subscribers. Pegasus has asked for damages in the amount of $459,200. Outside counsel for the Company has advised that at this stage no opinion can be offered as to the probable outcome or the amount or range of potential loss. F-63 INDEPENDENT AUDITORS' REPORT The Board of Directors Pioneer Services Corporation Greenville, Alabama We have audited the accompanying balance sheet of the DBS Operations of Pioneer Services Corporation (operating division of Pioneer Services Corporation as more fully described in Note 1 to financial statements) (the Division) as of September 30, 1996 and the related statements of operations and retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the DBS Operations of Pioneer Services Corporation as of September 30, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements may not necessarily be indicative of the conditions that would have existed or the results of operations had the Division been unaffiliated with Pioneer Services Corporation. As discussed in Notes 1 and 6 to the financial statements, Pioneer Services Corporation provides financing and certain general and administrative and other corporate services to the Division. Jackson Thornton & Co., P.C. Montgomery, Alabama January 14, 1997, except for Note 7 as to which the date is September 26, 1997 F-64 DBS OPERATIONS OF PIONEER SERVICES CORPORATION GREENVILLE, ALABAMA BALANCE SHEETS ASSETS
September 30, June 30, 1996 1997 --------------- ------------ (unaudited) CURRENT ASSETS: Cash ............................................................... $ 25,907 $ 26,347 Accounts receivable: Customers, less provision for doubtful accounts of $20,000 at Sep- tember 30, 1996 and June 30, 1997 338,500 340,699 Inventories ......................................................... 330,551 163,145 ------------ ------------ Total current assets ............................................. 694,958 530,191 ------------ ------------ EQUIPMENT: Leased property (net of accumulated depreciation of $210,964 and $624,124 at September 30, 1996 and June 30, 1997, respectively)...... 3,026,009 2,622,700 ------------ ------------ OTHER ASSETS: Deferred charges ...................................................... 1,884 2,656 ------------ ------------ Total assets ................................................... $ 3,722,851 $ 3,155,547 ============ ============ LIABILITIES AND DIVISION DEFICIENCY CURRENT LIABILITIES: Accounts payable ..................................................... $ 161,257 $ 217,302 Accrued liabilities .................................................. 34,758 -- Deferred credits ..................................................... 195,065 232,417 ------------ ------------ Total current liabilities ...................................... 391,080 449,719 ------------ ------------ LONG-TERM DEBT: Notes payable ........................................................ 5,057,051 4,722,867 ------------ ------------ Total liabilities ............................................... 5,448,131 5,172,586 ------------ ------------ EQUITY: Division deficiency .................................................. (1,725,280) (2,017,039) ------------ ------------ Total liabilities and division deficiency ....................... $ 3,722,851 $ 3,155,547 ============ ============
The accompanying notes are an integral part of these financial statements. F-65 DBS OPERATIONS OF PIONEER SERVICES CORPORATION STATEMENTS OF OPERATIONS AND DIVISION DEFICIENCY
Nine months ended Year ended ----------------------------------- September 30, June 30, June 30, 1996 1996 1997 --------------- ----------------- --------------- (unaudited) (unaudited) OPERATING REVENUES ........................ $ 3,027,960 $ 1,966,721 $ 3,912,923 OPERATING EXPENSES ........................ (2,843,580) (2,182,553) (3,922,294) ------------- ------------- ------------- INCOME (LOSS) FROM OPERATIONS ............ 184,380 (215,832) (9,371) INTEREST EXPENSE ........................... (215,147) (156,990) (282,388) ------------- ------------- ------------- NET INCOME (LOSS) ........................ (30,767) (372,822) (291,759) DIVISION DEFICIENCY AT BEGINNING OF PERIOD . (1,694,513) (1,694,513) (1,725,280) ------------- ------------- ------------- DIVISION DEFICIENCY AT END OF PERIOD ...... $ (1,725,280) $ (2,067,335) $ (2,017,039) ============= ============= =============
The accompanying notes are an integral part of these financial statements. F-66 DBS OPERATIONS OF PIONEER SERVICES CORPORATION STATEMENTS OF CASH FLOWS
Nine months ended Year ended -------------------------------- September 30, June 30, June 30, 1996 1996 1997 --------------- -------------- --------------- (unaudited) (unaudited) CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES: Net loss ............................................. $ (30,767) $ (372,822) $ (291,759) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ........................ 203,739 126,614 413,160 Provision for losses on notes and accounts receivable 105,417 79,063 152,092 Decrease (increase) in operating assets and increase (decrease) in operating liabilities: Accounts receivable .............................. (489,836) (218,779) (154,291) Inventories ....................................... (24,869) (182,696) 167,406 Accounts payable ................................. (69,393) 214,025 56,045 Accrued liabilities .............................. (8,050) 8,816 (34,758) Deferred credits ................................. 138,563 58,875 37,352 ------------ ------------ ----------- Net cash from (used for) operating activities (175,196) (286,904) 345,247 ------------ ------------ ----------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Capital expenditures ................................. (2,796,178) (2,096,623) (9,851) Net change in deferred assets ........................ (8,406) (1,357) (772) ------------ ------------ ----------- Net cash used for investing activities ......... (2,804,584) (2,097,980) (10,623) ------------ ------------ ----------- CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES: Proceeds from long-term debt ........................... 2,983,181 2,377,490 (334,184) ------------ ------------ ----------- Net cash from (used for) financing activities 2,983,181 2,377,490 (334,184) ------------ ------------ ----------- NET INCREASE (DECREASE) IN CASH ........................ 3,401 (7,394) 440 CASH AT BEGINNING OF PERIOD ........................... 22,506 22,506 25,907 ------------ ------------ ----------- CASH AT END OF PERIOD ................................. $ 25,907 $ 15,112 $ 26,347 ============ ============ =========== SUPPLEMENTAL INFORMATION: Cash paid for interest on long-term debt ............... $ 52,896 $ 41,550 $ 270,150 ============ ============ ===========
The accompanying notes are an integral part of these financial statements. F-67 DBS OPERATIONS OF PIONEER SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE 1 - PRESENTATION AND NATURE OF BUSINESS: Basis of presentation - The DBS operations of Pioneer Services Corporation (the Division) are comprised of the assets and liabilities of the division of Pioneer Services Corporation (Pioneer) which provides direct broadcast satellite (DBS) services. Pioneer intends to sell these assets pursuant to an agreement with Pegasus Communications Holdings, Inc. (see Note 7). This division has no separate legal existence apart from Pioneer. The historical financial statements of the DBS operations of Pioneer do not necessarily reflect the results of operations or financial position that would have existed if the DBS operations were an independent company. Pioneer provides certain general and administrative and other corporate services to the Division (see Note 6). Nature of business - The Corporation sells direct broadcast satellite equipment and programming for television to consumers in rural central Alabama franchised by the National Rural Telecommunication Cooperative (NRTC). While this franchise is exclusive as it relates to programming provided through NRTC, other programming providers may offer DBS services within the Division's market. Under the franchise agreement, NRTC leases satellite capacity through which programming is transmitted. The NRTC provides certain billing functions for the Division. The Division extends credit to its customers who are primarily in the State of Alabama. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Inventories - Inventories are stated at the lower of cost (first-in, first-out (FIFO) method) or market. Equipment - Equipment is stated at cost. Depreciation of equipment is computed on a straight-line basis over the useful lives of the assets. The useful life of equipment held at the balance sheet date was determined to be from five to seven years. The useful life of direct broadcast satellite equipment is estimated to be seven years. Depreciation expense on all equipment totaled $195,958 in 1996. Leased property is leased to customers on a monthly basis. In 1993, the Division borrowed $1,400,520 to acquire the franchise for the DBS service areas which it now serves. This loan was secured by the franchise for satellite television service. This note was satisfied in full on September 30, 1995 when Pioneer Services Corporation transferred the franchise for satellite television service to Pioneer Electric Cooperative. Deferred credits - Deferred credits include programming charges which have been collected in advance from the consumer. These charges are brought into income as the service is provided to the consumer. Revenue recognition - Revenue in connection with programming services and associated costs are recognized when such services are provided. Revenue in connection with the sale of equipment and installation and associated costs are recognized when the equipment is installed. Income taxes - Pioneer is established as a not-for-profit organization under the laws of the State of Alabama. Pioneer is subject to federal income tax. The Division is included in the tax return of Pioneer. Accordingly income taxes have been presented in these financial statements as though the Division filed a separate federal income tax return. The Division accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (see Note 5). Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Supplier - The Division purchases all of its programming from NRTC. The cost of programming was $1,022,400 for 1996. F-68 DBS OPERATIONS OF PIONEER SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (Continued) SEPTEMBER 30, 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued) Unaudited data - The balance sheet as of June 30, 1997 and the statements of operations and division deficiency and cash flows for the nine months ended June 30, 1996 and 1997 have been prepared by the Division's management and have not been audited. The data as of June 30, 1997 and for the nine months ended June 30, 1996 and 1997 has not subjected to any auditing procedures and, accordingly, we do not express an opinion on the data. The results of operations for the nine months ended June 30, 1996 and 1997 are not necessarily indicative of operating results for the full year. NOTE 3 - CASH AND CASH EQUIVALENTS: The Division maintains its cash accounts in a bank located in Ohio. The account at this bank is guaranteed by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000. At September 30, 1996, all of the Division's cash was insured. NOTE 4 - LONG-TERM DEBT: Long-term debt consists of the following: NRUCFC - variable interest rate, currently 6.20%; secured by all assets of Pioneer; note matures April 17, 2000....... $ 2,760,551 Pioneer Electric Cooperative - interest rate of 6.75%; unsecured; note matures December 19, 1997................... 2,296,500 ----------- Totals ................................................. $ 5,057,051 ===========
Annual maturities on long-term debt are as follows: September 30, 1998 .................................. $ 2,296,500 September 30, 2000 .................................. 2,760,551 ------------ Total ........................................... $ 5,057,051 ============ NOTE 5 - INCOME TAXES: Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109) requires companies to record deferred tax assets or liabilities for the deferred tax consequences of all temporary differences. The Statement requires that deferred tax balances be adjusted to reflect new tax rates when they are enacted into law. Also, SFAS 109 requires the establishment of an asset and/or liability to recognize the cumulative effect of deferred tax activity. The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are provided for certain temporary differences principally due to the use of accelerated depreciation for income tax purposes. Such deferred taxes are credited to income as the related temporary differences reverse. There is no provision or benefit for income taxes due to net losses incurred and the effect of recording a 100% valuation allowance on net deferred tax assets. F-69 DBS OPERATIONS OF PIONEER SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (Continued) SEPTEMBER 30, 1996 NOTE 5 - INCOME TAXES: -- (Continued) Significant items comprising the Division's deferred tax assets and liabilities at September 30, 1996 are as follows: Net deferred income tax asset: Deferred tax asset: Benefit from net operating loss carryforwards expiring through the year 2012 .............................. $ 194,400 Deferred tax liability: Depreciation expense ................................. (61,560) ---------- Net deferred tax asset ................................. 132,840 Valuation allowance .................................... (132,840) ---------- Net deferred tax balance ........................... $ 0 ==========
NOTE 6 - RELATED PARTIES: Some of the Pioneer Services Corporation's directors also serve as directors of Pioneer Electric Cooperative (PEC). Pioneer Services Corporation is managed in accordance with a management contract between Pioneer Services Corporation and PEC. At September 30, 1996, PEC is the guarantor of the long-term debt payable to NRUCFC. As disclosed in Note 4, the Division has notes payable to PEC for capital expenditures and working capital deficiencies. Interest expense on PEC loans for the year ended September 30, 1996 includes $60,719. Interest paid to PEC for the year ended September 30, 1996 was $52,896. Accrued interest payable at September 30, 1996 includes $35,507 due to PEC. NOTE 7 - SUBSEQUENT EVENT: Subsequent to January 14, 1997, Pioneer entered into a letter of intent with Pegasus Communications Holdings, Inc. (Pegasus). The terms of this letter are subject to change pursuant to ongoing negotiations between Pegasus and Pioneer. Under the present understanding of the terms of the negotiations as of September 26, 1997, Pioneer would sell to Pegasus its operating assets along with its subscribers list for the Division for a negotiated price. Although the Division believes that this transaction will be consummated, there can be no assurances that it will occur. F-70 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Basis of Presentation Pro forma consolidated statement of operations and other data for the year ended December 31, 1996, the six months ended June 30, 1997 and the twelve months ended June 30, 1997 give effect to (i) the Portland, Maine TV acquisition, which closed on January 29, 1996, and the Tallahassee, Florida TV acquisition, which closed on March 8, 1996, (ii) the acquisition of a Puerto Rico cable system, which closed on August 29, 1996, (iii) the Completed DBS Acquisitions, (iv) the Pending DBS Acquisitions, (v) the sale of the New Hampshire cable system (the "New Hampshire Cable Sale"), which closed on January 31, 1997, (vi) Pegasus' initial public offering of 3,000,000 shares of Class A Common Stock (the "Initial Public Offering"), which was consummated on October 8, 1996, and Pegasus' public offering of 100,000 shares of 12 3/4% Series A Cumulative Exchangeable Preferred Stock and warrants to purchase 193,600 shares of Class A Common Stock (the "Unit Offering"), which was consummated on January 27, 1997, and (vii) the Senior Notes Offering, all as if such events had occurred at the beginning of each period. The pro forma condensed consolidated balance sheet as of June 30, 1997 gives effect to (i) payments in connection with the Completed DBS Acquisitions, (ii) the Pending DBS Acquisitions and the New Credit Facility, which, if not completed prior to the consummation of the Senior Notes Offering, are anticipated to occur in the fourth quarter of 1997, (iii) the closing of an existing credit facility and the payment of accrued interest to holders of the PM&C 12 1/2% Series B Senior Subordinated Notes due 2005 ("PM&C Notes"), and (iv) the Senior Notes Offerring and the proceeds thereof, as if such events had occurred on such date. The acquisitions are accounted for using the purchase method of accounting. The total costs of such acquisitions are allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values. The allocation of the purchase price included in the pro forma financial statements is preliminary. The Company does not expect that the final allocation of the purchase price will materially differ from the preliminary allocation. The pro forma adjustments are based upon available information and upon certain assumptions that the Company believes are reasonable. The pro forma consolidated financial information should be read in conjunction with the Notes to Pro Forma Consolidated Statements of Operation, as well as the financial statements and notes thereto of the acquisitions, included elsewhere in this report. The pro forma consolidated financial information is not necessarily indicative of the Company's future results of operations. There can be no assurance whether or when the Pending DBS Acquisitions will be consummated. F-71 Pro Forma Consolidated Balance Sheet As of June 30, 1997 (Dollars in thousands)
Completed Pending DBS DBS Actual Acquisitions(a) Acquisitions(b) ------------ ----------------- ----------------- ASSETS Cash and cash equivalents ......... $ 12,518 ($ 802) ($ 7,419) Restricted cash ..................... 6,892 Accounts receivable, net ............ 10,482 Inventory ........................... 721 Prepaid expenses and other current assets .............................. 4,779 Property and equipment, net ......... 25,500 Intangibles, net .................. 192,873 $73,720 36,075 Other assets ........................ 2,147 ---------- ------- -------- Total assets ..................... $ 255,912 $72,918 $28,656 ========== ======= ======== LIABILITIES AND EQUITY Current liabilities ............... $ 10,440 Accrued interest .................. 5,771 Current portion of long-term debt ... 3,884 Current portion of program rights payable ........................... 1,102 Long-term debt, net ............... 83,061 $2,218 $ 975 PSH Credit Facility ............... $70,700 21,000 New Credit Facility .................. Senior Notes ........................ Program rights payable ............ 1,542 Other long term liabilities ......... 1,389 Preferred Stock ..................... 105,313 Minority Interest .................. 3,000 Class A Common Stock ............... 53 3 Class B Common Stock ............... 46 Additional paid in capital ......... 59,463 6,678 Retained earnings .................. (19,152) ---------- ------- -------- Total liabilities and equity ...... $ 255,912 $72,918 $28,656 ========== ======= ========
The Senior Notes Other(c) Subtotal Offering(d) Pro Forma ------------ ------------ ------------- ------------ ASSETS Cash and cash equivalents ......... $25,479 $ 29,776 ($ 6,650) $ 23,126 Restricted cash ..................... (6,892) -- Accounts receivable, net ............ 10,482 10,482 Inventory ........................... 721 721 Prepaid expenses and other current assets .............................. 4,779 4,779 Property and equipment, net ......... 25,500 25,500 Intangibles, net .................. 302,668 6,050 308,718 Other assets ........................ 2,147 2,147 -------- ---------- ---------- ---------- Total assets ..................... $18,587 $ 376,073 ($ 600) $ 375,473 ======== ========== ========== ========== LIABILITIES AND EQUITY Current liabilities ............... $ 10,440 $ 10,440 Accrued interest .................. ($ 5,313) 458 458 Current portion of long-term debt ... 3,884 3,884 Current portion of program rights payable ........................... 1,102 1,102 Long-term debt, net ............... 86,254 86,254 PSH Credit Facility ............... 23,900 115,600 ($ 115,600) -- New Credit Facility .................. -- Senior Notes ........................ 115,000 115,000 Program rights payable ............ 1,542 1,542 Other long term liabilities ......... 1,389 1,389 Preferred Stock ..................... 105,313 105,313 Minority Interest .................. 3,000 3,000 Class A Common Stock ............... 56 56 Class B Common Stock ............... 46 46 Additional paid in capital ......... 66,141 66,141 Retained earnings .................. (19,152) (19,152) -------- ---------- ---------- ---------- Total liabilities and equity ...... $18,587 $ 376,073 ($ 600) $ 375,473 ======== ========== ========== ==========
- ------------ (a) To record 12 Completed DBS Acquisitions which occurred after June 30, 1997. (b) To record eight Pending DBS Acquisitions. (c) To record additional borrowings under an existing credit facility and the payment of interest on July 1, 1997 to holders of the PM&C Notes. (d) To record the proceeds from the Senior Notes Offering and the uses of such proceeds and the use of cash to finance the Pending DBS Acquisitions and to record costs in connection with the New Credit Facility. F-72 Pro Forma Consolidated Statement of Operations Year Ended December 31, 1996 (Dollars in thousands)
Acquisitions ------------------------------------------------------------ Completed Pending DBS DBS Actual TV(a) Cable(b) Acquisitions(c) Acquisitions(d) Income Statement Data: ------------ ---------- ---------- ----------------- ----------------- Net Revenues: TV .................. $ 28,488 $ 651 DBS .................. 5,829 $27,930 $6,125 Cable ............... 13,496 $4,056 Other ............... 116 ---------- ------ ------ -------- ------- Total net revenues . 47,929 651 4,056 27,930 6,125 ---------- ------ ------ -------- ------- Location operating expenses: TV .................. 18,726 537 DBS .................. 4,958 27,599 5,367 Cable ............... 7,192 2,448 Other ............... 28 Incentive compensation ......... 985 Corporate expenses ... 1,429 33 88 1,429 85 Depreciation and amortization ........... 12,061 17 365 1,983 783 ---------- ------ ------ -------- ------- Income (loss) from operations ......... 2,550 64 1,155 (3,081) (110) Interest expense ...... (12,455) (585) (482) (1,269) (126) Other income (expense), net .................. 61 3 563 20 Provision (benefit) for income taxes ......... (120) 35 20 (79) 6 Dividends on Series A Preferred Stock ...... ---------- ------ ------ -------- ------- Income (loss) applicable to common shares before extraordinary items .................. ($ 9,724) ($ 553) $ 653 ($ 3,708) ($ 222) ========== ====== ====== ======== ======= Other Data: Location Cash Flow(r) . $ 17,025 $ 114 $1,608 $ 331 $ 757 Operating Cash Flow(r) 15,596 81 1,520 (1,098) 672 Capital Expenditures ... 6,294 96 5,095 445
The NH Senior Cable Previous Sub- Notes Pro Adjustments Sale(e) Offerings(f) total Offering Forma Income Statement Data: ----------------- ------------ -------------- ------------ ----------------- ----------- Net Revenues: TV .................. $ 17(g) $ 29,156 $ 29,156 DBS .................. 39,884 39,884 Cable ............... ($ 1,688) 15,864 15,864 Other ............... 116 116 ------------- -------- --------- --------- Total net revenues . 17 (1,688) 85,020 85,020 ------------- -------- --------- --------- Location operating expenses: TV .................. (43)(h) 19,220 19,220 DBS .................. (7,121)(i) 30,803 30,803 Cable ............... (249)(j) (918) 8,473 8,473 Other ............... 28 28 Incentive compensation ......... (75) 910 910 Corporate expenses ... (1,635)(k) 1,429 1,429 Depreciation and amortization ........... 16,137 (l) (618) $ 97 30,825 $ 800 (p) 31,625 ------------- -------- ---------- --------- ------------ --------- Income (loss) from operations ......... (7,072) (77) (97) (6,668) (800) (7,468) Interest expense ...... (16,342)(m) 11,330 (19,929) (2,307)(q) (22,236) Other income (expense), net .................. (586)(n) 61 61 Provision (benefit) for income taxes ......... 18 (o) (120) (120) Dividends on Series A Preferred Stock ...... (12,750) (12,750) (12,750) ------------- -------- ---------- --------- ------------ --------- Income (loss) applicable to common shares before extraordinary items .................. ($ 24,018) ($ 77) ($ 1,517) ($ 39,166) ($ 3,107) ($42,273) ============= ======== ========== ========= ============ ========= Other Data: Location Cash Flow(r) . $ 7,430 ($ 770) $ 26,496 $26,496 Operating Cash Flow(r) 9,065 (770) 25,067 25,067 Capital Expenditures ... (204) 11,726 11,726
F-73 Pro Forma Consolidated Statement of Operations Six Months Ended June 30, 1997 (Dollars in thousands)
Completed Pending DBS DBS Actual Acquisitions(c) Acquisitions(d) Adjustments Income Statement Data: ------------- ----------------- ----------------- ------------------ Net Revenues: TV ........................ $ 14,636 DBS ........................ 12,771 $11,247 $4,024 Cable ..................... 8,133 Other ..................... 70 --------- -------- ------- ----------- Total net revenues ......... 35,610 11,247 4,024 --------- -------- ------- ----------- Location operating expenses: TV ........................ 9,694 DBS ........................ 9,738 11,050 3,284 ($ 2,918)(i) Cable ..................... 4,365 Other ..................... 13 Incentive compensation ...... 521 Corporate expenses ......... 904 631 45 (676)(k) Depreciation and amortization ............... 10,854 719 420 4,705 (l) --------- -------- ------- ----------- Income (loss) from operations ............... (479) (1,153) 275 (1,111) Interest expense ............ (6,024) (363) (71) (7,105)(m) Other income (expense), net 452 80 10 (90)(n) Provision (benefit) for income taxes ..................... 50 (19) 5 14 (o) Dividends on Series A Preferred Stock ............ (5,313) --------- -------- ------- ----------- Income (loss) applicable to common shares before extraordinary items ......... ($ 11,414) ($ 1,417) $ 209 ($ 8,320) ========= ======== ======= =========== Other Data: Location Cash Flow(r) ...... $ 11,800 $ 197 $ 740 $ 2,918 Operating Cash Flow(r) ...... 10,896 (434) 695 3,594 Capital Expenditures ......... 5,233 2,327 610 The NH Senior Cable Previous Sub- Notes Pro Sale(e) Offerings(f) total Offering Forma Income Statement Data: ------------ -------------- ------------- ----------------- ----------- Net Revenues: TV ........................ $ 14,636 $14,636 DBS ........................ 28,042 28,042 Cable ..................... ($ 135) 7,998 7,998 Other ..................... 70 70 ------- --------- --------- ------------ --------- Total net revenues ......... (135) 50,746 50,746 ------- --------- --------- ------------ --------- Location operating expenses: TV ........................ 9,694 9,694 DBS ........................ 21,154 21,154 Cable ..................... (68) 4,297 4,297 Other ..................... 13 13 Incentive compensation ...... 521 521 Corporate expenses ......... 904 904 Depreciation and amortization ............... (52) 16,646 $ 400(p) 17,046 ------- --------- --------- ------------ --------- Income (loss) from operations ............... (15) (2,483) (400) (2,883) Interest expense ............ $ 3,600 (9,963) (1,154)(q) (11,117) Other income (expense), net 452 452 Provision (benefit) for income taxes ..................... 50 50 Dividends on Series A Preferred Stock ............ (1,062) (6,375) (6,375) ------- --------- --------- ------------ --------- Income (loss) applicable to common shares before extraordinary items ......... ($ 15) $ 2,538 ($ 18,419) ($ 1,554) ($ 19,973) ======= ========= ========= ============ ========= Other Data: Location Cash Flow(r) ...... ($ 67) $ 15,588 $ 15,588 Operating Cash Flow(r) ...... (67) 14,684 14,684 Capital Expenditures ......... (5) 8,165 8,165
F-74 Pro Forma Consolidated Statement of Operations Twelve Months Ended June 30, 1997 (Dollars in thousands)
Acquisitions ------------------------------------------------ Completed Pending DBS DBS Actual Cable(b) Acquisitions(c) Acquisitions(d) Income Statement Data: ------------ ---------- ----------------- ----------------- Net Revenues: TV ..................... $ 31,192 DBS ..................... 17,032 $26,616 $ 7,406 Cable .................. 16,003 $ 866 Other .................. 130 --------- ------- -------- ------- Total net revenues . 64,357 866 26,616 7,406 --------- ------- -------- ------- Location operating expenses: TV ..................... 20,149 DBS ..................... 13,435 26,745 6,441 Cable .................. 8,470 637 Other .................. 32 Incentive compensation ............ 1,076 Corporate expenses ...... 1,624 88 1,399 90 Depreciation and amortization ............. 18,010 164 1,661 832 --------- ------- -------- ------- Income (loss) from operations ............ 1,561 (23) (3,189) 43 Interest expense ......... (12,909) (69) (937) (136) Other income (expense), net ..................... 424 252 13 Provision (benefit) for income taxes ............ 63 (313) (135) 5 Dividends on Series A Preferred Stock ......... (5,313) --------- ------- -------- ------- Income (loss) applicable to common shares before extraordinary items .................. ($ 16,300) $ 221 ($ 3,739) ($ 85) ========= ======= ======== ======= Other Data: Location Cash Flow(r) . $ 22,271 $ 229 ($ 129) $ 965 Operating Cash Flow(r) 20,647 141 (1,528) 875 Adjusted Operating Cash Flow(s) .................. Capital Expenditures ... 8,779 3,899 1,024
The NH Senior Cable Previous Sub- Notes Pro Adjustments Sale(e) Offerings(f) total Offering Forma Income Statement Data: ------------------ ------------ -------------- ------------ ----------------- ----------- Net Revenues: TV ..................... $ 31,192 $ 31,192 DBS ..................... 51,054 51,054 Cable .................. ($ 1,039) 15,830 15,830 Other .................. 130 130 --------- --------- Total net revenues . (1,039) 98,206 98,206 -------- --------- --------- Location operating expenses: TV ..................... 20,149 20,149 DBS ..................... ($ 7,335)(i) 39,286 39,286 Cable .................. (83)(j) (552) 8,472 8,472 Other .................. 32 32 Incentive compensation ............ (66) 1,010 1,010 Corporate expenses ...... (1,577)(k) 1,624 1,624 Depreciation and amortization ............. 12,678 (l) (358) $ 32 33,019 $ 800 (p) 33,819 ------------- -------- --------- --------- ------------ --------- Income (loss) from operations ............ (3,683) (63) (32) (5,386) (800) (6,186) Interest expense ......... (17,314)(m) 11,330 (20,035) (2,201)(q) (22,236) Other income (expense), net ..................... (286)(n) 403 403 Provision (benefit) for income taxes ............ 443 (o) 63 63 Dividends on Series A Preferred Stock ......... (7,437) (12,750) (12,750) ------------- -------- --------- --------- ------------ --------- Income (loss) applicable to common shares before extraordinary items .................. ($ 21,726) ($ 63) $ 3,861 ($ 37,831) ($ 3,001) ($40,832) ============= ======== ========= ========= ============ ========= Other Data: Location Cash Flow(r) . $ 7,418 ($ 487) $ 30,267 $30,267 Operating Cash Flow(r) 8,995 (487) 28,643 28,643 Adjusted Operating Cash Flow(s) .................. 30,372 Capital Expenditures ... (62) 13,640 13,640
F-75 Notes to Pro Forma Consolidated Statements of Operations (a) Financial results of Portland Broadcasting, Inc. and WTLH, Inc. for the beginning of the period to the date of acquisition by the Company. (b) Financial results of Dom's Tele Cable, Inc. for the beginning of the period to the date of acquisition by the Company. (c) Represents the combined financial results of the Completed DBS Acquisitions for the beginning of the period to the date of acquisition by the Company or the end of the period. (d) Represents the combined financial results of the Pending DBS Acquisitions for the period presented. (e) Financial results of the New Hampshire operations of Pegasus Cable Television. (f) To remove interest expense on the debt retired with the proceeds of the Initial Public Offering and the Unit Offering, to eliminate amortization of deferred costs related to an old credit facility, to record amortization of costs incurred in connection with an existing credit facility and to record dividends on Pegasus' Series A Preferred Stock. (g) To reduce the commissions paid by WPXT and WTLH to their national advertising sales representative to conform to the Company's contract. (h) To eliminate payroll expense related to staff reductions and rent expenses incurred from prior acquisitions. (i) Represents elimination of costs associated with 32 call centers that were not acquired and to conform accounting policies with respect to subscriber acquisition costs, net of the Company adding additional customer service representatives. (j) To reflect expense reductions, such as redundant staff, rent, professional fees and utilities implemented in connection with acquisitions and interconnection of its Puerto Rico cable systems (k) To eliminate corporate expenses charged by prior owners. (l) To record additional depreciation and amortization resulting from the purchase accounting treatment of the acquisitions and to conform accounting policies with respect to subscriber acquisition costs. Such amounts are based on a preliminary allocation of the total consideration. The actual depreciation and amortization may change based upon the final allocation of the total consideration to be paid to the tangible and intangible assets acquired. (m) To record the increase in net interest expense associated with the borrowings incurred in connection with the acquisitions described above. (n) To eliminate certain nonrecurring expenses, primarily comprised of legal and professional expenses incurred by the prior owners of the businesses in connection with the acquisitions. (o) To eliminate the net tax benefit in connection with the acquisitions. (p) To record additional amortization resulting from the Senior Notes Offering and the New Credit Facility. (q) Interest expense is adjusted for the Senior Notes Offering and the use of proceeds therefrom and gives effect to the Completed DBS Acquisitions, the New Hampshire Cable Sale, the Unit Offering, the Pending DBS Acquisitions, the Subsidiaries Combination and the New Credit Facility (Dollars in thousands):
Six Months Twelve Months Year Ended Ended Ended 12/31/96 6/30/97 6/30/97 ------------ ------------ -------------- Interest expense: PM&C Notes .............................. $10,625 $ 5,313 $10,625 Senior Notes ........................... 11,069 5,534 11,069 Other debt .............................. 542 270 542 -------- -------- -------- Total ................................. 22,236 11,117 22,236 Interest expense previously recorded ...... 19,929 9,963 20,035 -------- -------- -------- Adjustment ................................. $ 2,307 $ 1,154 $ 2,201 ======== ======== ========
(r) Location Cash Flow is defined as net revenues less location operating expenses. Location operating expenses consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. Operating Cash Flow is defined as income (loss) from operations plus (i) depreciation and amortization and (ii) non-cash incentive compensation. The difference between Location Cash Flow and Operating Cash Flow is that Operating Cash Flow includes cash incentive compensation and corporate expenses. Although Location Cash Flow and Operating Cash Flow are not measures of performance under generally accepted accounting principles, the Company believes that Location Cash Flow and Operating Cash Flow are accepted within the Company's businesses as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such businesses. 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 measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. (s) Adjusted Operating Cash Flow is defined as Operating Cash Flow for the four most recent fiscal quarters less DBS cash flow for the most recent four-quarter period plus DBS cash flow for the most recent quarterly period multiplied by four. F-76 EXHIBIT INDEX Exhibit Description - ---------- ----------- 4.1 Indenture, dated as of October 21, 1997, by and between Pegasus and First Union National Bank, as trustee, relating to the Senior Notes 4.2 Registration Rights Agreement, dated as of October 21, 1997, by and between the Pegasus and CIBC Wood Gund Securities Corp. 99.1 Press release dated October 8, 1997 99.2 Press release dated October 17, 1997 EX-4.1 2 EXHIBIT 4.1 Execution Copy - -------------------------------------------------------------------------------- PEGASUS COMMUNICATION CORPORATION 9 5/8% SENIOR NOTES DUE 2005 --------------------- INDENTURE Dated as of October 21, 1997 --------------------- --------------------- FIRST UNION NATIONAL BANK as Trustee --------------------- - -------------------------------------------------------------------------------
TABLE OF CONTENTS ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE..............................................................1 Section 1.01 Definitions.................................................................................1 Section 1.02 Other Definitions..........................................................................19 Section 1.03 Incorporation by Reference of Trust Indenture Act..........................................19 Section 1.04 Rules of Construction......................................................................20 ARTICLE 2 THE NOTES..............................................................................................20 Section 2.01 Form and Dating............................................................................20 Section 2.02 Execution and Authentication...............................................................21 Section 2.03 Registrar and Paying Agent.................................................................21 Section 2.04 Paying Agent to Hold Money in Trust........................................................22 Section 2.05 Holder Lists...............................................................................22 Section 2.06 Transfer and Exchange......................................................................22 Section 2.07 Replacement Notes..........................................................................36 Section 2.08 Outstanding Notes..........................................................................36 Section 2.09 Treasury Notes.............................................................................37 Section 2.10 Temporary Notes............................................................................37 Section 2.11 Cancellation...............................................................................37 Section 2.12 Defaulted Interest.........................................................................37 ARTICLE 3 REDEMPTION AND PREPAYMENT..............................................................................39 Section 3.01 Notices to Trustee.........................................................................39 Section 3.02 Selection of Notes to Be Redeemed..........................................................39 Section 3.03 Notice of Redemption.......................................................................39 Section 3.04 Effect of Notice of Redemption.............................................................40 Section 3.05 Deposit of Redemption or Purchase Price....................................................40 Section 3.06 Notes Redeemed or Purchased in Part........................................................41 Section 3.07 Optional Redemption........................................................................41 Section 3.08 Mandatory Redemption.......................................................................42 Section 3.09 Offer to Purchase by Application of Excess Proceeds........................................42 ARTICLE 4 COVENANTS..............................................................................................45 Section 4.01 Payment of Notes...........................................................................45 Section 4.02 Maintenance of Office or Agency............................................................45 Section 4.03 Reports....................................................................................46 Section 4.04 Compliance Certificate.....................................................................46 Section 4.05 Taxes......................................................................................47 Section 4.06 Stay, Extension and Usury Laws.............................................................47 Section 4.07 Restricted Payments........................................................................47 Section 4.08 Dividend and Other Payment Restrictions Affecting Subsidiaries............................50 Section 4.09 Incurrence of Indebtedness and Issuance of Preferred Stock.................................50 Section 4.10 Asset Sales................................................................................53
Section 4.11 Transactions with Affiliates...............................................................54 Section 4.12 Liens......................................................................................55 Section 4.13 Limitation of Certain Subsidiary Indebtedness and Preferred Stock.........................55 Section 4.14 Continued Existence........................................................................55 Section 4.15 Offer to Repurchase Upon Change of Control.................................................56 Section 4.16 Limitation on Issuances and Sales of Capital Stock of Wholly Owned Restricted Subsidiaries...............................................................................57 Section 4.17 Limitation on Issuance of Subsidiary Guarantee.............................................57 Section 4.18 No amendment of subordination provisions...................................................58 ARTICLE 5 SUCCESSORS.............................................................................................60 Section 5.01 Merger, Consolidation, or Sale of Assets...................................................60 Section 5.02 Successor Corporation Substituted..........................................................60 ARTICLE 6 DEFAULTS AND REMEDIES..................................................................................61 Section 6.01 events of default..........................................................................61 Section 6.02 Acceleration...............................................................................63 Section 6.03 Other Remedies.............................................................................64 Section 6.04 Waiver of Past Defaults....................................................................64 Section 6.05 Control by Majority........................................................................64 Section 6.06 Limitation on Suits........................................................................64 Section 6.07 Rights of Holders of Notes to Receive Payment..............................................65 Section 6.08 Collection Suit by Trustee.................................................................65 Section 6.09 Trustee May File Proofs of Claim...........................................................65 Section 6.10 Priorities.................................................................................66 Section 6.11 Undertaking for Costs......................................................................66 ARTICLE 7 TRUSTEE ...............................................................................................67 Section 7.01 Duties of Trustee..........................................................................67 Section 7.02 Rights of Trustee..........................................................................68 Section 7.03 Individual Rights of Trustee...............................................................68 Section 7.04 Trustee's Disclaimer.......................................................................69 Section 7.05 Notice of Defaults.........................................................................69 Section 7.06 Reports by Trustee to Holders of the Notes.................................................69 Section 7.07 Compensation and Indemnity.................................................................69 Section 7.08 Replacement of Trustee.....................................................................70 Section 7.09 Successor Trustee by Merger, etc...........................................................71 Section 7.10 Eligibility; Disqualification..............................................................71 Section 7.11 Preferential Collection of Claims Against Company..........................................72 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE...............................................................72 Section 8.01 Option to Effect Legal Defeasance or Covenant Defeasance...................................72 Section 8.02 Legal Defeasance and Discharge.............................................................72 Section 8.03 Covenant Defeasance........................................................................73 Section 8.04 Conditions to Legal or Covenant Defeasance.................................................73
Section 8.05 Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions...................................................................75 Section 8.06 Repayment to Company.......................................................................75 Section 8.07 Reinstatement..............................................................................76 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER.......................................................................76 Section 9.01 Without Consent of Holders of Notes........................................................76 Section 9.02 With Consent of Holders of Notes...........................................................77 Section 9.03 Compliance with Trust Indenture Act........................................................78 Section 9.04 Revocation and Effect of Consents..........................................................78 Section 9.05 Notation on or Exchange of Notes...........................................................79 Section 9.06 Trustee to Sign Amendments, etc............................................................79 ARTICLE 10 MISCELLANEOUS.........................................................................................79 Section 10.01 Trust Indenture Act Controls...............................................................79 Section 10.02 Notices....................................................................................79 Section 10.03 Communication by Holders of Notes with Other Holders of Notes..............................80 Section.10.04 Certificate and Opinion as to Conditions Precedent.........................................80 Section 10.05 Statements Required in Certificate or Opinion..............................................81 Section 10.06 Rules by Trustee and Agents................................................................81 Section 10.07 No Personal Liability of Directors, Officers, Employees and Stockholders...................81 Section 10.08 Governing Law..............................................................................81 Section 10.09 No Adverse Interpretation of Other Agreements..............................................82 Section 10.10 Successors.................................................................................82 Section 10.11 Severability...............................................................................82 Section 10.12 Counterpart Originals......................................................................82 Section 10.13 Table of Contents, Headings, etc...........................................................82
INDENTURE dated as of October 21, 1997 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 9 5/8% Series A Senior Notes due 2005 (the "Series A Notes") and the 9 5/8% Series B Senior Notes due 2005 (the "Series B Notes" and, together with the Series A Notes, the "Notes"): ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "144A Global Note" means a Global Note in the form of Exhibit A hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of, and registered in the name of, the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Notes sold in reliance on Rule 144A. "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 assets 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, however, 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. 1 "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear and Cedel that apply to such transfer or exchange. "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 4.15 hereof and/or the provisions described in Section 5.01 hereof and not by the provisions 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 (i) one or more Permitted Businesses, (ii) a controlling equity interest in any Person whose assets consist primarily of one or more Permitted Businesses and/or (iii) long-term assets that are used in a Permitted Business in a like-kind exchange pursuant to Section 1031 of the Code or any similar or successor provision of the Code. "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. 2 "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 or limited liability company, partnership or membership 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 full faith and credit of 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 $500.0 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days 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, (v) commercial paper having the highest rating obtainable from either Moody's Investors Service, Inc. or Standard & Poor's Corporation and, in each case, maturing within six months after the date of acquisition and (vi) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (i) through (v) of this definition. "Cedel" means Cedel Bank, SA. "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 of 12 3/4% Series A Cumulative Exchangeable Preferred Stock of Pegasus Communications Corporation. "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 at the time beneficially owned (as defined above) 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 of the Company are not Continuing Directors. 3 "Class A Common Stock" means the Company's Class A Common Stock, par value $.01 per share. "Closing Date" means the original date of issuance of the Notes. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means Pegasus Communications Corporation, a Delaware corporation and any and all successors thereto. "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. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 10.02 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 Subsidiary of the Company from any 4 Unrestricted Subsidiary of the Company or 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) 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 fiscal 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. "Custodian" means the Trustee, as custodian with respect to the Notes in global form, or any successor entity thereto. "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. "Definitive Note" means a certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.06 hereof, in the form of Exhibit A hereto except that such Note shall not bear the Global Note Legend and shall not have the "Schedule of Exchanges of Interests in the Global Note" attached thereto. "Depositary" means, with respect to the 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 Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "Disqualified Stock" means any Capital 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 date that is 91 days after the date on which the Notes mature 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 in Section 4.07 hereof. "Eligible Indebtedness" means any Indebtedness other than (i) Indebtedness in the form of, or represented by, bonds or other securities or any guarantee thereof and (ii) Indebtedness which is, or may be, quoted, listed or ordinarily purchased and sold on any stock exchange, automated trading system or over-the-counter or other securities market (including, without prejudice to the 5 generality of the foregoing, the market for securities eligible for resale pursuant to Rule 144A under the Securities Act). "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). "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear system. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Offer" has the meaning set forth in the Registration Rights Agreement. "Exchange Offer Registration Statement" has the meaning set forth in the Registration Rights Agreement. "Existing Indebtedness" means all Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the New Credit Agreement) 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 of the Company (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 investment banking firm of national standing; provided that the fair market value of the assets purchased in an arm's-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 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 Notes" means, individually and collectively, each of the Restricted Global Notes and the Unrestricted Global Notes, in the form of Exhibit A hereto issued in accordance with Sections 2.01, 2.06(b)(iv), 2.06(d)(ii) or 2.06(f) hereof. 6 "Global Note Legend" means the legend which is required to be placed on all Global Notes issued under this Indenture. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America, and the payment for which the United States pledges its full faith and credit. "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 a Note is registered. "IAI Global Note" means the Global Note in the form of Exhibit A hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Notes sold to Institutional Accredited Investors. "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. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness issued with original issue discount and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. 7 "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 of the Restricted Subsidiaries of such Person as of such date (excluding Qualified Subsidiary Stock and 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 (iii) 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. "Indirect Participant" means a Person who holds a beneficial interest in a Global Note through a Participant. "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. "Initial Purchaser" means CIBC Wood Gundy Securities Corp. "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 on such payment for the intervening period. 8 "Letter of Transmittal" means the letter of transmittal to be prepared by the Company and sent to all Holders of Notes for use by such Holders in connection with the Exchange Offer. "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). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. "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. "New Credit Facility" means that certain credit facility, to be entered into by and among the lenders thereunder, PM&C and certain of PM&C's subsidiaries, providing for up to $180.0 million of revolving credit borrowings, with terms substantially similar to the terms described in the Offering Memorandum under the caption "Description of Certain Indebtedness--New Credit Facility" including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith. "Non-Cash Incentive Compensation" means incentive compensation paid to any officer 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 Restricted Stock Plan and the Pegasus 1996 Stock Option Plan. 9 "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. "Non-U.S. Person" means a Person who is not a U.S. Person. "Notes" has the meaning assigned to it in the preamble to this Indenture. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Offering" means the offering of the Notes by the Company. "Offering Memorandum" means the Offering Memorandum, dated October 15, 1997, relating to the Offering. "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 10.05 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, 10 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). "Opinion of Counsel" means an opinion from legal counsel who is not unsatisfactory to the Trustee, that meets the requirements of Section 10.05 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 Indebtedness of the Company or any Subsidiary Guarantor permitted by Section 4.09 hereof, which is pari passu in right of payment with the Notes or any Subsidiary Guarantee. "Participant" means, with respect to the Depositary, Euroclear or Cedel, a Person who has an account with the Depositary, Euroclear or Cedel, respectively (and, with respect to The Depository Trust Company, shall include Euroclear and Cedel). "Participating Broker-Dealer" has the meaning set forth in the Registration Rights Agreement. "Pegasus 1996 Stock Option Plan" means the Pegasus Communications 1996 Stock Option Plan, approved by the Company's stockholders and adopted by the Company in September 1996. "Pegasus Restricted Stock Plan" means the Pegasus Restricted Stock Plan, approved by the Company's stockholders and adopted by the Company in September 1996. "Permitted Businesses" means (i) 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 (ii) any business reasonably related or ancillary to any of the foregoing businesses. 11 "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 Section 4.10 hereof; and (e) other Investments made since the date of this Indenture (measured as of the time made and without giving effect to subsequent changes in value) that do not exceed an amount equal to $15.0 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 term loans, revolving borrowings, letters of credit or other Obligations under any Bank Facility; (ii) Liens securing Eligible 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 Restricted 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 Restricted 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 Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations permitted by clause (vii) 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 Restricted Subsidiary of the Company with respect to obligations that do not exceed $1.5 million at any one time outstanding; (x) Liens on deposits or Cash Equivalents made pursuant to legally binding agreements or non-binding letters of intent to acquire assets (or the Capital Stock of Persons owning such assets), in an amount not to exceed 10% of the purchase price of such assets or Capital Stock; provided that the assets to be acquired (or the Capital Stock of Persons owning such assets) will be owned by the Company or a Restricted Subsidiary of the Company upon consummation of the contemplated acquisition; (xi) Liens encumbering deposits or Cash Equivalents made to secure obligations of the Company to repurchase Capital Stock of the Company pledged to secure obligations of employees of the Company in an aggregate amount not to exceed $5.0 million at any time outstanding and (xii) Liens on assets of or Equity Interests in Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. 12 "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 (or accreted value, if applicable) such Permitted Refinancing Debt does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, 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 Notes, such Permitted Refinancing Debt has a final maturity date later than the final maturity date of the Notes, and is subordinated in right of payment to the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (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; and (v) if such Permitted Refinancing Debt is incurred by a Restricted Subsidiary that is not a Subsidiary Guarantor, such Permitted Refinancing Debt constitutes Eligible Indebtedness. "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). "PM&C" means Pegasus Media & Communications, Inc., a Delaware corporation and a direct Subsidiary of the Company. "PM&C Notes" means PM&C's 12 1/2% Series B Senior Subordinated Notes due 2005. "Principal" means Marshall W. Pagon. "Private Placement Legend" means the legend set forth in Section 2.06(g)(i) to be placed on all Notes issued under this Indenture except where otherwise permitted by the provisions of this Indenture. "PSTV Preferred Stock" means the Series A Preferred Stock, par value $1.00 per share, of Pegasus Satellite Television of Virginia, Inc. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. 13 "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 October 15, 2006 (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 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) October 15, 2004, (c) has no voting or remedial rights and (d) does not permit the payment of cash dividends prior to October 15, 2005 (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 Section 4.07 hereof). Notwithstanding the foregoing, for all purposes under this Indenture, "Qualified Subsidiary Stock" shall be deemed to include the PSTV Preferred Stock. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of October 21, 1997, between the Company and CIBC Wood Gundy Securities Corp., as such agreement may be amended, modified or supplemented from time to time. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Note" means a Global Note bearing the Private Placement Legend and deposited with or on behalf of the Depositary and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Notes initially sold in reliance on Rule 903 of Regulation S. "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 herein. 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 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 Definitive Note" means a Definitive Note bearing the Private Placement Legend. 14 "Restricted Global Note" means a Global Note bearing the Private Placement Legend. "Restricted Investment" means any Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Rule 144" means Rule 144 promulgated under the Securities Act. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 903" means Rule 903 promulgated under the Securities Act. "Rule 904" means Rule 904 promulgated the Securities Act. "SEC" means the Securities and Exchange Commission. "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. "Securities Act" means the Securities Act of 1933, as amended. "Series A Preferred Stock" means the Company's 12 3/4% Series A Cumulative Exchangeable Preferred Stock. "Series A Notes" has the meaning assigned to it in the preamble to this Indenture. "Series B Notes" has the meaning assigned to it in the preamble to this Indenture. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "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 date of this Indenture. "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. 15 "Stated Maturity" means, with respect to any interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subordinated Exchange Note Indenture" means the Indenture filed as an exhibit to the Certificate of Designations which would govern the Subordinated Exchange Notes, if issued, as the same may be amended, but without giving effect to any amendment that materially alters the economic terms thereof. "Subordinated Exchange Notes" means the Company's 12 3/4% Senior Subordinated Exchange Notes due 2007 issuable pursuant to the Subordinated Exchange Note Indenture in exchange for the Company's Series A Preferred Stock. "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 such Person or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such a Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof.) "Subsidiary Guarantee" means the Subsidiary Guarantee by each Subsidiary Guarantor of the Company's payment obligations under this Indenture and the Notes, executed pursuant to the provisions of this Indenture. "Subsidiary Guarantor" means any Restricted Subsidiary that shall have guaranteed, pursuant to a supplemental indenture and the requirements therefor set forth in this Indenture, the payment of all principal of, and interest and premium, if any, on, the Notes and all other amounts payable under the Notes or this Indenture, which guarantee shall be pari passu with or senior to all Indebtedness of such Restricted Subsidiary. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb as amended) as in effect on the date on which this Indenture is qualified under the TIA. "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 16 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 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 Global Note" means a permanent Global Note in the form of Exhibit A attached hereto that bears the Global Note Legend and that has the "Schedule of Exchanges of Interests in the Global Note" attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, representing a series of Notes that do not bear the Private Placement Legend. "Unrestricted Definitive Note" means one or more Definitive Notes that do not bear and are not required to bear the Private Placement Legend. "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 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 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 permitted to be incurred as of such date under 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 17 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 of the Company 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. "U.S. Person" means a U.S. person as defined in Rule 902(o) under the Securities Act. "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. 18 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"..............................................4.15 "Change of Control Payment"............................................4.15 "Change of Control Payment Date".......................................4.15 "Covenant Defeasance"..................................................8.03 "custodian"............................................................6.01 "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 "outstanding"..........................................................8.02 "Paying Agent".........................................................2.03 "Payment Default"......................................................6.01 "Purchase Date"........................................................3.09 "Registrar"............................................................2.03 "Restricted Payments"..................................................4.07 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 Notes and the Subsidiary Guarantees; "indenture security Holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture Trustee" or "institutional Trustee" means the Trustee; "obligor" on the Notes means the Company and any successor obligor upon the Notes. 19 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. ARTICLE 2. THE NOTES SECTION 2.01. FORM AND DATING. (a) General. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes shall be in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the 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. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. (b) Global Notes. Notes issued in global form shall be substantially in the form of Exhibit A attached hereto (including the Global Note Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Notes issued in definitive form shall be substantially in the form of Exhibit A attached hereto (but without the Global Note Legend thereon and without the "Schedule of Exchanges of Interests in the Global Note" attached 20 thereto). Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. (c) Euroclear and Cedel Procedures Applicable. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and Conditions of Cedel Bank" and "Customer Handbook" of Cedel Bank shall be applicable to transfers of beneficial interests in Global Notes that are held by Participants through Euroclear or Cedel Bank. SECTION 2.02. EXECUTION AND AUTHENTICATION. An Officer shall sign the Notes for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by an Officer (an "Authentication Order"), authenticate Notes for original issue up to the aggregate principal amount stated in paragraph 4 of the Notes. The aggregate principal amount of 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 Notes. An authenticating agent may authenticate 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 Holders or an Affiliate of the Company. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Notes may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. 21 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 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 or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Custodian with respect to the Global Notes. 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 or Liquidated Damages, if any, or interest on the 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 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 Section 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 Notes and the Company shall otherwise comply with TIA Section 312(a). SECTION 2.06. TRANSFER AND EXCHANGE. (a) Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, by the Depositary or any such nominee to a successor Depositary or a 22 nominee of such successor Depositary. All Global Notes will be exchanged by the Company for Definitive Notes if (i) the Company delivers to the Trustee notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary, (ii) the Company in its sole discretion determines that the Global Notes (in whole but not in part) should be exchanged for Definitive Notes and delivers a written notice to such effect to the Trustee or (iii) there shall have occurred and be continuing a Default or Event of Default with respect to the Notes. Upon the occurrence of any of the preceding events in (i), (ii) or (iii) above, Definitive Notes shall be issued in such names and denominations as the Depositary shall instruct the Trustee. Global Notes also may be exchanged or replaced, in whole or in part, as provided in Sections 2.07 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note. A Global Note may not be exchanged for another Note other than as provided in this Section 2.06(a), however, beneficial interests in a Global Note may be transferred and exchanged as provided in Section 2.06(b),(c) or (f) hereof. (b) Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs, as applicable: (i) Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Private Placement Legend; provided, however, that prior to the expiration of the Restricted Period, transfers of beneficial interests in the Regulation S Global Note may not be made to a U.S. Person or for the account or benefit of a U.S. Person (other than the Initial Purchaser). Beneficial interests in any Unrestricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b)(i). (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(i) above, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount 23 equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (1) above. Upon consummation of an Exchange Offer by the Company in accordance with Section 2.06(f) hereof, the requirements of this Section 2.06(b)(ii) shall be deemed to have been satisfied upon receipt by the Registrar of the instructions contained in the Letter of Transmittal delivered by the Holder of such beneficial interests in the Restricted Global Notes. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.06(h) hereof. (iii) Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.06(b)(ii) above and the Registrar receives the following: (A) if the transferee will take delivery in the form of a beneficial interest in the 144A Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transferee will take delivery in the form of a beneficial interest in the Regulation S Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transferee will take delivery in the form of a beneficial interest in the IAI Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications and certificates and Opinion of Counsel required by item (3) thereof, if applicable. (iv) Transfer and Exchange of Beneficial Interests in a Restricted Global Note for Beneficial Interests in the Unrestricted Global Note. A beneficial interest in any Restricted Global Note may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Note or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note if the exchange or transfer complies with the requirements of Section 2.06(b)(ii) above and: 24 (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of the beneficial interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Series B Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. If any such transfer is effected pursuant to subparagraph (B) or (D) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the aggregate principal amount of beneficial interests transferred pursuant to subparagraph (B) or (D) above. Beneficial interests in an Unrestricted Global Note cannot be exchanged for, or transferred to Persons who take delivery thereof in the form of, a beneficial interest in a Restricted Global Note. 25 (c) Transfer or Exchange of Beneficial Interests for Definitive Notes. (i) Beneficial Interests in Restricted Global Notes to Restricted Definitive Notes. If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Note, then, upon receipt by the Registrar of the following documentation: (A) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof; (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such beneficial interest is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; (F) if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (G) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, 26 the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c)(i) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein. (ii) Beneficial Interests in Restricted Global Notes to Unrestricted Definitive Notes. A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Definitive Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Series B Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; 27 and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Beneficial Interests in Unrestricted Global Notes to Unrestricted Definitive Notes. If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iii) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iii) shall not bear the Private Placement Legend. (d) Transfer and Exchange of Definitive Notes for Beneficial Interests. (i) Restricted Definitive Notes to Beneficial Interests in Restricted Global Notes. If any Holder of a Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note or to transfer such Restricted Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Note, then, upon receipt by the Registrar of the following documentation: (A) if the Holder of such Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof; (B) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; 28 (C) if such Restricted Definitive Note is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such Restricted Definitive Note is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such Restricted Definitive Note is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; (F) if such Restricted Definitive Note is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (G) if such Restricted Definitive Note is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cancel the Restricted Definitive Note, increase or cause to be increased the aggregate principal amount of, in the case of clause (A) above, the appropriate Restricted Global Note, in the case of clause (B) above, the 144A Global Note, in the case of clause (c) above, the Regulation S Global Note, and in all other cases, the IAI Global Note. (ii) Restricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of a Restricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Series B Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; 29 (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Definitive Notes proposes to exchange such Notes for a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or (2) if the Holder of such Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.06(d)(ii), the Trustee shall cancel the Definitive Notes and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note. (iii) Unrestricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Unrestricted Definitive Note and increase or cause to be increased the aggregate principal amount of one of the Unrestricted Global Notes. If any such exchange or transfer from a Definitive Note to a beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or (iii) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of Definitive Notes so transferred. 30 (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.06(e), the Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.06(e). (i) Restricted Definitive Notes to Restricted Definitive Notes. Any Restricted Definitive Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Definitive Note if the Registrar receives the following: (A) if the transfer will be made pursuant to Rule 144A under the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable. (ii) Restricted Definitive Notes to Unrestricted Definitive Notes. Any Restricted Definitive Note may be exchanged by the Holder thereof for an Unrestricted Definitive Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Note if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Series B Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; 31 (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or (2) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes. A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon receipt of a request to register such a transfer, the Registrar shall register the Unrestricted Definitive Notes pursuant to the instructions from the Holder thereof. (f) Exchange Offer. Upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02, the Trustee shall authenticate (i) one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of the beneficial interests in the Restricted Global Notes tendered for acceptance by Persons that certify in the applicable Letters of Transmittal that (x) they are not broker-dealers, (y) they are not participating in a distribution of the Series B Notes and (z) they are not affiliates (as defined in Rule 144) of the Company, and accepted for exchange in the Exchange Offer and (ii) Definitive Notes in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly, and the Company shall execute and the Trustee shall authenticate and deliver to the Persons designated by the Holders of Definitive Notes so accepted Definitive Notes in the appropriate principal amount. 32 (g) Legends. The following legends shall appear on the face of all Global Notes and Definitive Notes issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture. (i) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Note and each Definitive Note (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form: THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE ACT) OR (B) IT IS AN "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE ACT) (AN "ACCREDITED INVESTOR"), OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SENIOR NOTE IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS SENIOR NOTE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (C) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE ACT, (D) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHED (OR HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SENIOR NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE), (E) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE ACT, (F) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE ACT (IF AVAILABLE) OR (G) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SENIOR NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SENIOR NOTE PURSUANT TO CLAUSES (D), (F) AND (G) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY SUCH CERTIFICATES, LEGAL OPINIONS OR OTHER INFORMATION AS ANY OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANING GIVEN TO THEM BY REGULATION S UNDER THE ACT. 33 (B) Notwithstanding the foregoing, any Global Note or Definitive Note issued pursuant to subparagraphs (b)(iv), (c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.06 (and all Notes issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend. (ii) Global Note Legend. Each Global Note shall bear a legend in substantially the following form: "THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY." (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. (i) General Provisions Relating to Transfers and Exchanges. 34 (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Notes and Definitive Notes upon the Company's order or at the Registrar's request. (ii) No service charge shall be made to a holder of a beneficial interest in a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, 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 any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 3.09, 4.10, 4.15 and 9.05 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (v) The Company shall not be required (A) to issue, to register the transfer of or to exchange any Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (c) to register the transfer of or to exchange a Note between a record date and the next succeeding Interest Payment Date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.02 hereof. (viii) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile. 35 SECTION 2.07. REPLACEMENT NOTES If any mutilated 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 Note, the Company shall issue and the Trustee, upon receipt of an Authentication Order, shall authenticate a replacement 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 a Note is replaced. The Company may charge for its expenses in replacing a Note. Every replacement 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 Notes duly issued hereunder. SECTION 2.08. OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note; however, Notes held by the Company or a Subsidiary of the Company shall not be deemed to be outstanding for purposes of Section 3.07(b) hereof. If a 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 Note is held by a bona fide purchaser. If the principal amount of any 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, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. SECTION 2.09. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, 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 Notes that the Trustee knows are so owned shall be so disregarded. 36 SECTION 2.10. TEMPORARY NOTES. Until certificates representing Notes are ready for delivery, the Company may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of certificated Notes but may have variations that the Company considers appropriate for temporary Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy canceled Notes (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all canceled Notes shall be delivered to the Company. The Company may not issue new Notes to replace Notes that it has 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 Notes, it 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 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 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. 37 ARTICLE 3. REDEMPTION AND PREPAYMENT SECTION 3.01. NOTICES TO TRUSTEE. If the Company is required to make an offer to purchase Notes pursuant to the provisions of Section 3.09 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 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 3.09 hereof have been satisfied, as applicable. SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. If less than all of the Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed among the Holders of the Notes in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not so listed, to be redeemed among the Holders of Notes on a pro rata basis, by lot or by such method as the Trustee deems fair and appropriate; provided that no Notes of $1,000 or less shall be redeemed in part. In the event of partial redemption by lot, the particular 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 Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Note selected for partial redemption, the principal amount thereof to be redeemed. Notes and portions of Notes selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of Notes held by such Holder, even if not a multiple of $1,000, shall be redeemed. A new 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 Note. Notes called for redemption shall become due on the redemption date. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. Except as provided in this Section 3.02, provisions of this Indenture that apply to Notes called for redemption also apply to portions of 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 Notes are to be redeemed at its registered address. 38 The notice shall identify the Notes to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the redemption date upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original; (d) the name and address of the Paying Agent; (e) that 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 Notes called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Notes and/or Section of this Indenture pursuant to which the 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 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, 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 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 Notes to be redeemed or purchased. 39 If 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 Notes to be redeemed or purchased, on and after the applicable redemption or purchase date, interest, if any, ceases to accrue on the Notes or the portions of Notes called for redemption or tendered and not withdrawn in a Change of Control Offer (regardless of whether certificates for such Notes are actually surrendered). If a 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 Note was registered at the close of business on such record date. If any 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 Notes and in Section 4.01 hereof. SECTION 3.06. NOTES REDEEMED OR PURCHASED IN PART. Upon surrender of a 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 Note equal in principal amount to the unredeemed or unpurchased portion of the Note surrendered. SECTION 3.07. OPTIONAL REDEMPTION. (a) The Notes shall not be redeemable at the Company's option prior to October 15, 2001. The Notes may be redeemed, in whole or in part, at the option of the Company on or after October 15, 2001, at the redemption prices specified below (expressed as percentages of the principal amount thereof), in each case, together with accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption, upon not less than 30 nor more than 60 days notice, if redeemed during the twelve-month period beginning on October 15 of the years indicated below: 40 Redemption Year Price - ---- ---------- 2001 104.813% 2002 102.407% 2003 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 Capital Stock to redeem up to 35% of the aggregate principal amount of the Notes at a redemption price of 109.625% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption; provided that, after any such redemption, the aggregate principal amount of the Notes outstanding (excluding Notes held by the Company and its subsidiaries) 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 Capital Stock of the Company. (c) Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof. SECTION 3.08. MANDATORY REDEMPTION. The Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 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 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 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 Notes tendered in response to the Asset Sale Offer. Payment for any 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 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, 41 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 a Note is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender 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 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 and, if any Restricted Subsidiary is required to and does make an offer to holders of its Indebtedness pursuant to a requirement similar to that contained in Section 4.10 and this Section, the notice shall state that fact, that the Offer Amount will be reduced by the amount of Indebtedness required to be purchased pursuant to such other offer, and that the amount of such reduction will not be known until the expiration of such other offer, which shall not be later than the expiration of the Offer Period; (iii) that any Note not tendered or accepted for payment shall continue to accrue interest; (iv) that, unless the Company defaults in making such payment, any 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 a Note purchased pursuant to an Asset Sale Offer may only elect to have all of such Note purchased and may not elect to have only a portion of such Note purchased; (vi) that Holders electing to have a Note purchased pursuant to any Asset Sale Offer shall be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the 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 42 forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased; (viii) that, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased, other than in the case of Holders whose Notes were purchased in whole); and (ix) that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the 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 Notes or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Notes tendered, and shall deliver to the Trustee an Officers' Certificate stating that such 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 Notes an amount equal to the purchase price of the Notes tendered by such Holder of Notes and accepted by the Company for purchase, and the Company shall promptly issue a new Note and the Trustee, upon written request from the Company shall authenticate and mail or deliver such new Note to such Holder of Notes in a principal amount equal to any unpurchased portion of the Note surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder of 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 Notes under this Section 3.09 shall be deemed to be a redemption of Notes. 43 ARTICLE 4. COVENANTS SECTION 4.01. PAYMENT OF NOTES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due 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 all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. 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 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 and Liquidated Damages (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 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 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 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. 44 SECTION 4.03. REPORTS. (a) Whether or not required by the rules and regulations of the SEC, so long as any Notes are outstanding, the Company shall furnish to the Holders of Notes (i) 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 "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 (ii) 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 each case within the time periods specified in the SEC's rules and regulations. In addition, following consummation of the Exchange Offer contemplated by the Registration Rights Agreement, 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 within the time periods set forth in the SEC's rules and regulations (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 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. (b) In addition, the Company has agreed that, for so long as any Notes remain outstanding, it will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to rule 144A(d)(4) under the Securities 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 45 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 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 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 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 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 other payment or distribution on account of the Company's Equity Interests 46 (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 capacities as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or additional shares of such Qualified Subsidiary Stock); (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 (other than any such Equity Interests owned by the Company or any of its Restricted Subsidiaries); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Notes, except a payment of interest or principal at Stated Maturity; (iv) forgive any loan or advance to or other obligation of any Affiliate of the Company (other than a loan or advance to or other obligations of a Wholly Owned Restricted Subsidiary of the Company) which at the time it was made was not a Restricted Payment; or (v) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (v) 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 described 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 clauses (2) and (3) of Section 4.07(b)), is less than the sum of, without duplication, (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, plus (iii) 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 47 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 (iv) 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, liquidation or repayment of such Restricted Investment, plus (v) 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 (vi) 100% of any cash dividends and other cash distributions received by the Company from an Unrestricted Subsidiary, plus (vii) $2.5 million. (b) The foregoing provisions 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 Indenture; (2) the redemption, repurchase, retirement or other acquisition of any Equity Interests or subordinated Indebtedness 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; (3) 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; (4) 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; (5) 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 $5.0 million since the date of this Indenture; (6) the payment of dividends on the Series A Preferred Stock in accordance with the terms thereof as in effect on the Closing Date; provided, however, that cash dividends may not be paid on the Series A Preferred Stock pursuant to this clause (6) prior to July 1, 2002; (7) the issuance of Subordinated Notes in exchange for shares of the Series A Preferred Stock; provided that such issuance is permitted by Section 4.09 hereof; (8) in the event that the Company elects to issue Subordinated Notes in exchange for Series A Preferred Stock, cash payments made in lieu of the issuance of Subordinated Notes having a face amount less than $1,000 and any cash payments representing accrued and unpaid dividends in respect thereof, not to exceed $100,000 in the aggregate in any fiscal year; and (9) cash payments made in lieu of the issuance of additional Subordinated 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) or securities proposed to be transferred or issued 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. 48 (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 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 4.07(a) 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 only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary would otherwise meet 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 Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) the terms of any Indebtedness permitted by this Indenture to be incurred by any Subsidiary of the Company; provided, that, any such Indebtedness permits the payment of cash dividends to the Company in an amount sufficient to enable the Company to make payments of (A) interest required to be paid in respect of the Notes and (B) after July 1, 2002, dividends required to be paid in respect of the Series A Preferred Stock and interest required to be paid in respect of the Notes, if issued, in each case, in accordance with the terms thereof (except during the continuance of a default or event of default under such other Indebtedness), (b) Existing Indebtedness as in effect on the Closing Date, (c) this Indenture, the Notes and the Subsidiary Guarantees, (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 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, (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 or (g) any agreement for the sale of any Subsidiary or its assets that restricts distributions by that Subsidiary pending its sale. 49 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 shall not, and shall not permit any Subsidiary Guarantor to, issue any Disqualified Stock and shall not permit any of its Restricted Subsidiaries that are not Subsidiary Guarantors to issue any shares of preferred stock (other than Qualified Subsidiary Stock); provided, however, that the Company or any Restricted Subsidiary may incur Indebtedness (including Acquired Debt) or issue shares of preferred stock (including Disqualified Stock) if, in each case, (1) the Company's Indebtedness to Adjusted Operating Cash Flow Ratio as of the date on which such Indebtedness is incurred or such preferred stock or Disqualified 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 and (2) no Default or Event of Default would occur as a consequence thereof. The Company shall not, and shall not permit any Subsidiary Guarantor to, incur any Indebtedness that is contractually subordinated to any other Indebtedness of the Company or of such Subsidiary Guarantor, as the case may be, unless such Indebtedness is also contractually subordinated to the Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be, on substantially identical terms; provided, however, that no Indebtedness shall be deemed to be contractually subordinated to any other Indebtedness solely by virtue of being unsecured. (b) The foregoing provisions shall not apply to (collectively, "Permitted Debt"): (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 if the aggregate principal amount at any time outstanding incurred pursuant to this clause (ii) does not exceed $50.0 million; (iii) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (iv) the incurrence by the Company of Indebtedness under the Subordinated Exchange Notes to pay interest on outstanding Subordinated Notes; (v) Indebtedness under the Notes and the Subsidiary Guarantees; 50 (vi) 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 (1) if the Company or a Subsidiary Guarantor 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 Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be, and (2)(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 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; (vii) 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 $7.5 million at any time outstanding, including all Permitted Refinancing Debt incurred pursuant to clause (viii) below to refund, replace or refinance any Indebtedness incurred pursuant to this clause (vii); (viii) 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 (other than intercompany Indebtedness) that was permitted by this Indenture to be incurred; (ix) 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, including all Permitted Refinancing Debt incurred pursuant to clause (viii) above to refund, replace or refinance any Indebtedness incurred pursuant to this clause (ix), not to exceed $7.5 million; and (x) the guarantee by the Company or any Restricted Subsidiary of the Company of Indebtedness of the Company or a Subsidiary of the Company that was permitted to be incurred by another provision of this Section 4.09. For purposes of determining compliance with this Section 4.09, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (x) above or is permitted to be incurred pursuant to Section 4.09(a) hereof and also meets the criteria of one or more of the categories of Permitted Debt described in clauses (i) through (x) above, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this Section 4.09 and may from time to time reclassify such item of Indebtedness in any manner in which such item could be incurred at the time of such reclassification. For purposes of this paragraph, "Indebtedness" includes Disqualified Stock and preferred stock of Subsidiaries. Accrual of interest and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this Section 4.09. 51 SECTION 4.10. ASSET SALES. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, consummate 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 notes thereto), of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes or any guarantee thereof) that are assumed by the transferee of any such assets and (y) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are contemporaneously (subject to ordinary settlement periods) 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 Bank Facility (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 by the Company or any of its Restricted Subsidiaries 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 any Restricted Subsidiary enters into a legally binding agreement with an entity that is not an Affiliate of the Company 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 360 days of such Asset Sale, 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. 52 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. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this Section 4.10(c) 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 will be required to make an offer to all Holders of 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 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 and Liquidated Damages, if any, to the date of purchase, in accordance with the procedures set forth in Section 3.09 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 this Section 4.10. (e) To the extent that the aggregate amount of 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 Notes and Pari Passu Debt surrendered exceeds the amount of Excess Proceeds, the Trustee shall select the 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 (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 (a) 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 (b) 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 53 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, (y) the payment of any dividend on, or the issuance of additional Subordinated Notes in exchange for, the Series A Preferred Stock, provided that such dividends are paid on a pro rata basis and the additional Subordinated Notes are issued in accordance with the Certificate of Designation, and (z) transactions permitted by 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. SECTION 4.13. LIMITATION OF CERTAIN SUBSIDIARY INDEBTEDNESS AND PREFERRED STOCK Notwithstanding any other provision of this Indenture to the contrary, the Company will not permit any of its Restricted Subsidiaries to incur any Indebtedness (other than Eligible Indebtedness) or to issue any Disqualified Stock; provided that any Restricted Subsidiary that is a Subsidiary Guarantor may incur Indebtedness (whether or not such Indebtedness is Eligible Indebtedness) or issue Disqualified Stock if such incurrence or issuance is permitted under Section 4.09 hereof, provide further that notwithstanding the immediately preceding proviso, in no event shall the Company permit any of its Restricted Subsidiaries to incur any Indebtedness represented by senior secured bonds or other senior secured securities, unless such Subsidiary is a Subsidiary Guarantor and its Subsidiary Guarantee is secured on an equal and ratable basis with other such other senior secured bonds or other senior secured securities. 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 54 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 Notes. SECTION 4.15. OFFER TO REPURCHASE UPON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of 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 Notes held by such Holder, any Note in principal amount less than $1,000) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase (the "Change of Control payment"). (b) Within ten 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 4.15 and that all 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 Note not tendered shall continue to accrue interest; (5) that, unless the Company defaults in the payment of the Change of Control Payment, all 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 Notes purchased pursuant to a Change of Control Offer shall be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the 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 Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have the Notes purchased; and (8) that Holders whose Notes are being purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. The Company will 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 Notes as a result of a Change of Control. 55 (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 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 Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (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 Section 4.15 and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. SECTION 4.16. LIMITATION ON ISSUANCES 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 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 (a) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with Section 4.10 hereof and (ii) shall not permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity Interests (other than, 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. SECTION 4.17. LIMITATION ON ISSUANCE OF SUBSIDIARY GUARANTEE (a) The Company shall not permit any Restricted Subsidiary to guarantee the payment of any Indebtedness of the Company or any Indebtedness of any Subsidiary Guarantor (in each case, the "Guaranteed Debt;" the Company or the Subsidiary Guarantor that is primarily liable on the Guaranteed Debt being the "Obligor") unless (i) if such Restricted Subsidiary is not a Subsidiary Guarantor, such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture in form attached hereto as Exhibit E providing for a guarantee (a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary, (ii) if the Guaranteed Debt is by its express terms subordinated in right of payment to the Notes or the Subsidiary Guarantee of such Obligor, any such guarantee of such Subsidiary Guarantor with respect to the Guaranteed Debt shall be subordinated in right of payment to such Subsidiary Guarantor's Subsidiary Guarantee with respect to the Notes substantially to the 56 same extent as the Guaranteed Debt is subordinated to the Notes or the Subsidiary Guarantee of such Obligor, (iii) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee and (iv) such Restricted Subsidiary shall deliver to the Trustee an opinion of counsel to the effect that (A) such Subsidiary Guarantee of the Notes has been duly executed and authorized and (B) such Subsidiary Guarantee of the Notes constitutes a valid, binding and enforceable obligation of such Restricted Subsidiary, except insofar as enforcement thereof may be limited by bankruptcy, insolvency or similar laws (including, without limitation, all laws relating to fraudulent transfers) and except insofar as enforcement thereof is subject to general principles of equity. (b) No Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Subsidiary Guarantor unless (i) subject to the provisions of Section 4.17(c) hereof, the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to a supplemental indenture in the form attached hereto as Exhibit E, under the Notes, the Indenture and the Registration Rights Agreement; (ii) immediately after giving effect to such transaction no Default or Event of Default exists; and (iii) 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 4.09(a) hereof. (c) In the event of a sale or other disposition of all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all the capital stock of such Subsidiary Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Subsidiary Guarantor) will be released and relieved of any obligation under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition shall be applied in accordance with Section 4.10 hereof. (d) Any Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in accordance with the terms of this Indenture will be released and relieved of its obligations under its Subsidiary Guarantee for so long as such Subsidiary is so designated. SECTION 4.18. NO AMENDMENT OF SUBORDINATION PROVISIONS. Without the consent of each Holder of Notes outstanding, the Company shall not amend, modify or alter the Subordinated Exchange Note Indenture in any way that will (i) increase the rate of or change the time for payment of interest on any Subordinated Exchange Notes, (ii) increase the principal of, advance the final maturity date of or shorten the Weighted Average Life to Maturity of any Subordinated Exchange Notes, (iii) alter the redemption provisions or the price or terms at which the Company is required to offer to purchase such Subordinated Exchange Notes in a manner that would be adverse to any Holder of Notes or (iv) amend the provisions of Article 10 of the Subordinated Exchange Note Indenture (which relate to subordination). 57 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 (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 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 Notes, this Indenture and the Registration Rights Agreement pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; (iv) 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 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 4.09(a) hereof and (v) each Subsidiary Guarantor, if any, unless it is the other party to the transactions described above, shall have by supplemental indenture confirmed that its Subsidiary Guarantee shall apply to such Person's obligations under the Indenture and the Notes. 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 (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 Notes except in the case of a sale of all of the Company's assets that meets the requirements of Section 5.01 hereof. 58 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT An "Event of Default" occurs if: (a) the Company Defaults in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Notes and such Default continues for a period of 30 days; (b) the Company defaults in the payment when due of principal of or premium, if any, on the Notes when the same becomes due and payable at maturity, upon redemption or otherwise; (c) the Company fails to comply with any of the provisions of section 4.07, 4.09, 4.10, 4.15 or 5.01 hereof; (d) the Company or any Subsidiary fails to observe or perform any other covenant, representation, warranty or other agreement in this Indenture, the Notes for 60 days after notice to comply; (e) a default occurs 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 (on the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries), whether such Indebtedness or guarantee now exists, or is created after the date of this Indenture, which default (i) 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 (ii) 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; (f) 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; (g) the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary pursuant to or within the meaning of Bankruptcy Law: (i) commences a voluntary case, 59 (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, or (v) generally is not paying its debts as they become due; or (h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary in an involuntary case; (ii) appoints a custodian of the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary or for all or substantially all of the property of the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; or (iii) orders the liquidation of the Company or any of its Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days; or (i) the termination of any Subsidiary Guarantee for any reason not permitted by this Indenture, or the denial by any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary Guarantor of such Subsidiary Guarantor's obligations under its respective Subsidiary Guarantee. The term "custodian" as used in this Article VI 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 (c), (e) or (f) 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 (e) 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 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." 60 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 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 Notes, anything in this Indenture or in the 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 Notes so notify the Trustee. If an Event of Default occurs prior to October 15, 2001 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 Notes prior to October 15, 2001, 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 would otherwise be due but for the provisions of this sentence, plus accrued interest, if any, to the date of payment: Year Percentage 1997............................................................ 114.439% 1998............................................................ 112.033% 1999............................................................ 109.626% 2000............................................................ 107.220% SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event of Default specified in clause (g) or (h) of Section 6.01 hereof) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Upon any such declaration, the principal of, premium, if any, and accrued and unpaid interest and Liquidated Damages, if any, on the Notes shall become due and payable immediately. Notwithstanding the foregoing, if an Event of Default specified in clause (g) or (h) of Section 6.01 hereof occurs with respect to the Company, any of its Restricted Subsidiaries that would constitute a Significant Subsidiary, or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, all outstanding Notes shall be due and payable immediately without further action or notice. Holders of the Notes may not enforce this Indenture or the Notes except as provided in this Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the 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 or Liquidated Damages, if any) if it determines that withholding notice is in their interest. 61 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 Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a 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 Notes by notice to the Trustee may on behalf of the Holders of all of the 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 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 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 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 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 Notes or that may involve the Trustee in personal liability. SECTION 6.06. LIMITATION ON SUITS. A Holder of a Note may pursue a remedy with respect to this Indenture or the Notes only if: (a) the Holder of a Note gives to the Trustee written notice of a continuing Event of Default; 62 (b) the Holders of at least 25% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of a Note or Holders of 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 Notes do not give the Trustee a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note. SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, and interest on the Note, on or after the respective due dates expressed in the 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(a) or (b) 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 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. 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 Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the 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 63 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 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 Notes for amounts due and unpaid on the 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 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 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 a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. 64 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 person would exercise or use under the circumstances in the conduct of its 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. 65 (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 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. 66 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 Notes, it shall not be accountable for the Company's use of the proceeds from the 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 Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. 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 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 Notes. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the 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 Notes shall be mailed to the Company and filed with the SEC and each stock exchange on which the Notes are listed in accordance with TIA Section 313(d). The Company shall promptly notify the Trustee when the 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. 67 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. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular 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(g) or (h) 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 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; 68 (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 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 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 a Note who has been a Holder of a Note for at least six months, fails to comply with Section 7.10, such Holder of a 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 Notes. 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. 69 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) Section 7.01. 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 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 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 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 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 survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding 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 and Liquidated Damages, if any, on such Notes when such payments are due, (b) the Company's obligations with respect to such 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. 70 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, 4.17, 4.18 and 5.01 hereof with respect to the outstanding Notes on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the 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 Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the "outstanding" 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 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(d) through 6.01(f) 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 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 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, interest and premium and Liquidated Damages, if any, on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the 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 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 Notes will not recognize 71 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 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(g) or (h) 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 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 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 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. 72 SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. 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 Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such 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 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 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 or interest or Liquidated Damages, if any, on any 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 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. 73 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 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 or interest or Liquidated Damages, if any, on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES. Notwithstanding Section 9.02 of this Indenture, the Company, a Subsidiary Guarantor (with respect to a Subsidiary Guarantee or the Indenture to which it is a party) and the Trustee may amend or supplement this Indenture, the Notes or the Subsidiary Guarantees without the consent of any Holder of a Note: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; (c) to provide for the assumption of the Company's or any Subsidiary Guarantor's obligations to Holders of 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 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 or to allow any Subsidiary Guarantor to guarantee the Notes. Upon the request of the Company accompanied by a resolution of the Board of Directors of the Company or a Subsidiary Guarantor, as applicable, 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 or such Subsidiary 74 Guarantor 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 or Subsidiary Guarantee that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES. Except as provided below in this Section 9.02, the Company, a Subsidiary Guarantor (with respect to a Subsidiary Guarantee or the Indenture to which it is a party) and the Trustee may amend or supplement this Indenture, the Notes or the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, 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 or interest or Liquidated Damages, if any, on the Notes) or compliance with any provision of this Indenture or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for the 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 Notes then outstanding if such amendment would adversely affect the rights of Holders of Notes. Upon the request of the Company accompanied by a resolution of the Board of Directors of the Company or a Subsidiary Guarantor, as applicable, 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 Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company or such Subsidiary Guarantor 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 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 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 Notes then outstanding may waive 75 compliance in a particular instance by the Company with any provision of this Indenture or the Notes. However, without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder): (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to Sections 3.09, 4.10 and 4.15 hereof); (c) reduce the rate of or change the time for payment of interest, including default interest, on any Note; (d) waive a Default or Event of Default in the payment of principal of or interest or premium or Liquidated Damages, if any, on the Notes (except a rescission of acceleration of the Notes by the Holders of a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated in the Notes; (f) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or interest or premium or Liquidated Damages, if any, on the Notes; (g) waive a redemption payment with respect to any Note (other than a payment required by the provisions of Section 3.09, 4.10 or 4.15 hereof); (h) make any change in Section 6.04 or 6.07 hereof or in the foregoing amendment and waiver provisions; or (i) except as provided in Article 8 hereof or otherwise in accordance with the terms of this Indenture or any Subsidiary Guarantee, release a Subsidiary Guarantor from its obligations under its Subsidiary Guarantee or make any change in a Subsidiary Guarantee that would adversely affect the Holders of the Notes. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture or the Notes shall be set forth in an 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 a Note is a continuing consent by the Holder of a Note and every subsequent Holder of 76 a Note or portion of a Note that evidences the same debt as the consenting Holder's Notes, even if notation of the consent is not made on any Notes. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its 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 NOTES. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Notes thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or to issue new 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. 77 ARTICLE 10. MISCELLANEOUS SECTION 10.01. 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 10.02. 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 LLP 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 230 S. Tryon Street Charlotte, NC 28288-1153 Telecopier No.: (704) 374-6114 Attention: Client Service Group 78 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 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 10.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION.10.04 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 10.05 hereof) stating that, in the 79 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 10.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 10.05 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: (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 10.06 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 10.07. 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 Notes, this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. 80 SECTION 10.08. GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE AND THE NOTES. SECTION 10.09. 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 10.10. SUCCESSORS. All agreements of the Company in this Indenture and the Notes shall bind its respective successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 10.11. SEVERABILITY. In case any provision in this Indenture or in the 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. SECTION 10.12 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 10.13. 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. 81 SIGNATURES IN WITNESS WHEREOF, the parties have executed this Indenture as of the date first written above. Very truly yours, PEGASUS COMMUNICATIONS CORPORATION By: /s/ Marshall W. Pagon -------------------------------- Name: Marshall W. Pagon Title: President FIRST UNION NATIONAL BANK By: /s/ Alan G. Finn - --------------------------------- Name: Alan G. Finn Title: Assistant Vice President EXHIBIT A (Face of Note) 9-5/8% Senior Notes due 2005 [Insert the Global Note Legend, if applicable pursuant to the provisions of the Indenture] [Insert the Private Placement Legend, if applicable pursuant to the provisions of the Indenture] CUSIP: No: $______________ Pegasus Communications Corporation promises to pay to ______________ or registered assigns, the principal sum of ______________ Dollars on October 15, 2005. Interest Payment Dates: April 15 and October 15. Record Dates: April 1 and October 1. Dated: PEGASUS COMMUNICATIONS CORPORATION By:______________________________ Name: Title: This is one of the Notes referred to in the within-mentioned Indenture: FIRST UNION NATIONAL BANK, as Trustee By: __________________________________ Authorized Officer A-1 (Back of Note) 9-5/8% [Series A] [Series B] Senior Notes due 2005 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. Pegasus Communications Corporation, a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at 9-5/8% per annum from October 21, 1997 until maturity and shall pay the Liquidated Damages payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Liquidated Damages semi-annually on April 15 and October 15 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 on the 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 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; provided, further, that the first Interest Payment Date shall be April 15, 1998. 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 and Liquidated Damages (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 Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered Holders of Notes at the close of business on the April 1 or October 1 next preceding the Interest Payment Date, even if such Notes are canceled 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. The Notes will be payable as to principal, premium and Liquidated Damages, if any, and interest 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 and Liquidated Damages 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, premium and Liquidated Damages on, all Global Notes and all other 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. 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. A-2 4. INDENTURE. The Company issued the Notes under an Indenture dated as of October 21, 1997 (the "Indenture") between the Company and the Trustee. The terms of the 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 Notes are subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of such terms. The Notes are general obligations of the Company limited to $115,000,000 in aggregate principal amount. 5. OPTIONAL REDEMPTION. (a) The Notes will not be redeemable at the Company's option prior to October 15, 2001. The Notes may be redeemed, in whole or in part, at the option of the Company on or after October 15, 2001, at the redemption prices specified below (expressed as percentages of the principal amount thereof), in each case, together with accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption, upon not less than 30 nor more than 60 days' notice, if redeemed during the twelve-month period beginning on October 15 of the years indicated below: Redemption Year Price - ---- ----- 2001 104.813% 2002 102.407% 2003 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 Capital Stock to redeem up to 35% of the aggregate principal amount of the Notes at a redemption price of 109.625% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption; provided that, after any such redemption, the aggregate principal amount of the Notes outstanding (excluding Notes held by the Company and its Subsidiaries) 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 Capital Stock of the Company. 6. MANDATORY REDEMPTION. The Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. A-3 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control the Company shall be obligated to make an offer (a "Change in Control Offer") to each Holder of Notes to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase (the "Change of Control Payment"). Within ten days following any Change of Control, the Company shall mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes pursuant to the procedures required by the Indenture and described in such notice. (b) If the Company or a 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 commence an offer to all Holders of 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 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 and Liquidated Damages, if any, to the date of purchase, in accordance with the procedures set forth in 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. If the aggregate principal amount of Notes and Pari Passu Debt surrendered exceeds the amount of Excess Proceeds, the Trustee shall select the 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. Holders of Notes that are the subject of an offer to purchase will receive an Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the 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 Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in all appropriate denominations. The transfer of Notes may be registered and 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 Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, it need not transfer or exchange any Note for a period of 15 Business Days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. A-4 10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture, the Notes or the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes, and any existing default or compliance with any provision of the Indenture, the Notes or the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder of a Note, the Indenture, the Notes or the Subsidiary Guarantees may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's or any Subsidiary Guarantor's obligations to Holders of the 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 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 or to allow any Subsidiary Guarantor to guarantee the Notes. 12. DEFAULTS AND REMEDIES. Each of the following constitutes an Event of Default: (i) default by the Company in the payment of interest and Liquidated Damages, if any, on the Notes when the same becomes due and payable and the Default continues for a period of 30 days; (ii) default by the Company in the payment of the principal of or premium, if any, on the Notes when the same becomes due and payable at maturity, upon redemption or otherwise; (3) failure by the Company or any Subsidiary to comply with Sections 4.07, 4.09, 4.10, 4.15, or 5.01 of the Indenture; (4) failure by the Company or any Subsidiary for 60 days after notice to comply with any of its other agreements in the Indenture or the Notes; (5) 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; (6) 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; (7) 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 and (8) the termination of any Subsidiary Guarantee for any reason not permitted by the Indenture, or the denial by any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary Guarantor of such Subsidiary Guarantor's obligations under its respective Subsidiary Guarantee. If any Event of A-5 Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the 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 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, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the 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 or Liquidated Damages, if any) if it determines that withholding notice is in their interest. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the 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 principal, interest or premium or Liquidated Damages, if any, on the 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. 13. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Trustee. 14. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator or stockholder of the Company or any Subsidiary Guarantor as such, shall have any liability for any obligations of the Company or the Subsidiary Guarantors under the Notes, the Subsidiary Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 15. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. 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). 17. 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 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 A-6 numbers either as printed on the 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: Chief Financial Officer A-7 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this 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 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 Note) Signature Guarantee. A-8 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.10 or 4.15 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.15 If you want to elect to have only part of the 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 Note) Tax Identification No.:___________________ Signature Guarantee:_____________________ A-9 SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE(1) The following exchanges of a part of this Global Note for an interest in another Global Note or for a Definitive Note, or exchanges of a part of another Global Note or Definitive Note for an interest in this Global Note, have been made:
Amount of increase Principal Amount of in Principal this Global Note Signature of Amount of decrease Amount following such authorized officer in Principal Amount of decrease (or of Trustee or Date of Exchange of this Global Note this Global Note increase) Note Custodian ---------------- ------------------- ---------------- ------------------ -----------------
- ------------------- (1) This should be included only if the Debenture is issued in global form. A-10 EXHIBIT B FORM OF CERTIFICATE OF TRANSFER Pegasus Communications Corporation c/o Pegasus Communications Management Company 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 First Union National Bank 230 S. Tyron Street Charlotte, NC 28288-1153 Re: 9-5/8% Senior Notes due 2005 Reference is hereby made to the Indenture, dated as of October 21, 1997 (the "Indenture"), between Pegasus Communications Corporation, as issuer (the "Company"), and First Union National Bank, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ______________, (the "Transferor") owns and proposes to transfer the Note[s] or interest in such Note[s] specified in Annex A hereto, in the principal amount of $___________ in such Note[s] or interests (the "Transfer"), to __________ (the "Transferee"), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that: [CHECK ALL THAT APPLY] 1. |_| Check if Transferee will take delivery of a beneficial interest in the 144A Global Note or a Definitive Note Pursuant to Rule 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Definitive Note is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Definitive Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the 144A Global Note and/or the Definitive Note and in the Indenture and the Securities Act. B-1 2. |_| Check if Transferee will take delivery of a beneficial interest in the Regulation S Global Note or a Definitive Note pursuant to Regulation S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act, and (iv) if the proposed transfer is being made prior to the expiration of the Restricted Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on Transfer enumerated in the Private Placement Legend printed on the Regulation S Global Note and/or the Definitive Note and in the Indenture and the Securities Act. 3. |_| Check and complete if Transferee will take delivery of a beneficial interest in the IAI Global Note or a Definitive Note pursuant to any provision of the Securities Act other than Rule 144A or Regulation S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Notes and Restricted Definitive Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one): (a) |_| such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or (b) |_| such Transfer is being effected to the Company or a subsidiary thereof; or (c) |_| such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act; or (d) |_| such Transfer is being effected to an Institutional Accredited Investor and pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor hereby further certifies that it has not B-2 engaged in any general solicitation within the meaning of Regulation D under the Securities Act and the Transfer complies with the transfer restrictions applicable to beneficial interests in a Restricted Global Note or Restricted Definitive Notes and the requirements of the exemption claimed, which certification is supported by (1) a certificate executed by the Transferee in the form of Exhibit D to the Indenture and (2) if such Transfer is in respect of a principal amount of Notes at the time of transfer of less than $250,000, an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that such Transfer is in compliance with the Securities Act. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the IAI Global Note and/or the Definitive Notes and in the Indenture and the Securities Act. 4. |_| Check if Transferee will take delivery of a beneficial interest in an Unrestricted Global Note or of an Unrestricted Definitive Note. (a) |_| Check if Transfer is pursuant to Rule 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (b) |_| Check if Transfer is Pursuant to Regulation S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (c) |_| Check if Transfer is Pursuant to Other Exemption. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will not be subject to the B-3 restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes or Restricted Definitive Notes and in the Indenture. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. [Insert Name of Transferor] By: ------------------------------- Name: Title: Dated:____________ , ______ B-4 ANNEX A TO CERTIFICATE OF TRANSFER 1. The Transferor owns and proposes to transfer the following: [CHECK ONE OF (a) OR (b)] (a) |_| a beneficial interest in the: (i) |_| 144A Global Note (CUSIP ), or (ii) |_| Regulation S Global Note (CUSIP ), or (iii) |_| IAI Global Note (CUSIP ); or (b) |_| a Restricted Definitive Note. 2. After the Transfer the Transferee will hold: [CHECK ONE] (a) |_| a beneficial interest in the: (i) |_| 144A Global Note (CUSIP ), or (ii) |_| Regulation S Global Note (CUSIP ), or (iii) |_| IAI Global Note (CUSIP ); or (iv) |_| Unrestricted Global Note (CUSIP ); or (b) |_| a Restricted Definitive Note; or (c) |_| an Unrestricted Definitive Note, in accordance with the terms of the Indenture. B-5 EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE (CUSIP______________) Pegasus Communications Corporation c/o Pegasus Communications Management Company 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 First Union National Bank 230 S. Tyron Street Charlotte, NC 28288-1153 Re: 9-5/8% Senior Notes due 2005 Reference is hereby made to the Indenture, dated as of October 21, 1997 (the "Indenture"), between Pegasus Communications Corporation, as issuer (the "Company"), and First Union National Bank, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ____________, (the "Owner") owns and proposes to exchange the Note[s] or interest in such Note[s] specified herein, in the principal amount of $____________ in such Note[s] or interests (the "Exchange"). In connection with the Exchange, the Owner hereby certifies that: 1. Exchange of Restricted Definitive Notes or Beneficial Interests in a Restricted Global Note for Unrestricted Definitive Notes or Beneficial Interests in an Unrestricted Global Note (a) |_| Check if Exchange is from beneficial interest in a Restricted Global Note to beneficial interest in an Unrestricted Global Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the United States Securities Act of 1933, as amended (the "Securities Act"), (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. C-1 (b) |_| Check if Exchange is from beneficial interest in a Restricted Global Note to Unrestricted Definitive Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (c) |_| Check if Exchange is from Restricted Definitive Note to beneficial interest in an Unrestricted Global Note. In connection with the Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (d) |_| Check if Exchange is from Restricted Definitive Note to Unrestricted Definitive Note. In connection with the Owner's Exchange of a Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. 2. Exchange of Restricted Definitive Notes or Beneficial Interests in Restricted Global Notes for Restricted Definitive Notes or Beneficial Interests in Restricted Global Notes (a) |_| Check if Exchange is from beneficial interest in a Restricted Global Note to Restricted Definitive Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a Restricted Definitive Note with an equal principal amount, the Owner hereby certifies that the Restricted Definitive Note is being acquired for the Owner's own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Definitive Note issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Note and in the Indenture and the Securities Act. C-2 (b) |_| Check if Exchange is from Restricted Definitive Note to beneficial interest in a Restricted Global Note. In connection with the Exchange of the Owner's Restricted Definitive Note for a beneficial interest in the [CHECK ONE] 144A Global Note, Regulation S Global Note, IAI Global Note with an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer and (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the beneficial interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Note and in the Indenture and the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. ----------------------------------- [Insert Name of Owner] By: _______________________________ Name: Title: Dated: ________________, ____ C-3 EXHIBIT D FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR Pegasus Communications Corporation c/o Pegasus Communications Management Corporation 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, PA 19087 First Union National Bank 230 S. Tyron Street Charlotte, NC 28288-1153 Re: __% Senior Notes due 2005 Reference is hereby made to the Indenture, dated as of October 21, 1997 (the "Indenture"), between Pegasus Communications Corporation, as issuer (the "Company"), and First Union National Bank, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with our proposed purchase of $____________ aggregate principal amount of: (a) |_| a beneficial interest in a Global Note, or (b) |_| a Definitive Note, we confirm that: 1. We understand that any subsequent transfer of the Notes or any interest therein is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes or any interest therein except in compliance with, such restrictions and conditions and the United States Securities Act of 1933, as amended (the "Securities Act"). 2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes and any interest therein may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell the Notes or any interest therein, we will do so only (A) to the Company or any subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (c) to an institutional "accredited investor" (as defined below) that, prior to such D-1 transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to you and to the Company a signed letter substantially in the form of this letter and an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act, (D) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (E) pursuant to the provisions of Rule 144(k) under the Securities Act or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing the Definitive Note or beneficial interest in a Global Note from us in a transaction meeting the requirements of clauses (A) through (E) of this paragraph a notice advising such purchaser that resales thereof are restricted as stated herein. 3. We understand that, on any proposed resale of the Notes or beneficial interest therein, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. We further understand that any subsequent transfer by us of the Notes or beneficial interest therein acquired by us must be effected through one of the Placement Agents. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes or beneficial interest therein purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. ------------------------------------ [Insert Name of Accredited Investor] By: _________________________________ Name: Title: Dated: __________________, ____ D-2 EXHIBIT E FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED BY SUBSIDIARY GUARANTORS SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated as of ____________________, between _____________________ (the "Subsidiary Guarantor"), a subsidiary of Pegasus Communications Corporation (or its successor), a company incorporated under the laws of the State of Delaware (the "Company"), and First Union National Bank, as trustee under the indenture referred to below (the "Trustee"). W I T N E S E T H WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of October 21, 1997, providing for the issuance of an aggregate principal amount of $115,000,000 of 9-5/8% Senior Notes due 2005 (the "Notes"); WHEREAS, Section 4.17 of the Indenture provides that, under certain circumstances, the Company is required to cause the Subsidiary Guarantor to execute and deliver to the Trustee a Subsidiary Guarantee on the terms and conditions set forth herein; and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Subsidiary Guarantor and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: 1. CAPITALIZED TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. INDENTURE PROVISION PURSUANT TO WHICH GUARANTEE IS GIVEN. This Supplemental Indenture is being executed and delivered pursuant to Section 4.17 of the Indenture. 3. AGREEMENTS TO GUARANTEE. The Subsidiary Guarantor hereby agrees as follows: (a) The Subsidiary Guarantor, jointly and severally with all other Subsidiary Guarantors, if any, unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, regardless of the validity and enforceability of the Indenture, the Notes and the obligations of the Company under the Indenture and the Notes, that: E-1 (i) the principal of, premium, if any, and interest on the Notes shall be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of, premium, if any, and interest on the Notes, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee thereunder shall be promptly paid in full, all in accordance with the terms thereof; and (ii) in case of any extension of time for payment or renewal of any Notes or any of such other obligations, that the same shall be promptly paid in full when due in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Notwithstanding the foregoing, in the event that this Subsidiary Guarantee would constitute or result in a violation of any applicable fraudulent conveyance or similar law of any relevant jurisdiction, the liability of the Subsidiary Guarantor under this Supplemental Indenture and its Subsidiary Guarantee shall be limited to such amount as will not, after giving effect thereto, and to all other liabilities of the Subsidiary Guarantor, result in such amount constituting a fraudulent transfer or conveyance. 4. EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES. (a) To evidence its Subsidiary Guarantee set forth in this Supplemental Indenture, the Subsidiary Guarantor hereby agrees that a notation of such Subsidiary Guarantee substantially in the form of Annex A hereto shall be endorsed by an officer of such Subsidiary Guarantor on each Note authenticated and delivered by the Trustee after the date hereof. (b) Notwithstanding the foregoing, the Subsidiary Guarantor hereby agrees that its Subsidiary Guarantee set forth herein shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Subsidiary Guarantee. (c) If an officer whose signature is on this Supplemental Indenture or on the Subsidiary Guarantee no longer holds that office at the time the Trustee authenticates the Note on which a Subsidiary Guarantee is endorsed, the Subsidiary Guarantee shall be valid nevertheless. (d) The delivery of the Note by the Trustee, after the authentication thereof under the Indenture, shall constitute due delivery of the Subsidiary Guarantee set forth in this Supplemental Indenture on behalf of the Subsidiary Guarantor. (e) The Subsidiary Guarantor hereby agrees that its obligations hereof shall be unconditional, regardless of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. (f) The Subsidiary Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the E-2 Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that its Subsidiary Guarantee made pursuant to this Supplemental Indenture will not be discharged except by complete performance of the obligations contained in the Notes and the Indenture or pursuant to Section 5(b) of this Supplemental Indenture. (g) If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Supplemental Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then, and in every such case, subject to any determination in such proceeding, the Subsidiary Guarantor, the Trustee and the Holders shall be restored severally and respectively to their former positions hereof and thereafter all rights and remedies of the Subsidiary Guarantor, the Trustee and the Holders shall continue as though no such proceeding had been instituted. (h) The Subsidiary Guarantor hereby waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Subsidiary Guarantor as a result of any payment by such Subsidiary Guarantor under its Subsidiary Guarantee. The Subsidiary Guarantor further agrees that, as between the Subsidiary Guarantors, on the one hand, and the Holders and the Trustee, on the other hand: (i) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six of the Indenture for the purposes of the Subsidiary Guarantee made pursuant to this Supplemental Indenture, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby; and (ii) in the event of any declaration of acceleration of such obligations as provided in Article Six, such obligations (whether or not due and payable) shall forthwith become due and payable by the Subsidiary Guarantor for the purpose of the Subsidiary Guarantee made pursuant to this Supplemental Indenture. (i) The Subsidiary Guarantor shall have the right to seek contribution from any other non-paying Subsidiary Guarantor, if any, so long as the exercise of such right does not impair the rights of the Holders under the Subsidiary Guarantee made pursuant to this Supplemental Indenture. (j) The Subsidiary Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of the Indenture or this Subsidiary Guarantee; and the Subsidiary Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. E-3 5. SUBSIDIARY GUARANTOR MAY CONSOLIDATE, ETC. ON CERTAIN TERMS (a) Except as set forth in Articles Four and Five of the Indenture, nothing contained in the Indenture, this Supplemental Indenture or in the Notes shall prevent any consolidation or merger of the Subsidiary Guarantor with or into the Company or any other Subsidiary Guarantor or shall prevent any transfer, sale or conveyance of the property of the Subsidiary Guarantor as an entirety or substantially as an entirety, to the Company or any other Subsidiary Guarantor. (b) Except as set forth in Article Four and Five of the Indenture, upon the sale or disposition of all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in the even of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all the capital stock of such Subsidiary Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Subsidiary Guarantor) will be released and relieved of any obligation under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with Section 4.10 of the Indenture. Except with respect to transactions set forth in the preceding sentence, the Company and the Subsidiary Guarantor covenant and agree that upon any such merger, consolidation or sale of assets, the performance of all covenants and conditions of this Supplemental Indenture to be performed by such Subsidiary Guarantor shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee, by the corporation formed by such consolidation, or into which the Subsidiary Guarantor shall have merged, or by the corporation which shall have acquired such property. Upon receipt of an Officers' Certificate of the Company or the Subsidiary Guarantor, as the case may be, to the effect that the Company or such Subsidiary Guarantor has complied with the first sentence of this Section 5(b), the Trustee shall execute any documents reasonably requested by the Company or the Subsidiary Guarantor, at the cost of the Company or such Subsidiary Guarantor, as the case may be, in order to evidence the release of such Subsidiary Guarantor from its obligations under its Guarantee endorsed on the Notes and under the Indenture and this Supplemental Indenture. 6. RELEASES UPON RELEASE OF GUARANTEE OF GUARANTEED INDEBTEDNESS. Concurrently with the release or discharge of the Subsidiary Guarantor's guarantee of the payment of [describe indebtedness the guarantee of which gave rise to the delivery of this Supplemental Indenture] ("Guaranteed Debt") (other than a release or discharge by or as a result of payment under such guarantee of Guaranteed Indebtedness), the Subsidiary Guarantor shall be automatically and unconditionally released and relieved of its obligations under this Supplemental Indenture and its Subsidiary Guarantee made pursuant to Section 4 of this Supplemental Indenture. Upon delivery by the Company to the Trustee of an Officer's Certificate to the effect that such release or discharge has occurred, the Trustee shall execute any documents reasonably required in order to evidence the release of the Subsidiary Guarantor from its obligations under this Supplemental Indenture and its Subsidiary Guarantee made pursuant hereto; provided such documents shall not affect or impair the rights of the Trustee and Paying Agent under Section 7.07 of the Indenture. E-4 7. NEW YORK LAW TO GOVERN. The internal law of the State of New York shall govern and be used to construe this Supplemental Indenture. 8. COUNTERPARTS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 9. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not effect the construction hereof. [Signatures on following page] E-5 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated:_____________ , _____ [Subsidiary Guarantor] By:_________________________ Name: Title: Dated:_____________ , _____ as Trustee By:_________________________ Name: Title: E-6 ANNEX A TO SUPPLEMENTAL INDENTURE FORM OF NOTATION OF SUBSIDIARY GUARANTEE ON NOTE Each Subsidiary Guarantor (as defined in the Indenture) has jointly and severally unconditionally guaranteed (a) the due and punctual payment of the principal of, premium, if any, and interest on the Notes, whether at stated maturity or an Interest Payment Date, by acceleration, call for redemption or otherwise, (b) the due and punctual payment of interest on the overdue principal and premium of, and interest, to the extent lawful, on the Notes and (c) that in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the same will be promptly paid in full when due in accordance with the terms of the extension of renewal, whether at stated maturity, by acceleration or otherwise. Notwithstanding the foregoing, in the event that the Subsidiary Guarantee would constitute or result in a violation of any applicable fraudulent conveyance or similar law of any relevant jurisdiction, the liability of the Subsidiary Guarantor under its Subsidiary Guarantee shall be limited to such amount as will not, after giving effect thereto, and to all other liabilities of the Subsidiary Guarantor, result in such amount constituting a fraudulent transfer or conveyance. The Subsidiary Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Note upon which the Subsidiary Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual or facsimile signature of one of its authorized officers. Dated:_______________________________ [Subsidiary Guarantor] By:________________________________ Name: Title: E-7 EX-4.2 3 REGISTRATION RIGHTS AGREEMENT EXECUTION COPY =============================================================================== REGISTRATION RIGHTS AGREEMENT Dated as of October 21, 1997 between PEGASUS COMMUNICATIONS CORPORATION and CIBC WOOD GUNDY SECURITIES CORP. =============================================================================== This Registration Rights Agreement (this "Agreement") is made and entered into as of October 21, 1997 between Pegasus Communications Corporation, a Delaware corporation (the "Company") and CIBC Wood Gundy Securities Corp. (the "Initial Purchaser"), who has agreed to purchase $115,000,000 in aggregate principal amount of 9 5/8% Series A Senior Notes due 2005 (the "Series A Notes") pursuant to the Purchase Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement, dated October 10, 1997 (the "Purchase Agreement"), by and among the Company, each of its subsidiaries and the Initial Purchaser. In order to induce the Initial Purchaser to purchase the Series A Notes, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchaser set forth in Section 5 of the Purchase Agreement. The parties hereby agree as follows: SECTION 1. DEFINITIONS Terms used but not defined herein shall have the meaning given to such terms in the Indenture. As used in this Agreement, the following capitalized terms shall have the following meanings: Act: The Securities Act of 1933, as amended. Broker-Dealer: Any broker or dealer registered under the Exchange Act. Closing Date: The date of this Agreement. Commission: The Securities and Exchange Commission. Consummate: A Registered Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (i) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Series B Notes to be issued in the Exchange Offer, (ii) the maintenance of such Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the minimum period required pursuant to Section 3(b) hereof, and (iii) the delivery by the Company to the Registrar under the Indenture of Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes that were tendered by Holders thereof pursuant to the Exchange Offer. Damages Payment Date: With respect to the Series A Notes, each Interest Payment Date. Effectiveness Target Date: As defined in Section 5. Exchange Act: The Securities Exchange Act of 1934, as amended. Exchange Offer: The registration by the Company under the Act of the Series B Notes pursuant to a Registration Statement pursuant to which the Company offers the Holders of all outstanding Transfer Restricted Securities the opportunity to exchange all such outstanding Transfer Restricted Securities held by such Holders for Series B Notes in an aggregate principal amount equal to the aggregate principal amount of the Transfer Restricted Securities tendered in such exchange offer by such Holders. Exchange Offer Registration Statement: The Registration Statement relating to the Exchange Offer, including the related Prospectus. Exempt Resales: The transactions in which the Initial Purchaser proposes to sell the Series A Notes to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act, and to certain persons outside the United States in offshore transactions in reliance on Regulation S under the Act. Holders: As defined in Section 2(b) hereof. Indemnified Holder: As defined in Section 8(a) hereof. Indenture: The Indenture, dated as of October 21, 1997, between the Company and First Union National Bank, as trustee (the "Trustee"), pursuant to which the Notes are to be issued, as such Indenture is amended or supplemented from time to time in accordance with the terms thereof. Initial Purchaser: As defined in the preamble hereto. Interest Payment Date: As defined in the Indenture and the Notes. NASD: National Association of Securities Dealers, Inc. Notes: The Series A Notes and the Series B Notes. Person: An individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. Prospectus: The prospectus included in a Registration Statement, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. Record Holder: With respect to any Damages Payment Date relating to Notes, each Person who is a Holder of Notes on the record date with respect to the Interest Payment Date on which such Damages Payment Date shall occur. Registration Default: As defined in Section 5 hereof. Registration Statement: Any registration statement of the Company relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, which is filed pursuant to the provisions of this Agreement, in each case, including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. Series B Notes: The Company's 9 5/8% Series B Senior Notes due 2005 to be issued pursuant to the Indenture in the Exchange Offer. Shelf Filing Deadline: As defined in Section 4 hereof. 2 Shelf Registration Statement: As defined in Section 4 hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the Indenture. Transfer Restricted Securities: Each Note, until the earliest to occur of (a) the date on which such Note is exchanged by a person other than a Broker-Dealer for a Series B Note in the Exchange Offer, (b) following the exchange by a Broker-Dealer in the Exchange Offer of a Series A Note for a Series B Note, the date on which such Series B Note is sold to a purchaser who receives from such Broker-Dealer on or prior to the date of such sale a copy of the Prospectus contained in the Exchange Offer Registration Statement, (c) the date on which such Note has been effectively registered under the Act and disposed of in accordance with a Shelf Registration Statement or (d) the date on which such Note is distributed to the public pursuant to Rule 144 under the Act. Underwritten Registration or Underwritten Offering: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT (a) Transfer Restricted Securities. The securities entitled to the benefits of this Agreement are the Transfer Restricted Securities. (b) Holders of Transfer Restricted Securities. A Person is deemed to be a holder of Transfer Restricted Securities (each, a "Holder") whenever such Person owns Transfer Restricted Securities. 3 SECTION 3. REGISTERED EXCHANGE OFFER (a) The Company shall (i) cause to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 30 days after the Closing Date, a Registration Statement under the Act relating to the Series B Notes and the Exchange Offer, (ii) use its reasonable best efforts to cause such Registration Statement to become effective at the earliest possible time, but in no event later than 90 days after the Closing Date, (iii) in connection with the foregoing, file (A) all pre-effective amendments to such Registration Statement as may be necessary in order to cause such Registration Statement to become effective and (B) if applicable, a post-effective amendment to such Registration Statement pursuant to Rule 430A under the Act, (iv) cause all necessary filings in connection with the registration and qualification of the Series B Notes to be made under the Blue Sky laws of such jurisdictions within the United States as are necessary to permit Consummation of the Exchange Offer and (v) unless the Exchange Offer shall not be permissible under applicable law or Commission policy (after the procedures set forth in Section 6(a) below have been complied with), commence the Exchange Offer and use its reasonable best efforts to issue on or prior to 30 business days after the date on which the Exchange Offer Registration Statement was declared effective by the Commission, Series B Notes in exchange for all Series A Notes properly tendered prior thereto in accordance with the terms of the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting registration of the Series B Notes to be offered in exchange for the Transfer Restricted Securities and to permit resales of Notes held by Broker-Dealers as contemplated by Section 3(c) below. (b) The Company shall cause the Exchange Offer Registration Statement to be effective continuously and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 business days. The Company shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Notes shall be included in the Exchange Offer Registration Statement. (c) The Company shall indicate in a "Plan of Distribution" section contained in the Prospectus contained in the Exchange Offer Registration Statement that any Broker-Dealer who holds Series A Notes that are Transfer Restricted Securities and that were acquired for its own account as a result of market-making activities or other trading activities (other than Transfer Restricted Securities acquired directly from the Company), may exchange such Series A Notes pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with any resales of the Series B Notes received by such Broker-Dealer in the Exchange Offer, which prospectus delivery requirement may be satisfied by the delivery by such Broker-Dealer of the Prospectus contained in the Exchange Offer Registration Statement. Such "Plan of Distribution" section shall also contain all other information with respect to such resales by Broker-Dealers that the Commission may require in order to permit such resales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Notes held by any such Broker-Dealer except to the extent required by the Commission as a result of a change in policy after the date of this Agreement. The Company shall use its reasonable best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented and amended as required by the provisions of Section 6(c) below to the extent necessary to ensure that it is available for resales of Notes acquired by Broker-Dealers for their own accounts as a result of market-making activities or other trading activities, and to ensure 4 that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of one year from the date on which the Exchange Offer Registration Statement is declared effective. The Company shall provide sufficient copies of the latest version of such Prospectus to Broker-Dealers promptly upon request at any time, subject to Section 6(c)(i) hereof, during such one-year period in order to facilitate such resales. SECTION 4. SHELF REGISTRATION (a) Shelf Registration. If (i) the Company is not required to file an Exchange Offer Registration Statement or to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy (after the procedures set forth in Section 6(a) below have been complied with) or (ii) if any Holder of Transfer Restricted Securities notifies the Company within 20 business days after the Consummation of the Exchange Offer (A) that such Holder is prohibited by applicable law or Commission policy from participating in the Exchange Offer, or (B) that such Holder may not resell the Series B Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and that the Prospectus contained in the Exchange Offer Registration Statement is not legally available for such resales by such Holder or (C) that such Holder is a Broker-Dealer and owns Series A Notes acquired directly from the Company or an affiliate of the Company, then the Company shall: (x) cause to be filed a shelf registration statement pursuant to Rule 415 under the Act, which may be an amendment to the Exchange Offer Registration Statement (in either event, the "Shelf Registration Statement") on or prior to the earliest to occur of (1) the 60th day after the date on which the Company determines that it is not required to file the Exchange Offer Registration Statement, (2) the 60th day after the date on which the Company receives notice from a Holder of Transfer Restricted Securities as contemplated by clause (ii) above, and (3) the 120th day after the Closing Date (such earliest date being the "Shelf Filing Deadline"), which Shelf Registration Statement shall provide for resales of all Transfer Restricted Securities the Holders of which shall have provided the information required pursuant to Section 4(b) hereof; and (y) use its reasonable best efforts to cause such Shelf Registration Statement to be declared effective by the Commission on or before the 30th day after the Shelf Filing Deadline. The Company shall use its best efforts to keep such Shelf Registration Statement continuously effective, supplemented and amended as required by the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is available for resales of Notes by the Holders of Transfer Restricted Securities entitled to the benefit of this Section 4(a), and to ensure that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least three years (as extended pursuant to Section 6(c)(i)) following the Closing Date or such shorter period that will terminate when all Transfer Restricted Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. (b) Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. No Holder of Transfer Restricted Securities may include any of its Transfer Restricted 5 Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 20 business days after receipt of a request therefor, such information as the Company may reasonably request for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to liquidated damages pursuant to Section 5 hereof unless and until such Holder shall have used its best efforts to provide all such reasonably requested information. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. SECTION 5. LIQUIDATED DAMAGES If (i) any of the Registration Statements required by this Agreement is not filed with the Commission on or prior to the date specified for such filing in this Agreement, (ii) any of such Registration Statements has not been declared effective by the Commission on or prior to the date specified for such effectiveness in this Agreement (the "Effectiveness Target Date"), (iii) the Exchange Offer has not been Consummated within 30 business days after the Effectiveness Target Date with respect to the Exchange Offer Registration Statement or (iv) subject to the provisions of Section 6(c)(i) below, the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or legally available for use in connection with resales of Transfer Restricted Securities during the periods specified in this Agreement without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself immediately declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), the Company agrees to pay liquidated damages to each Holder of Transfer Restricted Securities with respect to the first 90-day period immediately following the occurrence of such Registration Default, in an amount equal to $.05 per week per $1,000 of aggregate principal amount of Series A Notes held by such Holder for each week or portion thereof that the Registration Default continues. The amount of the liquidated damages shall increase by an additional $.05 per week per $1,000 of aggregate principal amount of Series A Notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of liquidated damages of $.30 per week per $1,000 of aggregate principal amount of Series A Notes. All accrued liquidated damages shall be paid by the Company on each Damages Payment Date to the holder of the Global Notes by wire transfer of immediately available funds or by federal funds check and to holders of Certificated Notes by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults relating to any particular Transfer Restricted Securities, the accrual of liquidated damages with respect to such Transfer Restricted Securities will cease. All obligations of the Company set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Security at the time such security ceases to be a Transfer Restricted Security shall survive until such time as all such obligations with respect to such Security shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) Exchange Offer Registration Statement. In connection with the Exchange Offer, the Company shall comply with all of the provisions of Section 6(c) below, shall use its best efforts to effect 6 such exchange and to permit the sale of Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof, and shall comply with all of the following provisions: (i) If in the reasonable opinion of counsel to the Company there is a question as to whether the Exchange Offer is permitted by applicable law, the Company hereby agrees to seek a no-action letter or other favorable decision from the Commission allowing the Company to Consummate an Exchange Offer for such Series A Notes. The Company hereby agrees to pursue the issuance of such a decision to the Commission staff level but shall not be required to take commercially unreasonable action to effect a change of Commission policy. The Company hereby agrees, however, to (A) participate in telephonic conferences with the Commission, (B) deliver to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursue a resolution (which need not be favorable) by the Commission staff of such submission. (ii) As a condition to its participation in the Exchange Offer pursuant to the terms of this Agreement, each Holder of Transfer Restricted Securities shall furnish, upon the request of the Company, prior to the Consummation thereof, a written representation to the Company (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary course of business. In addition, all such Holders of Transfer Restricted Securities shall otherwise cooperate in the Company's preparations for the Exchange Offer. Each Holder hereby acknowledges and agrees that any Broker-Dealer and any such Holder using the Exchange Offer to participate in a distribution of the securities to be acquired in the Exchange Offer (1) could not under Commission policy as in effect on the date of this Agreement rely on the position of the Commission enunciated in Morgan Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and similar no-action letters (including any no-action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction should be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K if the resales are of Series B Notes obtained by such Holder in exchange for Series A Notes acquired by such Holder directly from the Company. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company shall provide a supplemental letter to the Commission (A) stating that the Company is registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991) and, if applicable, any no-action letter obtained pursuant to clause (i) above and (B) including a representation that the Company has not entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Exchange Offer and that, to the best of the Company's information and belief, each Holder participating in the Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Exchange Offer. 7 (b) Shelf Registration Statement. In connection with the Shelf Registration Statement, the Company shall comply with all the provisions of Section 6(c) below and shall use its best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof. (c) General Provisions. In connection with any Registration Statement and any Prospectus required by this Agreement to permit the sale or resale of Transfer Restricted Securities (including, without limitation, any Exchange Offer Registration Statement and the related Prospectus to the extent that the same are required to permit resales of Notes by Broker-Dealers), the Company shall: (i) use its reasonable best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements (including, if required by the Act or any regulation thereunder, financial statements of any of its subsidiaries) for the period specified in Section 3 or 4 of this Agreement, as applicable; upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain a material misstatement or omission or (B) not to be effective and legally available for use in connection with the resale of Transfer Restricted Securities during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement, in the case of clause (A), correcting any such misstatement or omission, and, in the case of either clause (A) or (B), use its reasonable best efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter. Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that it is in the best interests of the Company not to disclose the existence of or facts surrounding any proposed or pending material corporate transaction involving the Company, the Company may allow the Shelf Registration Statement or the Exchange Offer Registration Statement to fail to be effective and usable as a result of such nondisclosure for up to 90 days during the three year period of effectiveness required by Section 4 hereof, but in no event for any period in excess of 45 consecutive days, provided, that in the event the Exchange Offer is Consummated, the Company shall not allow the Exchange Offer Registration Statement to fail to be effective and usable for a period in excess of 30 days during the one year period of effectiveness required by Section 3(c) hereof; (ii) prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, as applicable, or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with the applicable provisions of Rules 424 and 430A under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; 8 (iii) advise the underwriter(s), if any, and selling Holders promptly and, if requested by such Persons, to confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto, or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading, including, without limitation, under circumstances described in Section 6(c)(i) above. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Company shall use its reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) furnish to each of the selling Holders and each of the underwriter(s), if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review of such Holders and underwriter(s), if any, for a period of at least five business days, and the Company will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which selling Holders holding at least 20% in the aggregate principal amount of the outstanding Transfer Restricted Securities covered by such Registration Statement or the underwriter(s), if any, shall reasonably object within five business days after the receipt thereof. A selling Holder or underwriter, if any, shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains a material misstatement or omission; (v) make available at reasonable times for inspection by the selling Holders, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney or accountant retained by such selling Holders or any of the underwriter(s), all financial and other records, pertinent corporate documents and properties of the Company and each of its subsidiaries and cause the Company's and each of its subsidiaries' officers, directors and employees to supply all information reasonably requested by any such Holder, underwriter, attorney or accountant in connection with such Registration Statement subsequent to the filing thereof and prior to its effectiveness; (vi) if requested by any selling Holders or the underwriter(s), if any, promptly incorporate in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such selling Holders and underwriter(s), if any, may reasonably request to have included therein, including, without limitation, information relating to the "Plan of 9 Distribution" of the Transfer Restricted Securities, information with respect to the principal amount of Transfer Restricted Securities being sold to such underwriter(s), the purchase price being paid therefor and any other terms of the offering of the Transfer Restricted Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (vii) cause the Transfer Restricted Securities covered by the Registration Statement to be rated with the appropriate rating agencies, if so requested by the Holders of a majority in aggregate principal amount of Notes covered thereby or the underwriter(s), if any; (viii) furnish to each selling Holder and each of the underwriter(s), if any, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference), subject to any confidentiality agreements; (ix) deliver to each selling Holder and each of the underwriter(s), if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company hereby consents to the use of the Prospectus and any amendment or supplement thereto by each of the selling Holders and each of the underwriter(s), if any, in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto; (x) enter into, and cause each of its subsidiaries to enter into, such agreements (including an underwriting agreement), and make, and cause each of its subsidiaries to make, such representations and warranties, and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any Registration Statement contemplated by this Agreement, all to such extent as may be reasonably requested by any Holder of Transfer Restricted Securities or underwriter in connection with any sale or resale pursuant to any Registration Statement contemplated by this Agreement; and whether or not an underwriting agreement is entered into and whether or not the registration is an Underwritten Registration, the Company shall use its best efforts to: (A) furnish to each selling Holder and each underwriter, if any, in such substance and scope as they may request and as are customarily made by issuers to underwriters in primary underwritten offerings, upon the date of the Consummation of the Exchange Offer and, if applicable, the effectiveness of the Shelf Registration Statement: (1) a certificate, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, signed by (y) the President or any Vice President and (z) a principal financial or accounting officer of the Company and each of its subsidiaries, confirming, as of the date thereof, the matters set forth in paragraphs (j)(i), (ii), (iii) and (iv) of Section 8 of the Purchase Agreement and such other matters as such parties may reasonably request; (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Company, covering the matters set forth in paragraph (a) of Section 8 of the Purchase 10 Agreement and such other matter as such parties may reasonably request, and in any event including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Company and representatives of the independent public accountants for the Company in connection with the preparation of such Registration Statement and the related Prospectus and have considered the matters required to be stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing (relying as to materiality to a large extent upon facts provided to such counsel by officers and other representatives of the Company and without independent check or verification), such counsel does not believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment thereto became effective, and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial and statistical statements, notes and schedules and other financial data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated as of the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters by underwriters in connection with primary underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 8(g) of the Purchase Agreement, without exception, provided, however, that if such registration is not an Underwritten Registration and the customary comfort letter referred to above cannot be delivered, the Company shall use its reasonable best efforts to cause its independent accountants to deliver the highest level of comfort permitted to be given by such accountants under the then applicable standards of the American Institute of Certified Public Accountants with respect to such registration statement; (B) set forth in full or incorporate by reference in the underwriting agreement, if any, the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and (C) deliver such other documents and certificates as may be reasonably requested by such parties to evidence compliance with clause (A) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company pursuant to this clause (xi), if any. 11 If at any time the representations and warranties of the Company or any of its subsidiaries contemplated in clause (A)(1) above cease to be true and correct, the Company shall so advise the Initial Purchaser and the underwriter(s), if any, and each selling Holder promptly and, if requested by such Persons, shall confirm such advice in writing; (xi) prior to any public offering of Transfer Restricted Securities, cooperate with, and cause each of its subsidiaries to cooperate with, the selling Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as the selling Holders or underwriter(s) may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the Shelf Registration Statement; provided, however, that neither the Company nor any of its subsidiaries shall be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xii) shall issue, upon the request of any Holder of Series A Notes covered by the Shelf Registration Statement, Series B Notes, having an aggregate principal amount equal to the aggregate principal amount of Series A Notes surrendered to the Company by such Holder in exchange therefor or being sold by such Holder; such Series B Notes to be registered in the name of such Holder or in the name of the purchaser(s) of such Notes, as the case may be; in return, the Series A Notes held by such Holder shall be surrendered to the Company for cancellation; (xiii) cooperate with, and cause each of its subsidiaries to cooperate with, the selling Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and enable such Transfer Restricted Securities to be in such denominations and registered in such names as the Holders or the underwriter(s), if any, may request at least two business days prior to any sale of Transfer Restricted Securities made by such underwriter(s); (xiv) use its reasonable best efforts to cause the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter(s), if any, to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (xii) above; (xv) subject to Section 6(c)(i), if any fact or event contemplated by clause (c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (xvi) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of the Registration Statement and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with the Depository Trust Company; 12 (xvii) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD, and use its reasonable best efforts to cause such Registration Statement to become effective and approved by such governmental agencies or authorities as may be necessary to enable the Holders selling Transfer Restricted Securities to consummate the disposition of such Transfer Restricted Securities; (xviii) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) for the twelve-month period (A) commencing at the end of any fiscal quarter in which Transfer Restricted Securities are sold to underwriters in a firm or best efforts Underwritten Offering or (B) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement; (xix) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement, and, in connection therewith, cooperate with the Trustee and the Holders of Notes to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its reasonable best efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; (xx) cause all Transfer Restricted Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed if requested by the Holders of a majority in aggregate principal amount of Series A Notes or the managing underwriter(s), if any; and (xxi) provide promptly to each Holder upon request each document filed with the Commission pursuant to the requirements of Section 13 and Section 15 of the Exchange Act. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus. If so directed by the Company, each Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of such notice. In the event the Company shall give any such notice, the time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(iii)(D) hereof to and including the date when each selling Holder covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof or shall have received the Advice. 13 SECTION 7. REGISTRATION EXPENSES (a) All expenses incident to the Company's or any of its subsidiary's performance of or compliance with this Agreement will be borne by the Company regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses (including filings made by the Initial Purchaser or Holder with the NASD (and, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel that may be required by the rules and regulations of the NASD)); (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing (including printing certificates for the Series B Notes to be issued in the Exchange Offer and printing of Prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company, its subsidiaries and, subject to Section 7(b) below, the Holders of Transfer Restricted Securities; (v) all application and filing fees in connection with listing Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company and its subsidiaries (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its and each of its subsidiaries' internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with any Shelf Registration Statement required by this Agreement, the Company will reimburse the Holders of Transfer Restricted Securities being registered pursuant to the Shelf Registration Statement for the reasonable fees and disbursements of not more than one counsel chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities; provided, however, that in no event shall the aggregate amount payable by the Company pursuant to this Section 7(b) exceed $25,000. SECTION 8. INDEMNIFICATION (a) The Company agrees to indemnify and hold harmless (i) each Holder, (ii) each person, if any, who controls any Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and (iii) the respective officers, directors, partners, employees, representatives and agents of any Holder or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Holder"), against any losses, claims, damages or liabilities to which such Underwriter or such controlling person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as any such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (1) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Securities under the securities or "Blue Sky" laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"); or 14 (2) the omission or alleged omission to state in (A) the Registration Statement or any amendment thereto or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading or (B) in any Prospectus or any amendment or supplement thereto, a material fact required to be stated therein or necessary to make the statement therein, in the light of the circumstances under which they were made, not misleading; and will reimburse, as incurred, each Indemnified Holder for any legal or other expenses reasonably incurred by such Indemnified Holder in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to an Indemnified Holder to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or any amendment thereto, any Prospectus or any amendment or supplement thereto, or any Application in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Indemnified Holder specifically for use therein. This indemnity agreement will be in addition to any liability that the Company may otherwise have to the Indemnified Holders. The Company will not, without the prior written consent of the Indemnified Holders, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification by the Indemnified Holders may be sought hereunder (whether or not any Indemnified Holder is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all Indemnified Holders from all liability arising out of such claim, action, suit or proceeding. (b) Each Holder of Transfer Restricted Securities will severally and not jointly indemnify and hold harmless the Company, its directors, officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Securities Act, the Exchange Act, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Prospectus or any amendment or supplement thereto or any Application, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement was made in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Holders of Transfer Restricted Securities specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability that the Holders of Transfer Restricted Securities may otherwise have to the indemnified parties. The Holders of Transfer Restricted Securities will not, without the prior written consent of the Company, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification by the Company may be sought hereunder (whether or not the Company or any person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Company and each such controlling person from all liability arising out of such claim, action, suit or proceeding or otherwise with the consent of the Company. 15 (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party except to the extent that such omission results in the forfeiture by the indemnifying party of substantial rights and defenses. In case any such action is brought against any indemnified party, and such indemnified party notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the named parties in any such action (including any impleaded parties) include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties that are different from or additional to those available to any such indemnifying party, then the indemnifying parties shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable and documented out-of-pocket costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the immediately preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Indemnified Holders in the case of paragraph (a) of this Section 8 or the Company in the case of paragraph (b) of this Section 8, representing the indemnified parties under such paragraph (a) or paragraph (b), as the case may be, who are parties to such action or actions); (ii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying parties; or (iii) the indemnifying party shall have failed to assume the defense or retain counsel reasonably satisfactory to the indemnified party. After such notice from the indemnifying parties to such indemnified party (so long as the indemnified party shall have informed the indemnifying parties of such action in accordance with this Section 8 on a timely basis prior to the indemnified party seeking indemnification hereunder), the indemnifying parties will not be liable under this Section 8 for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party, unless such indemnified party waived its rights under this Section 8, in which case the indemnified party may effect such a settlement without such consent. (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the Company 16 on the one hand and the Holders from their sale of Transfer Restricted Securities on the other or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the Company on the one hand and the Holders on the other in connection with the actions, statements or omissions or alleged actions, statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand, or the Holders on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Holders agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Company on the one hand and the Holders on the other hand were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). Notwithstanding any other provision of this paragraph (d), the Holders shall not be obligated to make contributions hereunder that in the aggregate exceed the dollar amount of proceeds received by such Holder upon sale of Transfer Restricted Securities under this Agreement, less the aggregate amount of any damages that the Holders have otherwise been required to pay by reason of the untrue or alleged untrue statements, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), each person, if any, who controls any of the Holders within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Holders, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls any of the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company. SECTION 9. RULE 144A The Company hereby agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding, to make available to any Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities from such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A. SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS No Holder may participate in any Underwritten Registration hereunder unless such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters and other documents required under the terms of such underwriting arrangements. The Company shall not be required to participate in an Underwritten Registration unless Holders of at least $10,000,000 in aggregate principal amount of Transfer Restricted Securities so request, nor 17 shall the Company be required to participate in more than two Underwritten Registrations; provided that, this paragraph in no way alters the Company's other obligations with respect to this Agreement. SECTION 11. SELECTION OF UNDERWRITERS The Holders of Transfer Restricted Securities covered by the Shelf Registration Statement who desire to do so may sell such Transfer Restricted Securities in an Underwritten Offering. In any such Underwritten Offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of the Transfer Restricted Securities included in such offering; provided, however, that such investment bankers and managers must be reasonably satisfactory to the Company. SECTION 12. MISCELLANEOUS (a) Remedies. The Company agrees that monetary damages (including the liquidated damages contemplated hereby) would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. (c) Adjustments Affecting the Notes. The Company will not take any action, or permit any change to occur, with respect to the Notes that would materially and adversely affect the ability of the Holders to Consummate any Exchange Offer. (d) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose securities are being tendered pursuant to the Exchange Offer and that does not affect directly or indirectly the rights of other Holders whose securities are not being tendered pursuant to such Exchange Offer may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities being tendered or registered. (e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and 18 (ii) if to the Company: Pegasus Communications Corporation c/o Pegasus Communications Management Company 5 Radnor Corporate Center, Suite 454 100 Matsonford Road Radnor, Pennsylvania 19087 Telecopier No.: (610) 341-1835 Attention: Ted S. Lodge, Esq. With a copy to: Drinker Biddle & Reath LLP PNB Building, 11th Floor 1345 Chestnut Street Philadelphia, PA 19107 Telecopier No.: (215) 988-2757 Attention: Michael B. Jordan, Esq. All such notices and communications 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 on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. (f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders of Transfer Restricted Securities; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign acquired Transfer Restricted Securities from such Holder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and 19 enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Entire Agreement. This Agreement together with the other Operative Documents (as defined in the Purchase Agreement) is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. PEGASUS COMMUNICATIONS CORPORATION By: /s/ Marshall W. Pagon ------------------------------------- Name: Marshall W. Pagon Title: President CIBC WOOD GUNDY SECURITIES CORP. By: /s/ William Phoenix --------------------------------- Name: William Phoenix Title: Managing Director 21 EX-99.1 4 PRESS RELEASE DATED OCTOBER 8, 1997 FOR IMMEDIATE RELEASE - --------------------- PEGASUS COMMUNICATIONS CORPORATION ANNOUNCES PRIVATE OFFERING OF $100 MILLION OF SENIOR NOTES RADNOR, PA October 8, 1997 -- Pegasus Communications Corporation (Nasdaq: PGTV) announced today that it is privately offering approximately $100 million of senior notes. The Company commenced the offering today and anticipates using the proceeds of the offering to finance DBS acquisitions and repay borrowings under an existing credit facility. The terms of the offering have not been finalized. The securities being offered in the private offering will not be and have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States without registration or an applicable exemption from registration requirements. In connection with the offering, Pegasus would reorganize its DBS operating subsidiaries as subsidiaries of Pegasus Media & Communications, Inc., a wholly-owned subsidiary of Pegasus, and would consolidate its existing credit facilities into a new single $180 million credit facility. Pegasus Communications Corporation operates in two growing areas of television - direct broadcast satellite television (DBS) and broadcast televison (TV). In DBS, Pegasus Satellite Television is the largest independent provider of DIRECTV services in the US. Pegasus owns the exclusive right to provide DIRECTV to approximately 2.3 million households in 27 states and serves approximately 126,000 DBS subscribers, giving effect to pending acquisitions. Pegasus Broadcast Television operates eight TV stations serving approximately 1.9 million households in six TV markets, giving effect to the pending launch of two TV stations. Pegasus' TV stations are affiliated with FOX, UPN and WB. Pegasus also serves approximately 42,000 cable subscribers in New England and Puerto Rico. This press release contains information about pending transactions,and there can be no assurance that these transactions will be completed. ### For further information, contact: Robert N. Verdecchio, CFO - --------------------------------- Pegasus Communications Corporation 610-341-1801 EX-99.2 5 PRESS RELEASE DATED OCTOBER 8, 1997 [LOGO] FOR IMMEDIATE RELEASE - --------------------- PEGASUS COMMUNICATIONS CORPORATION ANNOUNCES TERMS OF PRIVATE OFFERING OF SENIOR NOTES RADNOR, PA, October 17, 1997 -- Pegasus Communications Corporation (Nasdaq: PGTV) announced today that it increased its previously announced private offering of senior notes to $115 million. The notes will bear interest at a rate of 9 5/8% per annum and will mature in 2005. The offering is scheduled to close on October 21, 1997. The Company anticipates using the proceeds of the offering to finance DBS acquisitions and repay borrowings under an existing credit facility. The securities being offered in the private offering will not be and have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States without registration or an applicable exemption from registration requirements. ### For further information, contact: Robert N. Verdecchio, CFO Pegasus Communications Corporation 610-341-1801 -----END PRIVACY-ENHANCED MESSAGE-----