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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 19, 1999
PEGASUS COMMUNICATIONS CORPORATION
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(Exact Name of Registrant as Specified in Charter)
Delaware 0-21389 51-0374669
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(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
c/o Pegasus Communications Management Company, 225 City Line Avenue,
Suite 200, Bala Cynwyd, Pennsylvania 19004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 888-438-7488
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c/o Pegasus Communications Management Company
5 Radnor Corporate Center, Suite 454
100 Matsonford Rd.
Radnor, PA 19087
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(Former name or former address, if changed since last report.)
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Item 5. Other Events.
Exchange Offer for Subsidiary's Notes
On November 19, 1999, Pegasus Communications Corporation ("Pegasus")
completed an offer to exchange $155.0 million in principal amount of its 12 1/2%
Series A senior notes due 2007 for $155.0 million in principal amount of
outstanding senior subordinated notes due 2007 of its subsidiaries, Digital
Television Services, Inc. and DTS Capital, Inc. The effect of the exchange offer
was to simplify Pegasus' capital structure, and provide Pegasus with greater
flexibility under the debt covenants of its existing indebtedness.
Fourth Quarter Results
In the fourth quarter of 1999, Pegasus Communications Corporation added
internal net direct broadcast satellite subscriber additions of 65,000, compared
to 38,100 direct broadcast satellite subscribers in the fourth quarter of 1998.
Subscriber penetration increased from 13.0% at September 30, 1999 to 14.3% at
December 31, 1999.
Merger with Golden Sky Holdings, Inc.
On January 10, 2000, Pegasus entered into a definitive merger agreement
with Golden Sky Holdings, Inc. Golden Sky is the second largest independent
distributor of DIRECTV. It operates in 23 states and its territories include
approximately 1.9 million households and 345,200 subscribers. The following is a
summary of the material provisions of the merger agreement.
The Merger. The merger will be accomplished by merging a wholly-owned
subsidiary of Pegasus with and into Golden Sky. Golden Sky will be the surviving
corporation and will continue its corporate existence. When the merger becomes
effective, all of the issued and outstanding capital stock of Golden Sky, except
for treasury shares and dissenting shares, will be converted into 6.5 million
shares of Pegasus Class A common stock less adjustments arising from:
o sales by current Golden Sky stockholders, pursuant to the merger
agreement, of their Golden Sky stock to Pegasus for up to $25.0
million in cash in the aggregate;
o the replacement, pursuant to the merger agreement, of outstanding
options and warrants for Golden Sky capital stock (to the extent
not sold by the holders to Pegasus for cash as described above)
with options and warrants, as applicable, for Pegasus Class A
common stock; and
o certain obligations of the Golden Sky stockholders for expenses
related to the merger agreement.
The purchase price of the merger will include:
o 6.5 million shares and options of Pegasus' Class A common stock,
to be issued to Golden Sky's stockholders,
o the assumption of liabilities amounting to approximately $340.7
million,
o merger costs of approximately $4.9 million, and
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o a deferred tax liability of approximately $317.6 million.
Certain Covenants. The merger agreement contains covenants of Golden Sky
and Pegasus that are standard for transactions of this type. The covenants
include the agreement by Pegasus to file a registration statement with the SEC
registering the Class A common stock issued in the merger. In addition, Pegasus
will enter into a registration rights agreement that will provide certain Golden
Sky stockholders with demand, piggyback and shelf registration rights with
respect to resale of their shares. Further, two principal Golden Sky
stockholders will each have the right to name one director to Pegasus' board of
directors.
Conditions. The obligations of the parties to the merger agreement are
subject to the fulfillment of customary conditions, including the:
o obtaining of all requisite consents or approval by any
governmental authority or third parties, including the expiration
or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976;
o approval of the merger proposal by Pegasus' and Golden Sky's
stockholders;
o absence of a material adverse change with respect to the other
party; and
o absence of certain litigation or related actions affecting the
other party.
Other Pending Direct Broadcast Satellite Acquisitions
As of January 10, 2000, Pegasus has entered into letters of intent and a
definitive agreement to acquire DIRECTV distribution rights in rural areas of
seven states. In the aggregate, the consideration for the pending direct
broadcast satellite acquisitions is $39.4 million in cash, $2.2 million in
promissory notes, $32.5 million in preferred stock and $38.0 million in Class A
common stock. The closings of these acquisitions are subject to negotiation of
definitive agreements, third-party approvals and other customary conditions.
The territories covered by the letters of intent and definitive agreement
include approximately 437,300 television households, including approximately
21,900 seasonal residences and 43,700 business locations and approximately
50,700 subscribers.
Completed Direct Broadcast Satellite Acquisitions
From October 1, 1999 through January 10, 2000, Pegasus completed three
acquisitions for DIRECTV distribution rights in rural areas of Minnesota and
Mississippi. In the aggregate, the consideration for the completed direct
broadcast satellite acquisitions was $3.7 million in cash, $5.7 million in
Series B junior convertible participating preferred stock and $2.1 million in
promissory notes. The territories covered by these transactions include
approximately 47,700 households, including approximately 2,400 seasonal
residences and 4,800 business locations and 6,300 subscribers.
Investment in Personalized Media Communications, LLC and Licensing of Patents
Pegasus is making an investment in Personalized Media Communications, LLC.
Personalized Media is an advanced communications technology company that owns
an intellectual property portfolio consisting of seven issued U.S. patents and
over 10,000 claims submitted in several hundred pending U.S. patent
applications. A majority of the pending claims are based on a 1981 filing date,
with the remainder based on a 1987 filing date. Mary C. Metzger, Chairman of
Personalized Media and a member of Pegasus' board of directors, and John C.
Harvey, Managing Member of Personalized Media and Ms. Metzger's husband, own a
majority of and control Personalized Media as general partners of the Harvey
Family Limited Partnership.
A subsidiary of Personalized Media is granting to Pegasus an exclusive
license for the distribution of satellite based services using "Ku band" BSS
frequencies at the 101, 110 and 119 West Longitude orbital locations and "Ka
band" FSS frequencies at the 99, 101, 103 and 125 West Longitude orbital
locations, which frequencies have been licensed by the Federal Communications
Commission to affiliates of Hughes Electronics Corporation. In addition,
Personalized Media is granting to Pegasus the right to license on an exclusive
basis and on favorable economic terms the patent portfolio of Personalized
Media in connection with other frequencies that may be licensed to Pegasus in
the future.
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The license being granted by Personalized Media's subsidiary provides
rights to all claims covered by the Harvey patent portfolio, including
functionality for automating the insertion of programming at a direct broadcast
satellite uplink, the enabling of pay-per-view buying, the authorization of
receivers, the assembly of records of product and service selections made by
viewers including the communication of this information to billing and
fulfillment operations, the customizing of interactive program guide features
and functions made by viewers and the downloading of software to receivers by
broadcasters. Pegasus will pay license fees to Personalized Media of $100,000
per year for three years.
Pegasus is acquiring preferred interests of Personalized Media for
approximately $14.3 million in cash, 200,000 shares of Pegasus' Class A common
stock and warrants to purchase 1.0 million shares of Pegasus' Class A common
stock at an exercise price of $90.00 per share and with a term of ten years.
After certain periods of time, Personalized Media may redeem the preferred
interests, and Pegasus may require the redemption of the preferred interests,
in consideration for Personalized Media's transfer to Pegasus of Personalized
Media's ownership interest in its wholly-owned subsidiary that holds the
exclusive license from Personalized Media for the rights that are licensed to
Pegasus. Pegasus may also be required to make an additional payment to
Personalized Media if certain contingencies occur that Pegasus believes are
unlikely to occur. Because of the speculative nature of the contingencies, it
is not possible to estimate the amount of any such additional payment, but in
some cases it could be material. As part of the transaction, Personalized Media
will be entitled to designate one nominee to serve on Pegasus' board of
directors.
Sale of Puerto Rico Cable System
Pegasus has entered into a letter of intent to sell the assets of its
cable system business in Puerto Rico to a subsidiary of Centennial Cellular
Corporation for $170.0 million in cash, subject to certain adjustments. The sale
of this cable system is subject to the negotiation of a definitive agreement,
third party approvals, including regulatory approvals, and other customary
conditions. The sale is also subject to approval by Pegasus' board of directors.
Pegasus Media & Communications Credit Facility
Pegasus Media & Communications, Inc., a wholly-owned subsidiary of
Pegasus, has received credit commitments from a syndicate of lenders aggregating
$500 million. The new Pegasus Media & Communications credit facility will
replace the existing Pegasus Media & Communications and Digital Television
Services, Inc. credit facilities. Pegasus Media & Communications can use
borrowings under the credit facility for acquisitions and general corporate
purposes. The commitment is subject to customary conditions. The following
summary of the material provisions of the credit facility is not complete, and
is subject to all the provisions of the credit facility.
Pegasus and the lenders intend the new facility to include a $225.0
million secured reducing revolving credit facility that will mature October 31,
2004, as well as a $275.0 million secured term loan maturing April 30, 2005.
Furthermore, Pegasus Media & Communications will be permitted to borrow up to
$200.0 million under an incremental secured term loan maturing July 31, 2005.
The new facility will be secured by substantially all assets of Pegasus Media &
Communications, and a pledge of all capital stock of it and certain of its
principal subsidiaries.
Borrowings under the credit facility bear interest at LIBOR or the prime
rate, as selected by Pegasus Media & Communications, plus spreads that vary with
its ratio of total debt to a measure of its cash flow. The credit facility
requires an annual commitment fee of 0.75% of the unused portion of the
revolving credit commitment when less than 50% of the revolving credit
commitment is utilized, and an annual commitment fee of 0.50% of the unused
portion of the revolving credit commitment when greater than 50% of the
revolving credit commitment is utilized. The credit facility requires Pegasus
Media & Communications to purchase an interest rate hedging contract covering an
amount equal to at least 50% of the total amount of the term loan. Hedging
requirements for the revolving credit facility and the term loan will be based
on a method yet to be determined.
The Pegasus Media & Communications credit facility requires prepayments
and concurrent reductions of the commitment customary for credit facilities of
this nature. The credit facility:
o limits the amounts of indebtedness that Pegasus Media &
Communications and its subsidiaries may incur,
o requires Pegasus Media & Communications to maintain a maximum
leverage ratio, a minimum interest coverage, and a minimum fixed
charge coverage, and
o limits dividends and other restricted payments.
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Unless there is a default under the credit facility, Pegasus Media &
Communications can make certain distributions to Pegasus, including the
distribution to Pegasus of enough money to pay its interest and dividend
obligations under its publicly held debt securities and, beginning in 2002, its
Series A preferred stock. The credit facility contains other customary
covenants, representations, warranties, indemnities, conditions precedent to
closing and borrowing, and events of default.
Beginning March 31, 2001, the revolving credit commitment under the
credit facility will begin to reduce in quarterly amounts ranging from a 10%
annualized reduction in 2001 to a 50% annualized reduction in 2004. Amortization
will begin on the term loan on March 31, 2001 in quarterly amounts ranging from
0.25% in 2001 to 25% in 2005, with the balance due at maturity. The incremental
term loan will be accessible until June 30, 2001 with amortization commencing,
in quarterly amounts ranging from 0.25% in 2001 to 25%, on December 31, 2004
with the balance due at maturity.
DIRECTV Litigation
On June 3, 1999, the National Rural Telecommunications Cooperative filed
a lawsuit in federal court against DIRECTV seeking a court order to enforce the
National Rural Telecommunications Cooperative's contractual rights to obtain
from DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the National
Rural Telecommunications Cooperative's members and affiliates in their rural
markets. The National Rural Telecommunications Cooperative also sought a
temporary restraining order preventing DIRECTV from marketing the premium
programming in such markets and requiring DIRECTV to provide the National Rural
Telecommunications Cooperative with the premium programming for exclusive
distribution in those areas. The court, in an order dated June 17, 1999, denied
the National Rural Telecommunications Cooperative a preliminary injunction on
such matters, without deciding the underlying claims. On July 22, 1999, DIRECTV
responded to the National Rural Telecommunications Cooperative's continuing
lawsuit by rejecting the National Rural Telecommunications Cooperative's claims
to exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the National
Rural Telecommunications Cooperative. In particular, DIRECTV contends in its
counterclaim that the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative is measured solely by the orbital life of DBS-1,
the first DIRECTV satellite launched into orbit at the 101o W orbital location,
without regard to the orbital lives of the other DIRECTV satellites at the 101o
W orbital location. DIRECTV also alleges in its counterclaim that the National
Rural Telecommunications Cooperative's right of first refusal, which is
effective at the end of the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative, does not provide for certain programming and
other rights comparable to those now provided under the contract. On September
8, 1999, the court denied a motion by DIRECTV to dismiss certain of the National
Rural Telecommunications Cooperative's claims, leaving all of the causes of
action asserted by the National Rural Telecommunications Cooperative at issue.
On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations
of the end of term and right of first refusal provisions. On August 26, 1999,
the National Rural Telecommunications Cooperative filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to
the National Rural Telecommunications Cooperative its share of launch fees and
other benefits that DIRECTV and its affiliates have received relating to
programming and other services. On November 15, 1999, the court granted a
motion by DIRECTV and dismissed a portion of the National Rural
Telecommunications Cooperative's lawsuit regarding launch fees and other
benefits. In particular, the court dismissed the tort claim asserted by the
National Rural Telecommunications Cooperative, but left in place the remaining
claims asserted by the National Rural Telecommunications Cooperative. The court
also consolidated that lawsuit with the other pending National Rural
Telecommunications Cooperative/DIRECTV lawsuit. The court set various discovery
and motion deadlines for the Spring and Summer of 2000 but did not set a trial
date.
On December 29, 1999, DIRECTV filed a motion for partial summary judgment.
The motion seeks a court order that National Rural Telecommunications
Cooperative's right of first refusal, effective at the termination of DIRECTV's
contract with National Rural Communications Cooperative does not include
programming services and is limited to 20 program channels of transponder
capacity. DIRECTV's motion is scheduled to be heard by the court on February 7,
2000. The court has not yet set a trial date on the merits of the claims.
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On January 10, 2000, Pegasus and Golden Sky Systems, Inc. filed a class
action in federal court in Los Angeles against DIRECTV. In this new litigation,
Pegasus and Golden Sky are representatives of a proposed class that would
include all members and affiliates of National Rural Telecommunications
Cooperative that are distributors of DIRECTV. The complaint contains causes of
action for various torts, common counts and declaratory relief based on
DIRECTV's failure to provide National Rural Telecommunications Cooperative with
premium programming, thereby preventing National Rural Telecommunications
Cooperative from providing the programming to the class members. The claims are
also based on DIRECTV's position with respect to launch fees and other benefits,
term and rights of first refusal. The complaint seeks monetary damages and a
court order regarding the rights of National Rural Telecommunications
Cooperative and its members and affiliates. The outcome of this litigation and
the litigation filed by National Rural Telecommunications Cooperative could have
a material adverse effect on Pegasus' direct broadcast satellite business
because Pegasus is an associate of the National Rural Telecommunications
Cooperative with contract rights that are affected by the contractual
relationship between the National Rural Telecommunications Cooperative and
DIRECTV.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Ted S. Lodge
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Ted S. Lodge
Senior Vice President
January 11, 2000
