This excerpt taken from the DTV 8-K filed Apr 28, 2005.
Item 2.06 Material Impairments
On April 22, 2005, The DIRECTV Group, Inc., a Delaware corporation (DIRECTV Group, or DTVG, or we), completed previously announced transactions by which Hughes Network Systems, Inc., a Delaware corporation (the Company) and wholly-owned subsidiary of DIRECTV Group, contributed substantially all of its assets and liabilities and a portion of the Companys SPACEWAY Ka-band satellite communications platform that is under development to Hughes Network Systems, LLC, a Delaware limited liability company (HNS LLC) in exchange for $190.7 million in cash, which represents the stated purchase price of $201.0 million less an estimated purchase price adjustment of $10.3 million and 100% of the equity interests of HNS LLC. Subsequently, 50% of the equity interests in HNS LLC was sold to SkyTerra Communications, Inc., a Delaware corporation (SkyTerra), in exchange for $50.0 million in cash and 300,000 shares of common stock of SkyTerra. The Company was also reimbursed by HNS LLC for certain costs related to the transactions in the amount of approximately $5.0 million. The price paid by HNS LLC is subject to further adjustment in accordance with the Contribution Agreement as defined below. We refer to these transactions collectively as the HNS Transactions. The HNS Transactions were completed pursuant to the Contribution and Membership Interest Purchase Agreement (the Contribution Agreement) among the DIRECTV Group, SkyTerra, the Company and HNS LLC, which agreement is included as Exhibit 10.2 to this report and is incorporated herein by reference. Immediately after the HNS Transactions, the Company changed its name to DTV Network Systems, Inc.
As part of the HNS Transactions, an Amended and Restated Limited Liability Company Agreement of HNS LLC (LLC Agreement) has been executed by the Company and SkyTerra effective as of April 22, 2005. Under the terms of the LLC Agreement, two classes of units of LLC interests are established: Class A Units are voting units granted to investors in HNS LLC in exchange for money or other property, and Class B Units are non-voting units and shall be granted to certain persons as determined by the managing member of HNS LLC in exchange for the performance of services. As of the date of the LLC Agreement, each of the Company and SkyTerra owns 50% of the outstanding Class A Units of HNS LLC.
Under the LLC Agreement, SkyTerra is designated as the managing member with full responsibility for the day-to-day operations, business and affairs of HNS LLC and will be paid a quarterly management fee of $250,000 for its services during the first twelve quarters following the closing date of the HNS Transactions. A seven member board of managers is established comprised of three members designated by SkyTerra, three members designated by the Company and one member to be jointly appointed by SkyTerra and the Company. Each of SkyTerra and the Company shall be entitled to designate 3 members for election to the board of managers so long as they and their permitted transferees retain in the aggregate 25% of the equity interests of HNS LLC.
Certain major business decisions by HNS LLC, which are defined in more detail in the LLC Agreement, require the consent of a majority of the board of managers (not including the manager jointly appointed by SkyTerra and the Company), including:
incurring debt or guarantee obligations in excess of $10.0 million;
except with respect to any drag-along rights pursuant to the Investor Rights Agreement (as defined below), entering into mergers, consolidations or other significant transactions, including any proposed initial public offering by HNS LLC, acquisitions, joint ventures, dispositions or equity investments in third parties (where such equity investments are in excess of $2.5 million in the aggregate);
hiring or terminating senior executive officers, determining the financial terms of their employment and approving plans to issue non-voting units to employees, officers and members of the board of managers;
approving the annual operating budget of HNS LLC and changing accounting policies;
replacing the managing member; and
making any loans, advances, guarantees and similar transactions to any member of the board of managers or their affiliates.
Neither the DIRECTV Group nor the Company is required to make additional capital contributions or to provide new guarantees, collateral or any like support for the debts, obligations or contracts of HNS LLC.
The LLC Agreement contains other terms and conditions customary in such agreements. The description above is qualified in its entirety by reference to the full text of the LLC Agreement which is filed herewith as Exhibit 10.1 and is incorporated herein by reference and to the full text of the Contribution Agreement.
On April 22, 2005, pursuant to the Contribution Agreement, the Company also entered into an investor rights agreement (the Investor Rights Agreement) with SkyTerra and HNS LLC. Under the terms of the Investor Rights Agreement, as holders of Class A units of HNS LLC, the Company and SkyTerra have certain customary tag along rights, drag-along rights, registration rights and other related rights, with respect to sales of those units. Each of the Company and SkyTerra has the right after five years from the closing date of the HNS Transactions to request up to five demand registrations each for underwritten public offerings of $50.0 million or more of the membership interests or other equity interests of HNS LLC. However, HNS LLC is only required to effect one registration in any six-month period. In addition, if HNS LLC becomes eligible to file a shelf registration statement with the Securities and Exchange Commission for its equity interests, each of the Company and SkyTerra will have the right to register sales of the equity interests of HNS LLC owned by them in amounts of $10.0 million or more. HNS LLC has agreed to indemnify the investors in connection with any registered transactions and pay for certain costs of registration.
The Investor Rights Agreement contains other terms and conditions customary in such agreements. The description above is qualified in its entirety by reference to the full text of the Investor Rights Agreement, a copy of which is filed herewith as Exhibit 10.3 and is incorporated herein by reference.
In connection with the transactions discussed above, DIRECTV Group recorded a pre-tax charge of $190.6 million in Asset impairment charges in the Consolidated Statements of Operations in the fourth quarter of 2004 to write down the Companys long-lived assets to their fair values based on the agreed upon sales value. Reference is made to the DIRECTV Group Annual Report on Form 10-K for the fiscal year ended December 31, 2004. DIRECTV Group incurred an additional pre-tax asset impairment charge of $20.9 million in the quarter ended March 31, 2005, which will be reported in the DIRECTV Group Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, which DIRECTV Group expects to file in early May 2005. Including this charge and the previously reported charge, the total impairment charge related to this transaction was $211.5 million. The DIRECTV Group received total proceeds of $257.3 million, including cash of $245.7 million, which is net of closing adjustments, and the fair value of the SkyTerra common stock received of $11.6 million. The proceeds remain subject to adjustment based on a working capital calculation required by the Contribution Agreement. Under certain circumstances, the DIRECTV Group may be required to contribute a portion of the cash proceeds back to HNS LLC, which could also result in an additional impairment charge.
Also, as a result of these transactions, DIRECTV Group expects to record additional pension and severance related charges of up to $30 million in the remainder of 2005, and may incur further charges for post-closing adjustments that are not reasonably determinable at this time.
On April 25, 2005, the DIRECTV Group issued a press release announcing the consummation of the HNS Transactions. The press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
See Item 9.01 below for the pro forma effect of this disposition on the DIRECTV Groups consolidated financial statements.
This filing contains certain statements that we believe are, or may be considered to be, forward-looking statements within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. Such forward-looking statements can generally be identified by the use of statements that include words such as believe, expect, anticipate, estimate or other similar words or phrases. Similarly, statements related to future events also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the future
results expressed or implied by the forward-looking statements. These various factors include the uncertainty inherent in the business operations of HNS LLC and other factors.