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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13E-4
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1)
of the Securities Exchange Act of 1934)
CD Radio Inc.
(Name of Issuer)
CD Radio Inc.
(Name of Person(s) Filing Statement)
5% Delayed Convertible Preferred Stock
(Title of Class of Securities)
None
(CUSIP Number of Class of Securities)
David Margolese
Chairman and Chief Executive Officer
CD Radio Inc.
Sixth Floor, 1001 - 22nd Street, N.W.
Washington, D.C. 20037
Telephone (202) 296-6192
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Commissions on Behalf
of the Person(s) Filing Statement)
Copy To:
Leonard V. Quigley
Mitchell S. Fishman
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
(212) 373-3000
October 16, 1997
(Date Tender Offer First Published, Sent or Given to Security Holders)
CALCULATION OF FILING FEE
- --------------------------------------------------------------------------------
Transaction Valuation* Amount of Filing Fee
$120,016,756.00 $24,003.36
- --------------------------------------------------------------------------------
*Calculated pursuant to Rule 0-11(b)(2) under the Securities Exchange Act of
1934, based on the book value of the 5% Delayed Convertible Preferred Stock to
be received by the Issuer.
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: $35,369.00
Form or Registration No.: Form S-4
Filing Party: CD Radio Inc.
Date Filed: September 2, 1997
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Item 1. Security and Issuer.
(a) The issuer to which this Schedule 13E-4 (the "Schedule") relates is
CD Radio Inc. (the "Company"), which has its principal executive office located
at Sixth Floor, 1001 - 22nd Street, N.W., Washington, D.C. 20037.
(b) This Schedule relates to an offer (the "Exchange Offer") by the
Company to acquire up to all of the outstanding shares (the "Shares") of its 5%
Delayed Convertible Preferred Stock (the "5% Preferred Stock") by exchanging up
to 1,932,073 shares of its new 10 1/2% Series C Convertible Preferred Stock (the
"New Preferred Stock") for the Shares at a rate of one share of New Preferred
Stock for each $100 in Exchange Rate Liquidation Preference represented by
Shares not previously converted. The "Exchange Rate Liquidation Preference"
shall be the amount determined by dividing the liquidation preference of the
Shares being exchanged (including accrued and unpaid dividends on the Shares) by
0.696145. Such exchange will be upon the terms and subject to the conditions set
forth in the Prospectus dated October 16, 1997 (the "Prospectus") and the
related Letter of Transmittal, copies of which are attached to and filed with
this Schedule as Exhibits (a)(1) and (a)(2) respectively. As of September 30,
1997, there were 5,222,608 Shares outstanding.
(c) The information set forth under the captions "Risk Factors -- Lack
of Established Trading Market for New Preferred Stock" and "Market and Trading
Information" in the Prospectus is incorporated herein by reference.
(d) Not applicable.
Item 2. Source and Amount of Funds or Other Consideration.
(a) The information set forth on the cover of the Prospectus and under
the captions "The Exchange Offer -- Terms of the Exchange" and "Description of
New Preferred Stock" in the Prospectus is incorporated herein by reference.
(b) Not applicable.
Item 3. Purpose of the Tender Offer and Plans or Proposals of the Issuer or
Affiliate.
The information set forth on the cover of the Prospectus and under the
captions "The Exchange Offer -- Purpose of the Exchange Offer," "-- The
Solicitation" and "The Proposed Amendment" in the Prospectus is incorporated
herein by reference. Upon consummation of the Exchange Offer, all Shares
tendered for exchange and not withdrawn will be retired.
(a) The information set forth on the cover of the Prospectus and under
the captions "Risk Factors -- Reduced Trading Market for 5% Preferred Stock" and
"Proposed Financing" in the Prospectus is incorporated herein by reference.
(b)-(d) None.
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(e) The information set forth under the captions "Proposed Financing,"
"Capitalization," "Description of Series D Preferred Stock," "Description of
Certain Indebtedness" and "Description of Capital Stock" in the Prospectus is
incorporated herein by reference.
(f) None.
(g) The information set forth under the caption "Risk Factors --
Anti-takeover Provisions" in the Prospectus is incorporated herein by reference.
(h)-(j) None.
Item 4. Interest in Securities of the Issuer.
The information set forth under the caption "Description of Capital
Stock -- 5% Preferred Stock" in the Prospectus is incorporated herein by
reference.
Item 5. Contracts, Arrangements, Understandings or Relationships with
Respect to the Issuer's Securities.
The information set forth under the caption "Principal Stockholders --
Voting Trust Agreement" in the Prospectus is incorporated herein by reference.
Item 6. Persons Retained, Employed or to be Compensated.
The information set forth under the caption "The Exchange Offer --
Dealer Manager" in the Prospectus is incorporated herein by reference.
Item 7. Financial Information.
(a)(1) The information set forth under Item 8, "Financial Statements
and Supplementary Data" of the Company's Annual Report on Form 10-K, as amended
by the Annual Report on Form 10-K/A, for the year ended December 31, 1996,
attached to this Schedule as Exhibit (g)(1), is incorporated herein by
reference.
(a)(2) The information set forth in pages 1 through 6 of Part I,
"Financial Information" of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997, attached to this Schedule as Exhibit (g)(2), is
incorporated herein by reference.
(a)(3) The information set forth under the captions "Prospectus Summary
- -- Summary Consolidated Financial Data" and "Selected Historical Financial
Information" in the Prospectus is incorporated herein by reference.
(a)(4) The book value per share of the Company's Common Stock, par
value $.001 per share, as of the end of the fiscal year ended December 31, 1996
and as of June 30, 1997 was $0.48 and $1.19 respectively.
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(b) The information set forth under the caption "Capitalization" in the
Prospectus is incorporated herein by reference.
Item 8. Additional Information.
The information set forth in the entire text of the Prospectus and the
related Letter of Transmittal is incorporated herein by reference.
(a) None.
(b) None.
(c) Not applicable.
(d) None.
(e) None.
Item 9. Material to be Filed as Exhibits.
(a)(1) Prospectus, dated October 16, 1997.
(a)(2) Form of Letter of Transmittal.
(a)(3) Form of Notice of Guaranteed Delivery.
(a)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
(a)(5) Form of Letter to Clients.
(a)(6) Press Release dated September 2, 1997.
(b) None.
(c) Voting Trust Agreement, dated August 26, 1997, among CD Radio Inc.,
Darlene Friedland and David Margolese, as Trustee.
(d) None.
(e) See Exhibit (a)(1) hereto.
(f) None.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Date: October 16, 1997
CD RADIO INC.
By: /s/ David Margolese
---------------------------
David Margolese
Chairman and Chief Executive Officer
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STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as ..................'D'
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
(a)(1) -- Prospectus, dated October 16, 1997.
(a)(2) -- Form of Letter of Transmittal.
(a)(3) -- Form of Notice of Guaranteed Delivery.
(a)(4) -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
(a)(5) -- Form of Letter to Clients.
(a)(6) -- Press Release dated September 2, 1997.
(c) -- Voting Trust Agreement, dated August 26, 1997, among CD Radio
Inc., Darlene Friedland and David Margolese, as Trustee.
(g)(1) -- Item 8 of the Company's Annual Report on Form
10-K/A for the year ended December 31, 1996.
(g)(2) -- Pages 1 through 6 of Part I of the Company's
Quarterly Report on Form 10-Q for the period ended
June 30, 1997.
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PROSPECTUS
CD RADIO INC.
OFFER TO EXCHANGE
10 1/2% SERIES C CONVERTIBLE PREFERRED STOCK
FOR 5% DELAYED CONVERTIBLE PREFERRED STOCK
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CD Radio Inc. (the 'Company') hereby offers, upon the terms and subject to
the conditions set forth in this Prospectus (the 'Prospectus') and in the
accompanying Letter of Transmittal (the 'Letter of Transmittal'), to exchange
(the 'Exchange Offer') up to 1,932,073 shares of its new 10 1/2% Series C
Convertible Preferred Stock (the 'New Preferred Stock') for up to all of the
outstanding shares of its 5% Delayed Convertible Preferred Stock (the '5%
Preferred Stock') at a rate of one share of New Preferred Stock for each $100 in
Exchange Rate Liquidation Preference represented by shares of 5% Preferred Stock
not previously converted. The 'Exchange Rate Liquidation Preference' shall be
the amount determined by dividing (x) the liquidation preference of the shares
of 5% Preferred Stock being exchanged (including accrued and unpaid dividends
thereon, if any) by (y) 0.696145. On November 13, 1997, the assumed expiration
date of the Exchange Offer, the Exchange Rate Liquidation Preference will be
approximately $37.00 per share of 5% Preferred Stock. The liquidation preference
of each share of New Preferred Stock (the 'Liquidation Preference') will be
equal to $100.00. The Company will pay cash to exchanging holders of 5%
Preferred Stock in lieu of issuing fractional shares of New Preferred Stock.
Holders of New Preferred Stock will be entitled to the payment of dividends
commencing on November 15, 2002 as described below. As of September 30, 1997,
there were 5,222,608 shares of 5% Preferred Stock outstanding.
In conjunction with the Exchange Offer, the Company is soliciting (the
'Solicitation') consents ('Consents') from the holders of record of its Common
Stock, par value $.001 per share (the 'Common Stock'), and its 5% Preferred
Stock on October 1, 1997 (the 'Record Date') to a proposed amendment (the
'Proposed Amendment') to the Certificate of Designations of the 5% Preferred
Stock (the 'Certificate of Designations') (i) to allow the Company to redeem the
5% Preferred Stock (to the extent not previously converted) in whole or in part
upon the sale of any equity or debt securities in one or more offerings (each
such offering, a 'Qualifying Offering') occurring on or prior to December 30,
1997 for gross proceeds in an aggregate cash amount of not less than $100
million and (ii) to amend certain of the redemption provisions relating to the
requirements for the delivery of a notice of redemption in connection therewith.
If the Proposed Amendment is adopted, then upon the consummation of the
Qualifying Offerings for aggregate proceeds of $100 million, the Company will be
permitted to redeem the shares of 5% Preferred Stock held by holders who do not
tender their shares of 5% Preferred Stock in the Exchange Offer. The Company is
conducting the Solicitation pursuant to a separate Consent Solicitation
Statement dated on or about the date hereof (the 'Consent Solicitation
Statement'). The Company will make no separate payment for Consents delivered in
the Solicitation. Consents from the holders of a majority of the issued and
outstanding Common Stock and 5% Preferred Stock, respectively (the 'Requisite
Consents'), must be obtained in order to adopt the Proposed Amendment, and once
the Requisite Consents are obtained, the Certificate of Designations will be
amended to reflect the Proposed Amendment regardless of whether the Exchange
Offer is consummated. THE COMPANY IS NOT ASKING HOLDERS OF THE 5% PREFERRED
STOCK FOR A PROXY AND SUCH HOLDERS ARE REQUESTED NOT TO SEND THE COMPANY A
PROXY.
The Exchange Offer is one component of a financing transaction that
includes an underwritten public offering of 3,500,000 shares of Common Stock
(the 'Stock Offering') and an underwritten public offering of the Company's
Senior Discount Notes due 2007 for gross proceeds of $150 million (the 'Notes
Offering' and, together with the Stock Offering, the 'Offerings'). Separate
registration statements have been filed for each of the Stock Offering and the
Notes Offering, and such offers will be made by separate prospectuses. The
consummation of the Exchange Offer is not conditioned upon the consummation of
either the Notes Offering or the Stock Offering. Each of the Offerings is
conditioned upon consummation of the Exchange Offer.
The Exchange Offer will expire at 12:00 Midnight, New York City time, on
November 13, 1997, unless extended (the 'Expiration Date'). Tenders of 5%
Preferred Stock may be withdrawn at any time prior to the Expiration Date and,
unless accepted for exchange by the Company, may be withdrawn at any time after
forty business days after the date of this Prospectus.
The Exchange Offer is conditioned upon, among other things, (i) receipt by
the Company of the Requisite Consents to the Proposed Amendment, (ii) a minimum
of 95% of the issued and outstanding shares of 5% Preferred Stock being tendered
for exchange and not withdrawn prior to the Expiration Date and (iii) the
General Conditions (as defined herein). There can be no assurance that these
conditions will be satisfied or waived. The Company reserves the right to waive
certain of the conditions to the Exchange Offer and to amend or modify the
Exchange Offer at any time for any reason. See 'The Exchange Offer -- Expiration
Date; Extension; Amendments' and ' -- Conditions of the Exchange Offer.'
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SEE 'RISK FACTORS' BEGINNING ON PAGE 24 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN EVALUATING THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The Dealer Manager for the Exchange Offer is:
MERRILL LYNCH & CO.
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The date of this Prospectus is October 16, 1997.
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CERTAIN PERSONS PARTICIPATING IN THE EXCHANGE OFFER MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NEW
PREFERRED STOCK AND THE COMMON STOCK, OR EITHER OF THEM. SPECIFICALLY, THE
DEALER MANAGER MAY BID FOR AND PURCHASE NEW PREFERRED STOCK AND COMMON STOCK, OR
EITHER OF THEM, IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
'MARKET AND TRADING INFORMATION.'
IN CONNECTION WITH THE EXCHANGE OFFER AND THE STOCK OFFERING, THE DEALER
MANAGER AND CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE 'MARKET AND TRADING INFORMATION.'
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(cover continued from previous page)
The terms of the Preferred Stock Investment Agreement (as defined herein)
require that the Company not undertake to conduct any debt or equity financing
that is not either pari passu or junior to the 5% Preferred Stock in seniority,
structure and maturity until the Company completes a Pre-Amendment Qualifying
Offering (as defined herein).
IF THE PROPOSED AMENDMENT IS NOT APPROVED BY THE COMPANY'S STOCKHOLDERS AND
ANY SHARES OF 5% PREFERRED STOCK REMAIN OUTSTANDING AFTER THE EXCHANGE OFFER,
THE COMPANY WILL NOT BE PERMITTED TO UNDERTAKE ANY DEBT OR EQUITY FINANCING THAT
IS SENIOR TO THE 5% PREFERRED STOCK. THE COMPANY DOES NOT INTEND TO COMMENCE THE
OFFERINGS UNTIL THE SOLICITATION IS SUBSTANTIALLY COMPLETED AND THE NOTES
OFFERING WILL NOT BE CONSUMMATED UNLESS THE EXCHANGE OFFER AND THE SOLICITATION
ARE COMPLETED AND NO SHARES OF 5% PREFERRED STOCK REMAIN OUTSTANDING. SEE 'THE
EXCHANGE OFFER -- TERMS OF THE EXCHANGE OFFER,' ' -- THE SOLICITATION' AND 'THE
PROPOSED AMENDMENT.'
The terms of the New Preferred Stock (including dividend rate, liquidation
preference and conversion and redemption rights) differ in material respects
from the terms of the 5% Preferred Stock for which it may be exchanged pursuant
to the Exchange Offer. For a comparison of certain material terms of the New
Preferred Stock and the 5% Preferred Stock, see 'Prospectus
Summary -- Comparison of New Preferred Stock and 5% Preferred Stock.'
The annual dividend rate per share of the New Preferred Stock will be an
amount equal to 10.5% of the sum of (x) the liquidation preference of the New
Preferred Stock and (y) all accrued and unpaid dividends, if any, whether or not
declared, from the date of issuance of the shares of New Preferred Stock to the
applicable dividend payment date. Dividends on the shares of New Preferred Stock
will be cumulative, accruing quarterly and, when and as declared by the Board of
Directors of the Company, will be payable quarterly initially on November 15,
2002 (the 'First Scheduled Dividend Payment Date') and on February 15, May 15,
August 15 and November 15 in each year thereafter. In addition, accrued
dividends on the shares of New Preferred Stock will be paid on the redemption
date of any share of New Preferred Stock redeemed by the Company, on the
purchase date of any share of New Preferred Stock purchased by the Company
pursuant to an Offer to Purchase (as defined herein) or on the conversion date
of any share of New Preferred Stock converted into shares of Common Stock on or
after the First Scheduled Dividend Payment Date. No accrued dividends will be
paid on any shares of New Preferred Stock that are converted by the holders
thereof prior to the First Scheduled Dividend Payment Date, unless such shares
of New Preferred Stock are converted on or prior to a redemption date by holders
thereof electing to convert such shares after having received a notice of
redemption for such shares. Dividends may be paid in cash, shares of Common
Stock or any combination thereof at the option of the Company. Common Stock
issued to pay dividends will be valued at the average closing price of the
Common Stock as reported in The Wall Street Journal for the 20 consecutive
trading days immediately preceding the date of such payment. Dividends on the
shares of New Preferred Stock will be paid to the holders of record of the
shares of New Preferred Stock on a record date, not more than 40 days nor fewer
than 10 days preceding the payment date thereof. See 'Description of New
Preferred Stock -- Dividends.'
Except as described below, the shares of New Preferred Stock may not be
redeemed by the Company at its option prior to November 15, 2002. From and after
November 15, 1999 and prior to
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November 15, 2002, the Company may redeem shares of New Preferred Stock, in
whole or in part, at a redemption price of 100% of the Liquidation Preference of
the shares of New Preferred Stock redeemed, plus accrued and unpaid dividends,
if any, whether or not declared, to the redemption date, if the average closing
price of the Common Stock as reported in The Wall Street Journal for the 20
consecutive trading days prior to the notice of redemption thereof equals or
exceeds $31.50 per share (subject to adjustments). From and after November 15,
2002, the Company may redeem the outstanding shares of New Preferred Stock, in
whole or in part, initially at a redemption price of 105.25% of the Liquidation
Preference of the shares of New Preferred Stock redeemed and thereafter at
prices declining ratably to 100% of the Liquidation Preference of the shares of
New Preferred Stock redeemed from and after November 15, 2005, plus accrued and
unpaid dividends, if any, whether or not declared, to the redemption date. In
addition, within 30 days of the closing of the Debt Offering (as defined
herein), the Company may redeem up to 50% of the outstanding shares of New
Preferred Stock at a redemption price of 100% of the Liquidation Preference of
the shares of New Preferred Stock redeemed, plus accrued and unpaid dividends,
if any, whether or not declared, to the redemption date. On November 15, 2012,
the Company is required to redeem all outstanding shares of New Preferred Stock
at a redemption price of 100% of the Liquidation Preference, plus accrued and
unpaid dividends, if any, to the redemption date. The New Preferred Stock will
not be subject to any mandatory sinking fund redemption. See 'Description of New
Preferred Stock -- Redemption.'
Upon the occurrence of a Change in Control (as defined herein), the Company
must make an offer to purchase all outstanding shares of New Preferred Stock at
a purchase price in cash equal to 101% of its Liquidation Preference, plus all
accrued and unpaid dividends, if any, to the date such shares are purchased. See
'Description of New Preferred Stock -- Change in Control.'
Each share of New Preferred Stock may be converted at any time at the
option of the holder, into a number of shares of Common Stock calculated by
dividing the Liquidation Preference of the New Preferred Stock (without accrued
and unpaid dividends) by a conversion price (the 'Conversion Price') equal to
(x) prior to the date of the first underwritten public offering of the Company's
Common Stock following the initial issuance of the New Preferred Stock, $21.00
and (y) thereafter, the lower of $21.00 per share or the issue price per share
of the Common Stock in such underwritten public offering. The Conversion Price
will not be adjusted at any time for accrued and unpaid dividends on the New
Preferred Stock, but will be subject to adjustment for the occurrence of certain
corporate events affecting the Common Stock. Accrued dividends will be paid on
the conversion date on any shares of New Preferred Stock converted into shares
of Common Stock on or after the First Scheduled Dividend Payment Date. No
accrued dividends will be paid, and the holders thereof will not be entitled to
receive any dividends, on any shares of New Preferred Stock converted prior to
the First Scheduled Dividend Payment Date, unless such shares of New Preferred
Stock are converted on or prior to a redemption date by holders electing to
convert such shares after having received a notice of redemption for such
shares. See 'Description of New Preferred Stock -- Conversion.'
If the Company has not consummated one or more Qualifying Offerings
yielding gross proceeds in an aggregate cash amount of at least $100 million by
May 15, 1998 (the 'Automatic Exchange Date'), all outstanding shares of New
Preferred Stock shall be exchanged automatically (the 'Automatic Exchange') for
shares of the Company's Series D Convertible Preferred Stock with an initial
liquidation preference of $102.50 per share (the 'Series D Preferred Exchange')
on the Automatic Exchange Date, at an exchange rate of one share of Series D
Preferred Stock for each $100 of Automatic Exchange Rate Liquidation Preference
represented by the shares of New Preferred Stock held by any holder. The
'Automatic Exchange Rate Liquidation Preference' for the shares of New Preferred
Stock shall be $69.6145 per share (the amount determined by multiplying (x) the
Liquidation Preference for the shares of New Preferred Stock (without accrued
and unpaid dividends thereon) by (y) 0.696145). The Company will pay cash to
holders of New Preferred Stock in lieu of issuing fractional shares of Series D
Preferred Stock in the Automatic Exchange. For a description of the terms,
preferences and rights of the Series D Preferred Stock, see 'Description of
Capital Stock -- Series D Preferred Stock.'
FOR FEDERAL INCOME TAX PURPOSES, IT IS NOT CLEAR WHETHER THE EXCHANGE OF 5%
PREFERRED STOCK FOR NEW PREFERRED STOCK WILL BE A TAXABLE EVENT IN ITS ENTIRETY.
IF IT IS A TAXABLE EVENT IN ITS ENTIRETY, GAIN OR LOSS WILL BE RECOGNIZED. FOR A
DISCUSSION OF THESE AND OTHER UNITED
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STATES FEDERAL INCOME TAX CONSIDERATIONS RELEVANT TO THE EXCHANGE OFFER,
SEE 'CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.'
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE DEALER MANAGER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE NEW PREFERRED STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NEW
PREFERRED STOCK BY ANYONE IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act') and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the 'Commission'). Such reports and information may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, New
York, New York 10048; and Chicago Regional Office, Suite 1400, Northwestern
Atrium Center, 500 W. Madison Street, Chicago, Illinois 60661-2511; and copies
of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Such reports, proxy statements and other information concerning the Company also
can be inspected and copied at the offices of the National Association of
Securities Dealers, Inc. (the 'NASD'), 1735 K Street, N.W., Washington, D.C.
20006, which supervises the Nasdaq SmallCap Market on which the Company's Common
Stock is traded. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the Commission's
Web site is http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-4 (herein, together with all amendments and exhibits, the 'Registration
Statement') under the Securities Act of 1933, as amended (the 'Securities Act').
The Company has also filed a Schedule 13E-4 Issuer Tender Offer Statement (the
'Schedule 13E-4') with the Commission with respect to the Exchange Offer. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information, exhibits and undertakings contained in the Registration
Statement and the Schedule 13E-4. This Prospectus does not contain all of the
information set forth in the Registration Statement and the Schedule 13E-4,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission, and to which reference is hereby made. For further
information, reference is hereby made to the Registration Statement, and the
financial schedules and exhibits filed as a part thereof and to the Schedule
13E-4 and the exhibits thereto. The Registration Statement (including the
exhibits thereto) can be obtained by mail or inspected and copied at the public
reference facilities maintained by the Commission as provided in the prior
paragraph.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act are hereby incorporated by reference in this Prospectus:
1. The Company's Annual Report on Form 10-K, as amended by the Annual
Report on Form 10-K/A, for the year ended December 31, 1996.
2. The Company's Quarterly Report on Form 10-Q, as amended by the
Quarterly Report on Form 10-Q/A, for the period ended March 31, 1997.
3. The Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1997.
4. The Company's Current Report on Form 8-K dated April 10, 1997.
5. The Company's Current Report on Form 8-K dated May 2, 1997.
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6. The Company's Current Report on Form 8-K dated June 17, 1997.
7. The Company's Current Report on Form 8-K dated July 8, 1997.
8. The Company's Current Report on Form 8-K dated August 19, 1997.
9. The Company's Current Report on Form 8-K dated October 7, 1997.
10. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, as amended, filed pursuant to
Section 12(b) of the Exchange Act.
11. Issuer Tender Offer Statement on Schedule 13E-4.
Each document filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
Expiration Date shall be deemed to be incorporated by reference into this
Prospectus from the date of filing of such document. Any statement contained in
a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of the Registration
Statement and this Prospectus to the extent that a statement contained herein or
in any subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of the Registration Statement or this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE TO
ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF ANY OF THE 5% PREFERRED STOCK, TO
WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF
ANY SUCH PERSON. REQUESTS SHOULD BE DIRECTED TO SECRETARY, CD RADIO INC., SIXTH
FLOOR, 1001 22ND STREET, N.W., WASHINGTON, D.C. 20037. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS ANY REQUEST SHOULD BE MADE BY FIVE BUSINESS DAYS PRIOR
TO THE EXPIRATION DATE.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the 'Reform Act'), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made in
this Prospectus. Any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
'will likely result,' 'are expected to,' 'will continue,' 'is anticipated,'
'estimated,' 'intends,' 'plans,' 'projection' and 'outlook') are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Prospectus,
and particularly in the risk factors set forth herein under 'Risk Factors.'
Among the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; increased costs of construction and launch of necessary
satellites; dependence on satellite construction and launch contractors; risk of
launch failure; unproven market and unproven applications of existing
technology; and the Company's need for additional substantial financing. These
and other factors are discussed herein under 'Risk Factors,' 'Management's
Discussion and Analysis of Financial Condition and Results of Operations,'
'Business' and elsewhere in this Prospectus.
The risk factors described herein could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements of the
Company made by or on behalf of the Company and investors, therefore, should not
place undue reliance on any such forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
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TABLE OF CONTENTS
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Available Information...................................................................................... 4
Documents Incorporated by Reference........................................................................ 4
Special Note Regarding Forward-Looking Statements.......................................................... 5
Prospectus Summary......................................................................................... 7
Risk Factors............................................................................................... 24
Proposed Financing......................................................................................... 34
Use of Proceeds............................................................................................ 36
Price Range of Common Stock................................................................................ 36
Dividend Policy............................................................................................ 36
Capitalization............................................................................................. 37
Selected Historical Financial Information.................................................................. 38
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 39
The Exchange Offer......................................................................................... 44
Accounting Treatment....................................................................................... 51
Market and Trading Information............................................................................. 51
The Proposed Amendment..................................................................................... 52
Business................................................................................................... 53
Management................................................................................................. 69
Principal Stockholders..................................................................................... 76
Description of New Preferred Stock......................................................................... 81
Description of Series D Preferred Stock.................................................................... 88
Description of Certain Indebtedness........................................................................ 91
Description of Capital Stock............................................................................... 95
Shares Eligible for Future Sale............................................................................ 101
Certain United States Federal Income Tax Consequences...................................................... 102
Legal Opinions............................................................................................. 108
Independent Accountants.................................................................................... 108
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus. Holders
of 5% Preferred Stock should carefully consider the factors set forth herein
under the caption 'Risk Factors' and are urged to read this Prospectus in its
entirety. Unless otherwise indicated, (i) the information in this Prospectus,
other than the historical financial information, assumes and gives effect to the
proposed sale by the Company of 3,500,000 shares of Common Stock (the 'Stock
Offering') and the concurrent offering by the Company of Senior Discount Notes
due 2007 (the 'Notes') for gross proceeds of $150 million (the 'Notes Offering'
and, together with the Stock Offering, the 'Offerings'), and (ii) references
herein to the 'Company' refer to CD Radio Inc. and, where appropriate, its
subsidiary, Satellite CD Radio, Inc.
THE COMPANY
CD Radio Inc. was founded in 1990 to pioneer and commercialize a compact
disc quality, multi-channel radio service broadcast directly from satellites to
vehicles ('satellite radio'). In October 1997, the Company received one of two
licenses from the Federal Communications Commission (the 'FCC') to build, launch
and operate a national satellite radio broadcast system. The Company has
recently begun construction of two satellites that it plans to launch into
geosynchronous orbit to broadcast its radio service throughout the United
States. The Company's service, which will be marketed under the brand name 'CD
Radio,' is expected to consist of 30 channels of commercial-free, compact disc
quality music programming and 20 channels of news, sports and talk programming.
CD Radio will be broadcast over a frequency band (the 'S-band') that will
augment traditional AM and FM radio bands. Under its FCC license, the Company
has the exclusive use of a 12.5 megahertz portion of the S-band for this
purpose. The Company currently expects to commence CD Radio broadcasts in late
1999 at a subscription price of $10 per month.
The Company is positioning itself as an entertainment company and
accordingly plans to design and originate programming on each of its 30 music
channels. Each channel will be operated as a separate radio station with a
distinct format. Certain music channels will offer continuous music, while
others will have program hosts, depending on the type of music programming. CD
Radio will offer a wide range of music categories, such as:
Symphonic Classic Rock Soft Rock
Chamber Music 50's Oldies Singers & Songs
Opera 60's Oldies Beautiful Instrumentals
Today's Country Folk Rock Album Rock
Traditional Country Latin Ballads Alternative Rock
Contemporary Jazz Latin Rhythms New Age
Classic Jazz Reggae Broadway's Best
Blues Rap Gospel
Big Band/Swing Dance Children's Entertainment
Top of the Charts Urban Contemporary World Beat
THE CD RADIO OPPORTUNITY
The Company believes that there is a significant market for music and other
radio programming delivered through advanced radio technology. While television
technology has advanced steadily -- from black and white to color, from
broadcast to cable, and from ordinary to high-definition television -- the last
major advance in radio technology was the introduction of FM broadcasts. CD
Radio will provide a new generation of radio service, offering a wide variety of
music formats available on demand, nearly seamless signal coverage throughout
the United States and commercial-free, compact-disc quality programming. The
Company's planned multiplicity of formats currently is not available to
motorists in any market within the United States.
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CD Radio is primarily a service for motorists. The Yankee Group, a market
research organization, estimates that there will be approximately 198 million
registered private motor vehicles in the United States by the end of 1999, when
the Company expects to commence broadcasting. At present, approximately 89% of
all private vehicles have a radio that could easily be utilized to receive CD
Radio's broadcasts, with this number estimated to be approximately 182 million
vehicles in 1999, and approximately 199 million in 2004. CD Radio initially will
target a number of demographic groups among the drivers of these vehicles,
including 110 million commuters, 34 million of whom spend between one and two
hours commuting daily, three million truck drivers and three million owners of
recreational vehicles. According to a 1996 market study, although almost all
vehicles contain either a cassette or compact disc player, 87% of automobile
commuters listened to the radio an average of 50 minutes a day while commuting.
The Company believes that the ability to offer a wide variety of musical
formats simultaneously throughout the United States will enable it to tap
significant unmet consumer demand for specialized music programming. The
economics of the existing advertiser supported local radio industry dictate that
radio stations generally program for the greatest potential audience. Even in
the largest metropolitan areas, station formats are limited. Nearly half of all
commercial radio stations in the United States offer one of only three formats:
country, adult contemporary and news/talk, and the next three most prevalent
formats account for another 30 percent of all stations. Although niche music
categories such as classical, jazz, rap, gospel, oldies, soundtracks, new age,
children's and others accounted for approximately 27% of sales of recorded music
in 1996, such formats generally are unavailable on existing radio stations in
many markets. Even in New York City, the nation's largest radio market, there
are no radio stations devoted solely to such programming as opera, blues,
chamber music, soundtracks, reggae, children's programming and many others. CD
Radio's wide choice of formats is expected to appeal to a large number of
currently underserved listeners.
In addition, due to the limited coverage area of conventional radio
broadcasting, listeners often travel beyond the range of any single station.
Unlike conventional FM stations, which have an average range of only
approximately 30 miles before reception fades, CD Radio's signal will cover the
entire continental United States, enabling listeners always to remain within its
broadcast range. The Company's satellite delivery system is designed to permit
CD Radio to be received by motorists in all outdoor locations where a vehicle
has an unobstructed line-of-sight with one of the Company's satellites or is
within range of one of the Company's terrestrial repeating transmitters.
The ability to broadcast nationwide will also allow the Company to serve
currently underserved radio markets. In the United States, there are more than
45 million people aged 12 and over living in areas with such limited radio
station coverage that the areas are not monitored by The Arbitron Company, a
broadcast industry ratings organization ('Arbitron'). Of these, the Company
believes that approximately 22 million people receive five or fewer FM stations,
1.6 million receive only one FM station and at least one million people receive
no FM stations. This segment of the population also has a limited choice of
radio music formats and is one of CD Radio's primary target markets.
The Company also believes that CD Radio will have a competitive advantage
over conventional radio stations because its music channels will be
commercial-free. In contrast, conventional radio stations interrupt their
broadcasts with up to 18 minutes of commercials in every hour of music
programming, and most stations also frequently interrupt programming with news,
promotional announcements, public service announcements and miscellaneous
information. The Company believes that consumers dislike frequent radio
commercial interruptions and that 'station surfing' to avoid them is common.
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THE CD RADIO SERVICE
CD Radio will offer motorists: (i) a wide range of finely focused music
formats; (ii) nearly seamless signal coverage throughout the continental United
States; (iii) commercial-free music programming; and (iv) plug and play
convenience.
Wide Choice of Programming. Each of CD Radio's 30 music channels will have
a distinctive format, such as opera, reggae, classic jazz and children's
entertainment, intended to cater to specific subscriber tastes. In most markets,
radio broadcasters target their programming to broad audience segments. Even in
the largest metropolitan markets the variety of station formats generally is
limited, and many of the Company's planned formats are unavailable.
'Seamless' Signal Coverage. CD Radio will be available throughout the
continental United States, enabling listeners almost always to be within its
broadcast range. The Company expects its nearly seamless signal will appeal to
motorists who frequently travel long distances, including truck drivers and
recreational vehicle owners, as well as commuters and others who outdrive the
range of their FM signals. In addition, the Company expects its broadcasts will
appeal to the 45 million consumers who live in areas that currently receive only
a small number of FM stations.
Commercial-Free Music Programming. The Company will provide commercial-free
music programming. The Company's market research indicates that a principal
complaint of radio listeners concerning conventional broadcast radio is the
frequency of commercials. Because CD Radio, unlike most commercial AM and FM
stations, will be a subscription and not an advertiser supported service, its
music channels will not contain commercials.
Plug and Play Convenience. Consumers will be able to receive CD Radio
broadcasts by acquiring an adapter (a 'radio card') and an easily attachable,
silver dollar-sized satellite dish antenna. Listeners will not be required to
replace their existing car radios and will be able to use the radio card by
plugging it into their radio's cassette or compact disc slot. CD Radio listeners
using a radio card will be able to push a button to switch between AM, FM and CD
Radio. Radio cards will have a visual display that will indicate the channel and
format selected, as well as the title, recording artist and album title of the
song being played. Radio cards will also be portable and will be able to be
moved from car to car. Radio card activation will be accomplished directly via
satellite by calling the Company's customer service center at 888-CD-RADIO.
THE CD RADIO DELIVERY SYSTEM
The CD Radio delivery system will consist of three principal components:
(i) the satellites; (ii) the receivers; and (iii) the national broadcast studio.
The Satellites. The Company has designed the CD Radio delivery system to
transmit an identical signal from two satellites placed in geosynchronous orbit
at 80[d] W and 110[d] W longitude. The Company believes that these two
satellites will provide nearly continuous, 'seamless' signal coverage throughout
the continental United States. When the line-of-sight to one satellite is
obstructed, the line-of-sight to the other generally will be available. In
certain urban areas with significant line-of-sight obstructions, the Company
intends to install terrestrial repeating transmitters that will rebroadcast its
signals and improve the quality of reception.
There currently are no commercial satellites in orbit capable of
transmitting radio signals on S-band frequencies to the United States. In order
to provide CD Radio the Company must build and launch its own satellites. The
Company has entered into a contract with Space Systems/Loral, Inc. ('Loral'), a
subsidiary of Loral Space & Communications Ltd. ('Loral Space'), to build three
satellites, one of which the Company intends to hold as a spare, and which
grants an option to the Company to purchase an additional satellite (the 'Loral
Satellite Contract'). The Company also has contracted for two launch slots (the
'Arianespace Launch Contract') with Arianespace S.A. ('Arianespace'), a leading
supplier of satellite launch services.
The Receivers. Subscribers to CD Radio will not need to replace their
existing AM/FM car radios. Instead they will be able to receive CD Radio in
their vehicles using a radio card similar in size to a cassette tape or compact
disc that has been designed to plug easily into the cassette or compact disc
slot
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of existing car radios. The radio card uses proprietary technology developed by
the Company. In addition to radio cards, the Company expects that consumers will
be able to receive CD Radio using a new generation of radios capable of
receiving S-band as well as AM and FM signals ('S-band radios').
In addition to a radio card or S-band radio, a vehicle must be equipped
with an antenna in order to receive CD Radio. The Company has designed a battery
powered, miniature silver dollar-sized satellite dish antenna, the base of which
has an adhesive backing so that consumers will be able to easily attach the
satellite dish antenna to a car's rear window. The base houses a wireless
transmitter that will relay the CD Radio signal to the vehicle's radio card or
S-band radio. The satellite dish antenna also uses proprietary technology
developed by the Company.
The Company expects that radio cards, S-band radios and miniature satellite
dish antennas will be manufactured by one or more consumer electronics
manufacturers and sold at retail outlets that sell consumer electronics, and
that the miniature satellite dish antennas will be sold together with the radio
cards or S-band radios. The Company believes that, when manufactured in
quantity, S-band radios will be incrementally more expensive than today's car
radios. The Company currently expects that the radio card together with the
miniature satellite dish antenna will be sold at a retail price of approximately
$200. Because subscribers will be able to use the radio card in almost all
existing vehicles, the Company believes that the availability of plug and play
radio cards will be of prime importance to its market penetration for a number
of years.
The Company does not intend to manufacture or distribute radio cards,
S-band radios or miniature satellite dish antennas. The Company has entered into
non-binding memoranda of understanding with two major consumer electronics
manufacturers, and has commenced discussions with several other such
manufacturers, regarding the manufacture of radio cards, S-band radios and
miniature satellite dish antennas for retail sale in the United States.
The National Broadcast Studio. The Company plans to originate its 50
channels of programming from a national broadcast studio (the 'National
Broadcast Studio') to be located in the New York area. The National Broadcast
Studio will house the Company's music library, facilities for programming
origination, programming personnel and program hosts, as well as facilities to
uplink programming to the satellites, to activate or deactivate service to
subscribers and to perform the tracking, telemetry and control of the orbiting
satellites.
PROGRESS TO DATE
The Company was formed in May 1990 and at that time proposed that the FCC
create a satellite radio broadcast service and also filed an application with
the FCC for a license to provide such a service. Since that time, the Company
has:
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1993 Contracted with Loral for construction of its satellites
Contracted with Arianespace for launch of two of its satellites
Developed and patented its miniature satellite dish antenna
1994 Completed an initial public offering of its Common Stock
1996 Designed the radio card receiver
1997 Received one of two FCC national satellite radio broadcast licenses
Completed a $135 million private placement of 5% Preferred Stock
Commenced construction of two satellites
Completed $105 million of vendor financing with Arianespace Finance S.A.
Recruited its key programming, marketing and financial management team
Completed a strategic sale of $25 million of Common Stock to Loral Space
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See 'Business -- Progress to Date and Significant Development Milestones.'
PROPOSED FINANCING
The Exchange Offer is part of a proposed financing transaction, which
includes the Stock Offering and the Notes Offering, that is intended to raise
capital to partially finance the construction and launch
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of the Company's satellites and for general corporate purposes. The Company
expects that the Offerings will result in net proceeds to the Company of
approximately $201.5 million, approximately $58.7 million from the Stock
Offering (based on an assumed offering price of $18.44 per share, the closing
price of the Company's Common Stock at September 30, 1997) and approximately
$142.8 million from the Notes Offering. The Company will receive no proceeds
from the Exchange Offer. See 'Proposed Financing.'
RISK FACTORS
The Company's ability to meet its objectives will depend on several
factors, including the timely receipt of necessary governmental approvals,
obtaining additional financing, construction and launch into orbit of two
satellites, the rapid creation of an organization and the management of growth.
The Company estimates that it will require approximately $660.1 million to
develop and commence commercial operation of CD Radio by the end of 1999. Of
this amount, the Company has raised approximately $266.6 million to date. After
giving effect to the Offerings, the Company will have raised approximately
$491.6 million of funds, leaving anticipated additional cash needs of
approximately $168.5 million to fund its operations through 1999. The Company
anticipates additional cash requirements of approximately $100.0 million to fund
its operations through the year 2000. The Company expects to finance the
remainder of its funding requirements through the issuance of debt or equity
securities, or a combination thereof. See 'Risk Factors' for a discussion of
important factors that should be considered by prospective exchanging
stockholders.
------------------------
The Company was incorporated in the State of Delaware as Satellite CD
Radio, Inc. on May 17, 1990. On December 7, 1992, the Company's name was changed
to CD Radio Inc., and the Company formed a wholly-owned subsidiary, Satellite CD
Radio, Inc., that is the holder of record of one of two FCC licenses to launch
and operate the satellites that are needed to offer CD Radio. The Company's
executive offices are located at Sixth Floor, 1001 22nd Street, N.W.,
Washington, D.C. 20037, and its telephone number is 202-296-6192. The Company
has a Web site at www.cdradio.com.
THE EXCHANGE OFFER
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The Exchange Offer........................... The Company is offering to exchange pursuant to the Exchange Offer
up to 1,932,073 shares of its New Preferred Stock for up to all of
the outstanding shares of its 5% Preferred Stock at a rate of one
share of New Preferred Stock for each $100 in Exchange Rate
Liquidation Preference represented by shares of 5% Preferred Stock
not previously converted. The 'Exchange Rate Liquidation
Preference' shall be the amount determined by dividing (x) the
liquidation preference of the shares of 5% Preferred Stock being
exchanged (including accrued and unpaid dividends thereon, if
any), by (y) 0.696145. On November 13, 1997, the assumed
expiration date of the Exchange Offer, the Exchange Rate
Liquidation Preference will be approximately $37.00 per share of
5% Preferred Stock. The Liquidation Preference of each share of
New Preferred Stock will be equal to $100.00. The terms of the New
Preferred Stock (including the dividend rate, liquidation
preference and conversion and redemption rights) differ in
material respects from the terms of the 5% Preferred Stock for
which it may be exchanged pursuant to this Exchange Offer. As of
September 30, 1997, there were 5,222,608 shares of 5% Preferred
Stock outstanding. For a
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comparison of certain material terms of the New Preferred Stock
and the 5% Preferred Stock, see ' -- Comparison of New Preferred
Stock and 5% Preferred Stock.' The 5% Preferred Stock was originally
issued in April 1997. See 'The Exchange Offer -- Terms of the
Exchange' and ' -- Terms and Conditions of the Letter of Transmittal,'
'Description of New Preferred Stock' and 'Description of Capital
Stock -- 5% Preferred Stock.'
The Exchange Offer is open to all holders of 5% Preferred Stock.
Concurrent Consent Solicitation.............. In conjunction with the Exchange Offer and pursuant to the Consent
Solicitation Statement, the Company is soliciting Consents from
its stockholders of record on October 1, 1997 (the 'Record Date')
to the Proposed Amendment.
Under the Company's Amended and Restated Certificate of
Incorporation, as currently in effect, the Company may redeem the
shares of 5% Preferred Stock (to the extent not previously
converted), in whole but not in part, following a sale by the
Company of Common Stock for net cash proceeds to the Company in an
amount not less than $100 million in a registered underwritten
public offering prior to October 15, 1997. The Company is
soliciting the consent of its stockholders, including the holders
of the 5% Preferred Stock, on the Record Date to the Proposed
Amendment that would, among other things, permit the Company to
redeem the 5% Preferred Stock (to the extent not previously
converted) in whole or in part upon the sale of any equity or debt
securities in one or more offerings occurring after the date of
the initial issuance of the 5% Preferred Stock and on or prior to
December 30, 1997 for gross proceeds in an aggregate cash amount
of not less than $100 million. See 'The Proposed Amendment.'
If the Proposed Amendment is adopted, then upon the consummation
of the Qualifying Offerings, for aggregate proceeds of $100
million the Company will be permitted to redeem the shares of 5%
Preferred Stock held by holders who do not tender their shares of
5% Preferred Stock in the Exchange Offer.
The terms of the Preferred Stock Investment Agreement (as defined
herein) require that the Company not undertake to conduct any debt
or equity financing that is not either pari passu or junior to the
5% Preferred Stock in seniority, structure and maturity until the
Company completes a Pre-Amendment Qualifying Offering (as defined
herein). If the Proposed Amendment is not approved by the
Company's stockholders and any shares of 5% Preferred Stock remain
outstanding after the Exchange Offer is consummated, the Company
will not be permitted to undertake any debt or equity financing
that is senior to the 5% Preferred Stock. The Company does not
intend to commence the Offerings until the Solicitation is
substantially completed and the
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Notes Offering will not be consummated unless the Exchange Offer
and the Solicitation are completed and no shares of 5% Preferred
Stock remain outstanding.
The Requisite Consents from holders on the Record Date of a
majority of the issued and outstanding shares of 5% Preferred
Stock and Common Stock, respectively, must be obtained in order to
adopt the Proposed Amendment. If the Proposed Amendment is
adopted, then each non-exchanging holder of 5% Preferred Stock
will be bound by the Proposed Amendment regardless of whether such
holder consented to the Proposed Amendment. The Company intends to
amend the Certificate of Designations to reflect the Proposed
Amendment as promptly as practicable after it obtains the
Requisite Consents. See 'The Exchange Offer -- The Consent
Solicitation' and 'The Proposed Amendment.'
Consent Payment.............................. The Company will not make a separate payment for Consents
delivered in the Solicitation.
Dividend Payments............................ Dividends on the 5% Preferred Stock accepted for exchange pursuant
to the Exchange Offer that are accrued and unpaid from April 10,
1997 to the date of issuance of the shares of New Preferred Stock
will be included in the calculation of the Exchange Rate
Liquidation Preference of the 5% Preferred Stock in determining
the number of shares of New Preferred Stock to be received by the
holders of the 5% Preferred Stock participating in the Exchange
Offer. The Company will pay cash to exchanging holders in lieu of
issuing fractional shares of New Preferred Stock. The annual
dividend rate per share of the New Preferred Stock will be an
amount equal to 10.5% of the sum of (x) the liquidation preference
of the New Preferred Stock and (y) all accrued and unpaid
dividends, if any, whether or not declared, from the date of
issuance of the shares of New Preferred Stock to the applicable
dividend payment date. Dividends on the shares of the New
Preferred Stock will be cumulative, accruing quarterly and, when
and as declared by the Board of Directors of the Company, will be
payable initially on November 15, 2002 (the 'First Scheduled
Dividend Payment Date') and on February 15, May 15, August 15 and
November 15 in each year thereafter.
Expiration Date.............................. The Exchange Offer will expire at 12:00 midnight, New York City
time, on November 13, 1997, unless extended (the 'Expiration
Date'). See 'The Exchange Offer -- Expiration Date; Extension;
Amendments' and ' -- Acceptance of 5% Preferred Stock for
Exchange; Delivery of New Preferred Stock.'
Exchange Date................................ The date of acceptance for exchange of the shares of 5% Preferred
Stock (the 'Exchange Date') will be the Expiration Date. Shares of
New Preferred Stock will be delivered as promptly as practicable
thereafter.
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Conditions of the Exchange Offer............. The Exchange Offer is conditioned upon, among other things, (i)
receipt by the Company of the Requisite Consents to the Proposed
Amendment, (ii) a minimum of 95% of the issued and outstanding
shares of 5% Preferred Stock being tendered for exchange and not
withdrawn prior to the Expiration Date and (iii) the General
Conditions (as defined herein). There can be no assurance that
these conditions will be satisfied or waived. The Company reserves
the right to waive certain of the conditions to the Exchange Offer
and to amend or modify the Exchange Offer at any time for any
reason. See 'The Exchange Offer -- Expiration Date; Extension;
Amendments' and ' -- Conditions of the Exchange Offer.'
Withdrawal Rights............................ The tender of shares of 5% Preferred Stock pursuant to the
Exchange Offer may be withdrawn at any time prior to the
Expiration Date and unless accepted for exchange by the Company,
may be withdrawn at any time after forty business days after the
date of this Prospectus. Withdrawal of tendered shares of 5%
Preferred Stock will be deemed a rejection of the Exchange Offer.
See 'The Exchange Offer -- Withdrawal Rights.'
Procedures for Tendering..................... See 'The Exchange Offer -- Tender Procedure.'
Federal Income Tax Consequences.............. As a result of certain provisions of the Taxpayer Relief Act of
1997 it is not clear whether the exchange of shares of 5%
Preferred Stock for shares of New Preferred Stock will be a
taxable event in its entirety. If it is a taxable event in its
entirety, gain or loss will be recognized. For a discussion of
these and other United States federal income tax considerations
relevant to the Exchange Offer, see 'Certain United States Federal
Income Tax Consequences.'
Use of Proceeds.............................. There will be no cash proceeds to the Company from the exchange
pursuant to the Exchange Offer. See 'Use of Proceeds.'
No Dissenters' Rights........................ Holders of shares of 5% Preferred Stock do not have any appraisal
or dissenters' rights under the Delaware General Corporation Law
or the Certificate of Designations. See 'The Exchange
Offer -- Dissenters' Rights.'
Dealer Manager............................... Merrill Lynch & Co. ('Merrill Lynch') is serving as Dealer Manager
in connection with the Exchange Offer. See 'The Exchange
Offer -- Dealer Manager.'
Exchange Agent............................... IBJ Schroder Bank & Trust Company is serving as Exchange Agent in
connection with the Exchange Offer. See 'The Exchange
Offer -- Exchange Agent.'
Consequence of Failure to Exchange........... Holders of shares of 5% Preferred Stock who do not exchange their
shares of 5% Preferred Stock for shares of New Preferred Stock
pursuant to the Exchange Offer or whose shares of 5% Preferred
Stock are not accepted for exchange will continue to hold such
shares of 5% Preferred Stock and will be entitled to all the
rights and preferences, and will be subject to all of the
limitations, applicable thereto. Assuming the Requisite Consents
are obtained,
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however, the terms of such 5% Preferred Stock will have been
revised pursuant to the Proposed Amendment. To the extent that
shares of 5% Preferred Stock are tendered and accepted in the
Exchange Offer, the liquidity and trading market for untendered
shares of 5% Preferred Stock, and the terms upon which such shares
could be sold, could be adversely affected. See 'Risk
Factors -- Reduced Trading Market for 5% Preferred Stock' and 'The
Exchange Offer -- Consequence of Failure to Exchange.'
Potentially Limited Market for New Preferred
Stock...................................... The New Preferred Stock will be a new issue of securities with no
established trading market. The Company has been advised by
Merrill Lynch that it intends to make a market in the New
Preferred Stock but is not obligated to do so and may discontinue
market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the New
Preferred Stock. The trading market for the 5% Preferred Stock
generally has not been liquid. See 'Market and Trading
Information.'
Restrictions on Transfer..................... Subject to certain exceptions, holders of shares of New Preferred
Stock issued in the Exchange Offer and holders of New Preferred
Stock who convert such shares into shares of Common Stock
('Converted Stock') will not be permitted to sell, grant any
option to purchase or otherwise transfer or dispose of
(collectively, 'Transfer') any shares of New Preferred Stock or
Converted Stock, as the case may be, until the later to occur of
(i) the 181st day following the Stock Offering or (ii) the 181st
day following consummation of the Exchange Offer (such later date
being herein referred to as the 'Lock-Up Expiration Date');
provided, however, that if a holder is prevented by applicable law
from owning assets subject to such restrictions on Transfer, such
restrictions shall be inapplicable to such holder and the Company
will have a right of first refusal with respect to all shares of
New Preferred Stock held by such holder that is exercisable for a
period of 90 days from the date an agreement to sell shares of New
Preferred Stock is reached with a potential buyer at any time on
or prior to the Lock-Up Expiration Date. See 'Risk
Factors -- Restrictions on Transfer' and 'Description of New
Preferred Stock -- Restrictions on Transfer.'
</TABLE>
COMPARISON OF NEW PREFERRED STOCK AND 5% PREFERRED STOCK
The following is a brief summary comparison of certain of the principal
terms of the New Preferred Stock and the 5% Preferred Stock.
<TABLE>
<CAPTION>
NEW PREFERRED STOCK 5% PREFERRED STOCK
----------------------------------------- -----------------------------------------
<S> <C> <C>
Dividends.................. The annual dividend rate per share of the The annual dividend rate per share of 5%
New Preferred Stock will be an amount Preferred Stock is an amount equal to
equal to 10.5% of the sum of (x) the $1.25. Dividends on the shares of 5%
liquidation preference of the New Preferred Stock, when and as declared by
Preferred Stock and the Board of
</TABLE>
15
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW PREFERRED STOCK 5% PREFERRED STOCK
----------------------------------------- -----------------------------------------
<S> <C> <C>
(y) all accrued and unpaid dividends, if Directors of the Company, are cu-
any, whether or not declared, from the mulative, accruing daily, and payable on
date of issuance of the shares of New April 15th and October 15th of each year.
Preferred Stock to the applicable Any dividend payable on the shares of 5%
dividend payment date. Dividends on the Preferred Stock may be paid, at the
shares of the New Preferred Stock will be option of the Company, either (i) in cash
cumulative, accruing quarterly and, when or (ii) by adding the amount of such
and as declared by the Board of Directors dividend to the liquidation preference of
of the Company, will be payable quarterly the 5% Preferred Stock. See 'Description
initially on November 15, 2002 (the of Capital Stock -- 5% Preferred
'First Scheduled Dividend Payment Date') Stock -- Dividends.'
and on February 15, May 15, August 15 and
November 15 in each year thereafter. In
addition, accrued dividends on shares of
New Preferred Stock will be paid on the
redemption date of any share of New
Preferred Stock redeemed by the Company,
on the purchase date of any share of New
Preferred Stock purchased by the Company
pursuant to an Offer to Purchase (as
defined herein) or on the conversion date
of any share of New Preferred Stock
converted into shares of Common Stock on
or after the First Scheduled Dividend
Payment Date. No accrued dividends will
be paid on any shares of New Preferred
Stock that are converted by the holders
thereof prior to the First Scheduled
Dividend Payment Date, unless such shares
of New Preferred Stock are converted on
or prior to a redemption date by holders
thereof electing to convert such shares
after having received a notice of
redemption for such shares. Dividends may
be paid in cash, shares of Common Stock
or any combination thereof at the option
of the Company. Common Stock issued to
pay dividends will be valued at the aver-
age closing price of the Common Stock as
reported in The Wall Street Journal for
the 20 consecutive trading days
immediately preceding the date of such
payment. Dividends on the shares of New
Preferred Stock will be paid to the
holders of record of shares of the New
Preferred Stock on a record date not more
than 40 days nor fewer than 10 days
preceding the payment date thereof. See
'Description of New Preferred
Stock -- Dividends.'
Mandatory Redemption....... On November 15, 2012, the Company is If the Company does not have sufficient
required to redeem all outstanding shares shares of Common Stock reserved to effect
of New Preferred Stock at a redemption the conversion of all outstanding shares
price of 100% of the 5% Pre-
</TABLE>
16
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW PREFERRED STOCK 5% PREFERRED STOCK
----------------------------------------- -----------------------------------------
<S> <C> <C>
of the Liquidation Preference, plus ferred Stock, then at any time at the
accrued and unpaid dividends, if any, to request of any holder of 5% Preferred
the redemption date. Stock, the Company must purchase from
such holder the number of shares of the
5% Preferred Stock equal to such holder's
pro-rata share of the number of shares of
the 5% Preferred Stock that would not be
able to be converted due to an
insufficient number of shares of Common
Stock reserved for such purpose at the
Maximum Price (as defined herein). In
addition, if prior to the earlier of
April 21, 1998 or the closing of a
Pre-Amendment Qualifying Offering (as
defined herein), the FCC awards more than
two licenses (including the license
awarded to the Company) permitting the
licensee to provide satellite digital
audio radio services and more than two
licensees (including the Company)
commence or announce an intention to
commence satellite digital audio radio
services, then upon the request of the
holders of more than one-third of the
outstanding shares of the 5% Preferred
Stock, the Company must purchase one-half
of the shares of the 5% Preferred Stock
held by each requesting shareholder at a
purchase price per share equal to the sum
of the liquidation preference for the 5%
Preferred Stock plus any Cash Payments
(as defined herein) divided by the
Applicable Multiplier (as set forth
below). See 'Description of Capital
Stock -- 5% Preferred Stock -- Required
Redemption.'
Optional Redemption........ Except as described below, the shares of The shares of 5% Preferred Stock may be
New Preferred Stock may not be redeemed redeemed, in whole but not in part, at a
by the Company at its option prior to redemption price equal to the sum of the
November 15, 2002. From and after liquidation preference for the 5%
November 15, 1999 and prior to November Preferred Stock plus any Cash Payments at
15, 2002, the Company may redeem shares the option of the Company at any time
of New Preferred Stock, in whole or in beginning on the date that is ten months
part, at a redemption price of 100% of after the date of original issuance of
the Liquidation Preference of the shares the 5% Preferred Stock, plus one day for
of New Preferred Stock redeemed, plus ac- each day during which any registration
crued and unpaid dividends, if any, statement with respect to the Common
whether or not declared, to the Stock issuable upon conversion of the
redemption date, if the average closing shares of 5% Preferred Stock is suspended
price of the Common Stock as reported in or the related prospectus is not current,
The Wall Street Journal for the 20 complete or otherwise usable. The Company
consecutive trading days prior to the may not exercise its right of redemption
notice of redemption thereof equals or unless (i) the average closing price of
exceeds $31.50 per share (subject to the Common Stock as reported in The
adjustments). From
</TABLE>
17
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW PREFERRED STOCK 5% PREFERRED STOCK
----------------------------------------- -----------------------------------------
<S> <C> <C>
and after November 15, 2002, the Company Wall Street Journal for the 20 consec-
may redeem shares of New Preferred Stock, utive trading days prior to the notice of
in whole or in part, initially at a redemption shall equal or exceed $18 per
redemption price of 105.25% of the share (subject to adjustments) and (ii)
Liquidation Preference of the shares of the shares of Common Stock issuable upon
New Preferred Stock redeemed and conversion of the shares of 5% Preferred
thereafter at prices declining ratably to Stock are registered for resale by an
100% of the Liquidation Preference of the effective registration statement under
shares of New Preferred Stock redeemed the Securities Act. The Company also may
from and after November 15, 2005, plus redeem the shares of 5% Preferred Stock,
accrued and unpaid dividends, if any, to in whole but not in part, at the Maximum
whether or not declared, the redemption Price if the Company sells Common Stock
date. In addition, within 30 days of the for cash in an amount not less than $100
closing of the Debt Offering (as defined million in a registered underwritten
herein), the Company may redeem up to 50% public offering on or prior to October
of the outstanding shares of New 15, 1997 (a 'Pre-Amendment Qualifying
Preferred Stock at a redemption price of Offering'). The Company is soliciting the
100% of the Liquidation Preference of the consent of its stockholders, including
shares of New Preferred Stock redeemed, the holders of the 5% Preferred Stock, on
plus accrued and unpaid dividends, if the Record Date to the Proposed Amendment
any, whether or not declared, to the to the Certificate of Designations that
redemption date. The New Preferred Stock would permit the Company to redeem the
will not be subject to any mandatory shares of 5% Preferred Stock, in whole or
sinking fund redemption. See 'Description in part, upon the sale of any equity or
of New Preferred Stock -- Redemption.' debt securities in one or more offerings
occurring after the date of the initial
issuance of the 5% Preferred Stock and on
or prior to December 30, 1997 for gross
proceeds in an aggregate cash amount of
not less than $100 million. See 'Proposed
Financing' and 'Description of Capital
Stock -- 5% Preferred Stock --
Redemption.'
Conversion................. Each share of New Preferred Stock may be Shares of 5% Preferred Stock are
converted at any time at the option of convertible at the option of the holder
the holder, unless previously redeemed, at any time into shares of Common Stock,
into a number of shares of Common Stock provided that the Company is not
calculated by dividing the Liquidation obligated to honor any request for
Preference of the New Preferred Stock conversion of the 5% Preferred Stock at
(without accrued and unpaid dividends) by any time if certain governmental
a conversion price (the 'Conversion approvals of the issuance of the Common
Price') equal to (x) prior to the date of Stock upon such conversion have not been
the first underwritten public offering of obtained. If such approvals (other than
the Company's Common Stock following the with respect to a conversion resulting in
initial issuance of the New Preferred a holder or group of holders holding more
Stock, $21.00 and (y) thereafter, the than 50% of the voting securities of the
lower of $21.00 per share or the issue Company) are not obtained within 270 days
price per share of the Common Stock in after the Initial Registration Deadline
such underwritten public offering. The (as defined in the Preferred Stock
Conversion Price will not be adjusted at Investment Agreement (as defined
any time for accrued and unpaid divi- herein)), the Company must, at the
dends on the shares of New Preferred request of any holder, repurchase the
Stock, but will be subject to shares of the 5% Preferred Stock held by
such holder at a
</TABLE>
18
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW PREFERRED STOCK 5% PREFERRED STOCK
----------------------------------------- -----------------------------------------
<S> <C> <C>
adjustment for the occurrence of certain purchase price per share equal to the sum
corporate events affecting the Common of the liquidation preference of the 5%
Stock. Accrued dividends will be paid on Preferred Stock plus any other cash
the conversion date on any shares of New payments due to such holder (the 'Cash
Preferred Stock converted into shares of Payments'), divided by 0.72125 (the
Common Stock on or after the First 'Maximum Price'). The number of shares of
Scheduled Dividend Payment Date. No Common Stock issuable upon conversion of
accrued dividends will be paid, and the the shares of the 5% Preferred Stock will
holders thereof will not be entitled to equal the liquidation preference of the
receive any dividends, on any shares of shares of 5% Preferred Stock being
New Preferred Stock converted prior to converted plus any Cash Payments divided
the First Scheduled Dividend Payment by the then-effective conversion price
Date, unless such shares of New Preferred applicable to the Common Stock (the '5%
Stock are converted on or prior to a Preferred Conversion Price'). The 5%
redemption date by holders electing to Preferred Conversion Price, as of any
convert such shares after having received date up to and including November 15,
a notice of redemption for such shares. 1997, is determined in accordance with a
See 'Description of New Preferred formula based on market prices of the
Stock -- Conversion.' Common Stock or actual prices at which
the converting holder sold shares of
Common Stock, in either case, multiplied
by the Applicable Multiplier. The
Applicable Multiplier decreases each
month, from 0.75125 for conversions
occurring after September 15, 1997, to 0.72125
for conversions occurring after November
15, 1997. For a complete list of the
Applicable Multipliers, see 'Description
of Capital Stock -- 5% Preferred
Stock -- Conversion.' At any date after
November 15, 1997, the 5% Preferred
Conversion Price is determined in
accordance with a formula based on the
lowest of (i) market prices of the Common
Stock between October 15, 1997 and
November 15, 1997, (ii) market prices of
the Common Stock during the three
consecutive trading days immediately
preceding the date of conversion or (iii)
actual prices at which the converting
holder sold the shares of Common Stock,
in each case, multiplied by. The 5% Pre-
ferred Stock is at all times subject to
customary anti-dilution adjustments for
events such as stock splits, stock
dividends, reorganizations and certain
mergers affecting the Common Stock. See
'Description of Capital Stock -- 5%
Preferred Stock -- Conversion.'
Automatic Exchange......... If the Company has not consummated one or
more Qualifying Offerings yielding gross
proceeds in an aggregate cash amount of
at least $100 million by May 15, 1998
(the 'Auto-
</TABLE>
19
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW PREFERRED STOCK 5% PREFERRED STOCK
----------------------------------------- -----------------------------------------
<S> <C> <C>
matic Exchange Date'), all outstanding
shares of New Preferred Stock shall be
exchanged automatically (the 'Automatic
Exchange') for shares of the Company's
Series D Convertible Preferred Stock (the
'Series D Preferred Stock'), with an
initial liquidation preference of $102.50
on the Automatic Exchange Date, at an
exchange rate of one share of Series D
Preferred Stock for each $100 of
Automatic Exchange Rate Liquidation
Preference represented by the shares of
New Preferred Stock held by any holder.
The Automatic Exchange Rate Liquidation
Preference for the shares of New
Preferred Stock shall be $69.6145 per
share (the amount determined by
multiplying (x) the Liquidation
Preference for the shares of New
Preferred Stock (without accrued and
unpaid dividends thereon) by (y)
0.696145). The Company will pay cash to
holders of New Preferred Stock in lieu of
issuing fractional shares of Series D
Preferred Stock in the Automatic
Exchange. For a description of the terms,
preferences and rights of the Series D
Preferred Stock, see 'Description of
Capital Stock.'
Liquidation................ The Liquidation Preference of each share The liquidation preference of each share
of New Preferred Stock will be equal to of 5% Preferred Stock is equal to $25.00
$100.00. See 'Description of New plus an amount equal to accrued and
Preferred Stock -- Liquidation.' unpaid dividends on such share of 5%
Preferred Stock. See 'Description of
Capital Stock -- 5% Preferred
Stock -- Dividends.'
Cash Payments.............. None. The Company must make a monthly Cash
Payment in an amount per share equal to
3% of the liquidation preference of the
shares of 5% Preferred Stock or the
equivalent in securities issued or
issuable upon conversion to each holder
if the Company fails (i) to honor any
request for conversion of the 5%
Preferred Stock except as permitted by
the terms and conditions of the 5%
Preferred Stock or (ii) to maintain the
listing of the Common Stock on Nasdaq,
the New York Stock Exchange or the
American Stock Exchange. A similar Cash
Payment must be made if, after effecting
a registration statement with respect to
the resale of Common Stock issuable upon
conversion of the shares of 5% Preferred
Stock, the use of the prospectus is
suspended
</TABLE>
20
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW PREFERRED STOCK 5% PREFERRED STOCK
----------------------------------------- -----------------------------------------
<S> <C> <C>
for more than 60 cumulative days in the
aggregate in any twelve month period. In
addition, if the Company fails at any
time to reserve a sufficient number of
shares of Common Stock for issuance upon
conversion of the shares of 5% Preferred
Stock, it must make a Cash Payment equal
to 3% of the liquidation preference
(proportionately reduced by the amount of
shares that are so authorized and
reserved) per month to the holders of the
shares of 5% Preferred Stock. See
'Description of Capital Stock -- 5%
Preferred Stock -- Cash Payments.'
Change in Control.......... If a Change in Control (as defined below) If a Reorganization (as defined below)
occurs, the Company must make an offer to occurs or is proposed, each holder of
purchase all outstanding shares of New shares of 5% Preferred Stock may require
Preferred Stock at a purchase price in the Company to redeem the shares of 5%
cash equal to 101% of the Liquidation Preferred Stock at the Maximum Price. A
Preference, plus all accrued and unpaid 'Reorganization' is defined as any
dividends, if any, whether or not reorganization or any reclassification of
declared, to the date such shares are the Common Stock or other capital stock
purchased. See 'Description of New of the Company or any consolidation or
Preferred Stock -- Change in Control.' merger of the Company with or into any
other corporation or corporations or a
sale of all or substantially all of the
assets of the Company. If the holder of
shares of 5% Preferred Stock chooses not
to require the Company to redeem such
holder's shares, the shares will be
convertible into the number of shares of
stock or other securities or property
(including cash) to which a holder of the
number of shares of Common Stock
deliverable upon conversion of such share
of 5% Preferred Stock not so redeemed
would have been entitled upon the
Reorganization. See 'Description
of Capital Stock -- 5% Preferred
Stock -- Required Redemption.'
Limitations on Debt and
Equity Financing......... None. Pursuant to the Preferred Stock In-
vestment Agreement, prior to the
completion of a Pre-Amendment Qualifying
Offering, the Company must not undertake
to conduct any debt or equity financing
that is not either pari passu or junior
to the 5% Preferred Stock in seniority,
structure and maturity. See 'Proposed
Financing' and 'Description of Capital
Stock -- 5% Preferred Stock.'
Restrictions on
Transfer................. Subject to certain exceptions, holders of None.
New Preferred Stock issued in the
Exchange Offer and holders of
</TABLE>
21
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW PREFERRED STOCK 5% PREFERRED STOCK
----------------------------------------- -----------------------------------------
<S> <C> <C>
New Preferred Stock who convert such New
Preferred Stock into shares of Common
Stock ('Converted Stock') will not be
permitted to sell, grant any option to
purchase or otherwise transfer or dispose
of (collectively, 'Transfer') any New
Preferred Stock or Converted Stock, as
the case may be, until the later to occur
of (i) the 181st day following the Stock
Offering or (ii) the 181st day following
consummation of the Exchange Offer (such
later date being herein referred to as
the 'Lock-Up Expiration Date'); pro-
vided, however, that if a holder is
prevented by applicable law from owning
assets subject to such restrictions on
Transfer, such restrictions shall be
inapplicable to such holder and the
Company will have a right of first
refusal with respect to all shares of New
Preferred Stock held by such holder that
is exercisable for a period of 90 days
from the date an agreement to sell shares
of New Preferred Stock is reached with a
potential buyer at any time on or prior
to the Lock-Up Expiration Date. See 'Risk
Factors -- Restrictions on Transfer' and
'Description of New Preferred
Stock -- Restrictions on Transfer.'
Forced Conversion.......... None. Three years or more after the date of
original issuance of the 5% Preferred
Stock, the Company may require the
holders of the 5% Preferred Stock to
convert such shares into Common Stock at
the then applicable 5% Preferred Con-
version Price and all Cash Payments due
on a date specified in the notice of
forced conversion. However, the Company
will not have the right to require such
conversion if the Company has commenced
bankruptcy proceedings, has ceased
operations or is in default for money
borrowed in excess of $50 million.
</TABLE>
22
<PAGE>
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data for the Company set forth below
with respect to the statements of operations for the years ended December 31,
1994, 1995 and 1996 and with respect to the balance sheets at December 31, 1995
and 1996 are derived from the Consolidated Financial Statements of the Company,
audited by Coopers & Lybrand L.L.P., independent accountants, incorporated
herein by reference. The summary consolidated financial data for the Company
with respect to the balance sheets at December 31, 1992, 1993 and 1994 and with
respect to the statement of operations data for the years ended December 31,
1992 and 1993, are derived from the Company's audited consolidated financial
statements, which are not incorporated herein by reference. The financial
information as of and for the six months ended June 30, 1996 and 1997 is derived
from unaudited consolidated financial statements incorporated herein by
reference. In the opinion of management, the unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
that are necessary for a fair presentation of the financial position and results
of operations for these periods. The selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements and related
notes thereto incorporated herein by reference.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- ------ -------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ................................ $-- $-- $-- $-- $-- $-- $ --
Net loss .......................................... (1,551) (6,568) (4,065) (2,107) (2,831) (1,204) (835)
Net loss per share of Common Stock ................ $ (.23) $ (.79) $ (.48) $ (.23) $ (.29) $ (.13) $ (4.28)(1)
Weighted average shares of Common Stock
and Common Stock equivalents
outstanding ..................................... 6,715 8,284 8,398 9,224 9,642 9,358 10,307
Accretion on 5% Preferred Stock added to
liquidation preference .......................... $-- $-- $-- $-- $-- $-- $ (1,406)
Deemed dividend on 5% Preferred Stock ............. $-- $-- $-- $-- $-- $-- $(43,313)
Deficiency in the coverage of combined
fixed charges and preferred dividends
by earnings before fixed charges and
preferred dividend(2) ........................... $-- $-- $-- $-- $-- $-- $(45,554)
Ratio of earnings to combined fixed
charges and preferred dividends(3) .............. N.A. N.A. N.A. N.A. N.A. N.A. N.A.
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
-------------------------------------------------- ------------------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................ $ 1,883 $ 777 $ 3,400 $ 1,800 $ 4,584 $ 1,371 $ 30,184
Designated cash(4)....................... -- -- -- -- -- -- 66,677
Working capital (deficit)................ 1,399 (250) 2,908 1,741 4,442 1,293 30,424
Total assets............................. 2,292 1,663 3,971 2,334 5,065 1,874 124,354
Deficit accumulated during the
development stage...................... (2,965) (9,533) (13,598) (15,705) (18,536) (16,909) (62,683)
Stockholders' equity..................... 1,791 505 3,431 1,991 4,898 1,486 12,286
Book value per share..................... .48 1.19
</TABLE>
- ------------
(1) Includes a deemed dividend on the Company's 5% Preferred Stock of $43.3
million, or $4.20 per share. The deemed dividend relates to the discount
feature associated with the 5% Preferred Stock, computed in accordance with
the Commission's position on accounting for preferred stock which is
convertible at a discount to the market price.
(2) For the purpose of this calculation, the deficiency is computed as the
Company's net loss adjusted for the accretion on the 5% Preferred Stock and
the deemed dividend on the 5% Preferred Stock.
(3) Because the Company has not generated revenues from earnings for the periods
described, the ratio of earnings to fixed charges is not material.
(4) Represents proceeds of the offering of the 5% Preferred Stock which have
been classified as designated cash reflecting the balance due to the FCC for
the Company's FCC License. The Company paid this amount to the FCC in
October 1997.
23
<PAGE>
<PAGE>
RISK FACTORS
Prospective exchanging stockholders should carefully consider, in addition
to the other information set forth elsewhere in this Prospectus, the factors set
forth below. This Prospectus contains certain forward-looking statements within
the meaning of the federal securities laws. Actual results and the timing of
certain events could differ materially from those projected in the
forward-looking statements due to a number of factors, including those set forth
below and elsewhere in this Prospectus. See 'Special Note Regarding
Forward-Looking Statements.'
EXPECTATION OF CONTINUING LOSSES; NEGATIVE CASH FLOW
The Company is a development stage company and its proposed service, CD
Radio, is in an early stage of development. Since its inception, the Company's
activities have been concentrated on raising capital, obtaining required
licenses, developing technology, strategic planning and market research. From
its inception on May 17, 1990 through June 30, 1997, the Company has had no
revenues and has incurred aggregate net losses of approximately $19.4 million,
including net losses of approximately $2.8 million during the year ended
December 31, 1996 and $0.8 million during the six months ended June 30, 1997.
The Company does not expect to generate any revenues from operations until late
1999 or 2000 at the earliest, and expects that positive cash flow from
operations will not be generated until late 2000 at the earliest. The ability of
the Company to generate revenues and achieve profitability will depend upon a
number of factors, including the timely receipt of all necessary FCC
authorizations, the successful and timely construction and deployment of its
satellite system, the development and manufacture of radio cards, S-band radios
and miniature satellite dish antennas by consumer electronics manufacturers, the
timely establishment of its National Broadcast Studio and the successful
marketing and consumer acceptance of CD Radio. There can be no assurance that
any of the foregoing will be accomplished, that CD Radio will ever commence
operations, that the Company will attain any particular level of revenues or
that the Company will achieve profitability.
NEED FOR SUBSTANTIAL ADDITIONAL FINANCING
The Company estimates that it will require approximately $660.1 million to
develop and commence commercial operation of CD Radio by the end of 1999. Of
this amount, the Company has raised approximately $266.6 million to date. After
giving effect to the Offerings, the Company will have raised approximately
$491.6 million of funds, leaving anticipated additional cash needs of
approximately $168.5 million to fund its operations through 1999. The Company
anticipates additional cash requirements of approximately $100.0 million to fund
its operations through the year 2000. The Company expects to finance the
remainder of its funding requirements through the issuance of debt or equity
securities, or a combination thereof. Additional funds, however, would be
required in the event of delays, cost overruns, launch failure or other adverse
developments. Furthermore, if the Company were to exercise its option under the
Loral Satellite Contract to purchase and deploy an additional satellite,
substantial additional funds would be required. See 'Proposed Financing.' The
Company anticipates funding its projected cash requirements through the
completion of additional debt and equity financings. The Company currently does
not have sufficient financing commitments to fund all of its capital needs, and
there can be no assurance that the Company will be able to obtain additional
financing on favorable terms, if at all, or that it will be able to do so on a
timely basis. The AEF Agreements (as defined herein) contain, the indenture
governing the Notes (the 'Indenture') will contain and documents governing any
other future indebtedness are likely to contain, provisions that limit the
ability of the Company to incur additional indebtedness. The Company has
substantial near-term funding requirements related to the construction and
launch of its satellites. The Company is committed to make aggregate payments of
$272.8 million under the Loral Satellite Contract and of $176.0 million under
the Arianespace Launch Contract. Under the Loral Satellite Contract, payments
are to be made in 22 installments, which commenced in April 1997. Payments due
under the Arianespace Launch Contract commence November 1997 for the first
launch, and February 1998 for the second launch. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Funding Requirements.' Failure to secure the necessary
financing on a timely basis could result in delays and increases in the cost of
satellite
24
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construction or launch or other activities necessary to put CD Radio into
operation, could cause the Company to default on its commitments to its
satellite construction or satellite launch contractors, its creditors or others,
could render the Company unable to put CD Radio into operation and could force
the Company to discontinue operations or seek a purchaser for its business. The
issuance by the Company of additional equity securities could cause substantial
dilution of the interest in the Company of holders of shares of New Preferred
Stock received pursuant to the Exchange Offer who convert their shares of New
Preferred Stock into shares of Common Stock.
POSSIBLE DELAYS AND ADVERSE EFFECT OF DELAY ON FINANCING REQUIREMENTS
The Company currently expects to begin offering CD Radio in late 1999. The
Company's ability to meet that objective will depend on several factors. For
both of the two satellites required for the CD Radio service to be launched and
in operation by the end of 1999, Loral will be required to deliver the second
satellite three months prior to the delivery date specified in the contract,
which cannot be assured. See 'Business -- The CD Radio Delivery System -- The
Satellites -- Satellite Construction.' Furthermore, the launch of both
satellites will have to occur within the early months of the launch periods
reserved with Arianespace, which also cannot be assured. See 'Business -- The CD
Radio Delivery System -- The Satellites -- Launch Services.' A significant delay
in the planned development, construction, launch and commencement of operation
of the Company's satellites would have a material adverse effect on the Company.
Other delays in the development or commencement of commercial operations of CD
Radio may also have a material adverse effect on the Company. Any such delays
could result from a variety of causes, including delays associated with
obtaining FCC authorizations, coordinating use of spectrum with Canada and
Mexico, inability to obtain necessary financing in a timely manner, delays in or
modifications to the design, development, construction or testing of satellites,
the National Broadcast Studio or other aspects of the CD Radio system, changes
of technical specifications, delay in commercial availability of radio cards,
S-band radios or miniature satellite dish antennas, failure of the Company's
vendors to perform as anticipated or a delayed or unsuccessful satellite launch
or deployment. During any period of delay, the Company would continue to have
significant cash requirements, including capital expenditures, administrative
and overhead costs, contractual obligations and debt service requirements that
could materially increase the aggregate amount of funding required to permit the
Company to commence operating CD Radio. Additional financing may not be
available on favorable terms or at all during periods of delay. Delay also could
cause the Company to be placed at a competitive disadvantage in relation to any
competitor that succeeds in beginning operations earlier than the Company.
RELIANCE ON UNPROVEN APPLICATIONS OF TECHNOLOGY
CD Radio is designed to be broadcast from two satellites in geosynchronous
orbit that transmit identical signals to radio cards or S-band radios through
miniature satellite dish antennas. This design involves new applications of
existing technology which have not been deployed and there can be no assurance
that the CD Radio system will work as planned. In addition, radio cards, S-band
radios and miniature satellite dish antennas are not currently available. In
certain areas with high concentrations of tall buildings and other obstructions,
such as large urban areas, or in tunnels, signals from both satellites will be
blocked and CD Radio reception will be adversely affected. In urban areas, the
Company plans to install terrestrial repeating transmitters to rebroadcast CD
Radio; however, certain areas with impediments to satellite line-of-sight may
still experience 'dead zones.' Although management believes that the technology
developed by the Company will allow the CD Radio system to operate as planned,
there can be no assurance that it will do so. See ' -- Unavailability of Radio
Cards, S-band radios or Miniature Satellite Dish Antennas,' 'Business -- The CD
Radio Delivery System' and 'Business -- Technology, Patents and Trademarks.'
DEPENDENCE UPON SATELLITE AND LAUNCH CONTRACTORS
The Company's business will depend upon the successful construction and
launch of the satellites which will be used to transmit CD Radio. The Company
will rely upon its satellite vendor, Loral, for the construction and timely
delivery of these satellites. Failure by Loral to deliver functioning satellites
in a
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timely manner could materially adversely affect the Company's business. Although
the Loral Satellite Contract provides for certain late delivery penalties, Loral
will not be liable for indirect or consequential damages or lost revenues or
profits resulting from late delivery or other defaults. Title and risk of loss
for the first and second satellites are to pass to the Company at the time of
launch. The satellites are warranted to be in accordance with the performance
specifications in the Loral Satellite Contract and free from defects in
materials and workmanship at the time of delivery, which for the first two
satellites will be deemed to occur at the time of arrival of the satellites at
the launch base. After delivery, no warranty coverage applies if the satellite
is launched. See 'Business -- The CD Radio Delivery System -- The
Satellites -- Satellite Construction.'
The Company is dependent on its satellite launch vendor, Arianespace, for
the construction of launch vehicles and the successful launch of the Company's
satellites. Failure of Arianespace to launch the satellites in a timely manner
could materially adversely affect the Company's business. The Arianespace Launch
Contract entitles Arianespace to postpone either of the Company's launches for a
variety of reasons, including technical problems, lack of co-passenger(s) for
the Company's launch or the need to conduct a replacement launch for another
customer, a launch of a scientific satellite whose mission may be degraded by
delay, or a launch of another customer's satellite whose launch was postponed.
Although the Arianespace Launch Contract provides liquidated damages for delay,
depending on the length of the delay, and entitles the Company to terminate the
agreement for delay exceeding 12 months, there can be no assurance that these
remedies will adequately mitigate any damage to the Company's business caused by
launch delays. See ' -- Possible Delays and Adverse Effect of Delay on Financing
Requirements.' The liability of Arianespace in the event of a launch failure is
limited to providing a replacement launch in the case of a total launch failure
or paying an amount based on lost satellite capacity in the case of a partial
launch failure. See 'Business -- The CD Radio Delivery System -- The
Satellites -- Launch Services.'
SATELLITE LAUNCH RISKS
Satellite launches are subject to significant risks, including launch
failure, satellite destruction or damage during launch and failure to achieve
proper orbital placement. Launch failure rates may vary depending on the
particular launch vehicle and contractor. Although past experience is not
necessarily indicative of future performance, Arianespace has advised the
Company that as of August 8, 1997, 84 of 89 Arianespace launches (or
approximately 94%) have been completed successfully since May 1984. See
'Business -- The CD Radio Delivery System -- The Satellites -- Launch Services.'
However, the Ariane 5, the particular launch vehicle intended for the launches
of the Company's satellites, has had only one launch, which was a failure, and
is untested in flight. The next launch of an Ariane 5 currently is planned for
October 1997. In the event of a significant delay in the Ariane 5 program, the
Company has the right to request launch on an Ariane 4 launch vehicle. There is
no assurance that Arianespace's launches of the Company's satellites will be
successful. Satellites also may fail to achieve a proper orbit or be damaged in
space. See ' -- Limited Life of Satellites; In-orbit Failure.' As part of its
risk management program, the Company plans to construct a third, backup
satellite and to obtain insurance covering a replacement launch to the extent
required to cover risks not assumed by Arianespace under the Arianespace Launch
Contract. See ' -- Insurance Risks.' The launch of a replacement satellite would
delay the commencement or continuation of the Company's commercial operations
for a period of at least several months, which could have a material adverse
effect on the demand for the Company's services and on its revenues and results
of operations. See 'Business -- The CD Radio Delivery System -- The
Satellites -- Launch Services.'
UNCERTAIN MARKET ACCEPTANCE
There is currently no satellite radio service such as CD Radio in
commercial operation in the United States. As a result, the extent of the
potential demand for such a service and the degree to which the Company's
proposed service will meet that demand cannot be estimated with certainty, and
there can be no assurance that there will be sufficient demand for CD Radio to
enable the Company to achieve significant revenues or cash flow or profitable
operations. The success of CD Radio in gaining market acceptance will be
affected by a number of factors beyond the Company's control, including the
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willingness of consumers to pay subscription fees to obtain satellite radio
broadcasts, the cost, availability and consumer acceptance of radio cards,
S-band radios and miniature satellite dish antennas, the marketing and pricing
strategies of competitors, the development of alternative technologies or
services and general economic conditions. See 'Business -- The Radio Market,'
'Business -- The CD Radio Service,' 'Business -- Marketing Strategy,'
'Business -- The CD Radio Delivery System' and 'Business -- Competition.'
LIMITED LIFE OF SATELLITES; IN-ORBIT FAILURE
A number of factors will affect the useful lives of the Company's
satellites, including the quality of construction, the expected gradual
environmental degradation of solar panels, the amount of fuel on board and the
durability of component parts. Random failure of satellite components could
result in damage to or loss of a satellite. In rare cases, satellites could also
be damaged or destroyed by electrostatic storms or collisions with other objects
in space. If the Company is required to launch the spare satellite, due to
failure of the launch or in-orbit failure of one of the operational satellites,
its operational timetable would be delayed for approximately six months or more.
The launch or in-orbit failure of two satellites would require the Company to
arrange for additional satellites to be built and could delay the commencement
or continuation of the Company's operations for three years or more. The
Company's satellites are expected to have useful lives of approximately 15
years, after which their performance in delivering CD Radio is expected to
deteriorate. There can be no assurance, however, of the specific longevity of
any particular satellite. The Company's operating results would be adversely
affected in the event the useful life of its initial satellites is significantly
shorter than 15 years.
INSURANCE RISKS
Pursuant to the Loral Satellite Contract and the Arianespace Launch
Contract, the Company is the beneficiary of certain limited warranties with
respect to the services provided under each agreement. However, these limited
warranties do not cover a substantial portion of the risks inherent in satellite
launches or in-orbit operations, and the Company will have to obtain insurance
to adequately protect against such risks.
The Arianespace Launch Contract contains a provision entitling the Company
to a replacement launch in the event of a launch failure caused by the launch
vehicle used to launch the Company's satellites. In such event, the Company
would utilize the spare satellite that it is having constructed. Thus, the
Company does not intend to purchase additional insurance for launch failure of
the launch vehicle. The Company intends to insure against other contingencies,
including a failure during launch caused by factors other than the launch
vehicle and/or a failure involving the second or third satellite in a situation
in which the spare satellite has been used to replace the first or second
satellite. Any adverse change in insurance market conditions may result in an
increase, which may be substantial, in the insurance premiums paid by the
Company. There is no assurance that launch insurance will be available or, if
available, that it can be obtained at a cost or on terms acceptable to the
Company.
If the launch of either of the Company's two satellites is a full or
partial failure or if, following launch, either of the satellites does not
perform to specifications, there may be circumstances in which insurance will
not fully reimburse the Company for its expenditures with respect to the
applicable satellite. In addition, the Company has not acquired insurance that
would reimburse the Company for business interruption, loss of business and
similar losses which might arise from such events or from delay in the launch of
either of the satellites. Any insurance obtained by the Company also will likely
contain certain exclusions and material change conditions that are customary in
the industry. See 'Business -- The CD Radio Delivery System -- The
Satellites -- Risk Management and Insurance.'
RISK ASSOCIATED WITH CHANGING TECHNOLOGY
The industry in which the Company operates is characterized by rapid
technological advances and innovations. There is no assurance that one or more
of the technologies utilized or under development by the Company will not become
obsolete, or that its services will be in demand at the time they are offered.
The Company will be dependent upon technologies developed by third parties to
implement
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key aspects of its proposed system, and there can be no assurance that more
advanced technologies will be available to the Company on a timely basis or on
reasonable terms or that more advanced technologies will be used by the
Company's competitors and that such technologies will be available to the
Company. In addition, unforeseen problems in the development of the Company's
satellite radio broadcasting system may occur that could adversely affect
performance, cost or timely implementation of the system and could have a
material adverse effect on the Company.
UNAVAILABILITY OF RADIO CARDS, S-BAND RADIOS OR MINIATURE SATELLITE DISH
ANTENNAS
The Company's business strategy requires that subscribers to CD Radio
purchase radio cards or S-band radios as well as the associated miniature
satellite dish antennas in order to receive the service. See 'Business -- The CD
Radio Delivery System.' Neither the radio cards, S-band radios nor miniature
satellite dish antennas currently are available, and the Company is unaware of
any manufacturer currently developing such products. The Company does not intend
to manufacture or distribute radio cards, S-band radios or miniature satellite
dish antennas. The Company has entered into non-binding memoranda of
understanding with two major consumer electronics manufacturers, and has
commenced discussions with several other such manufacturers, regarding the
manufacture of radio cards, S-band radios and miniature satellite dish antennas
for retail sale in the United States. The Company currently intends to select
one manufacturer of these products on an exclusive basis for the first year of
CD Radio broadcasts. There can be no assurance, however, that these discussions
or memoranda of understanding will result in a binding commitment on the part of
any manufacturer to produce radio cards, S-band radios and miniature satellite
dish antennas in a timely manner and at an affordable price so as to permit the
widespread introduction of CD Radio in accordance with the Company's business
plan or that sufficient quantities of radio cards, S-band radios and miniature
satellite dish antennas will be available to meet anticipated consumer demand.
The failure to have one or more consumer electronics manufacturers develop these
products for commercial sale in a timely manner, at an affordable price and with
mass market nationwide distribution would have a material adverse effect on the
Company's business. See 'Business -- The CD Radio Delivery System,'
'Business -- Marketing Strategy,' and 'Business -- Technology, Patents and
Trademarks.'
NEED TO OBTAIN RIGHTS TO PROGRAMMING
In connection with its music programming, the Company will be required to
negotiate and enter into royalty arrangements with performing rights societies,
such as The American Society of Composers, Authors and Publishers ('ASCAP'),
Broadcast Music, Inc. ('BMI') and SESAC, Inc. ('SESAC'). These organizations
collect royalties and distribute them to songwriters and music publishers.
Copyright users negotiate a fee with these organizations based on a percentage
of advertising and/or subscription revenues. Broadcasters currently pay a
combined total of approximately 3% of their revenues to the performing rights
societies. The Company also will be required to negotiate similar arrangements,
pursuant to the Digital Performance Right in Sound Recordings Act of 1995 (the
'Digital Recording Act'), with the owners of the sound recordings. The
determination of certain royalty arrangements with the owners of sound
recordings under the Digital Recordings Act currently are subject to arbitration
proceedings. The Company believes that it will be able to negotiate royalty
arrangements with these organizations and the owners of sound recordings, but
there can be no assurance as to the terms of any such royalty arrangements
ultimately negotiated or established by arbitration.
DEVELOPMENT OF BUSINESS AND MANAGEMENT OF GROWTH
The Company has not yet commenced CD Radio broadcasts. The Company expects
to experience significant and rapid growth in the scope and complexity of its
business as it proceeds with the development of its satellite radio system and
the commencement of CD Radio. Currently, the Company has only ten employees and
does not have sufficient staff to program its broadcast service, manage
operations, control the operation of its satellites, handle sales and marketing
efforts or perform finance and accounting functions. Although the Company has
recently retained experienced executives in several of these areas, the Company
will be required to hire a broad range of additional personnel before its
planned service begins commercial operations. Growth, including the creation of
a
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management infrastructure and staffing, is likely to place a substantial strain
on the Company's management and operational resources. The failure to develop
and implement effective systems or to hire and train sufficient personnel for
the performance of all of the functions necessary to the effective provision of
its service and management of its subscriber base and business, and the failure
to manage growth effectively, would have a material adverse effect on the
Company.
CONTINUING OVERSIGHT BY THE FCC
In order to offer CD Radio, the Company was required to obtain a license
from the FCC to launch and operate its satellites. The Company was a winning
bidder in the April 1997 FCC auction for an FCC license to build, launch and
operate a national satellite radio broadcast service (the 'FCC License'), and
the FCC's International Bureau issued such a license on October 10, 1997 (the
'IB Order'). Although the FCC License is effective immediately, it is subject to
reconsideration at the International Bureau, and review by the full Commission.
Thereafter, any party may file an appeal with the FCC or the U.S. Court of
Appeals. The Company cannot predict the ultimate outcome of any of these
proceedings.
In order to ensure compliance with the transfer of control and 'cut-off'
rule restrictions contained in the Communications Act of 1934, as amended (the
'Communications Act'), any future assignments or transfers of control of the
Company's license must be approved by the FCC. There can be no assurance that
the FCC would approve any such transfer or assignment.
The term of the FCC License with respect to each satellite is eight years,
commencing from the date each satellite is declared operational after having
been inserted into orbit. Upon the expiration of the term with respect to each
satellite, the Company will be required to apply for a renewal of the relevant
license. Although the Company believes that the FCC will grant such renewals
absent significant misconduct on the part of the Company, there can be no
assurance that such renewals in fact will be obtained.
The CD Radio system is designed to permit CD Radio to be received by
motorists in all outdoor locations where the vehicle has an unobstructed
line-of-sight with one of the Company's satellites. However, in certain areas
with high concentrations of tall buildings, such as urban cores, or in tunnels,
signals from both satellites will be blocked and reception will be adversely
affected. Therefore, the Company plans to install terrestrial repeating
transmitters to rebroadcast CD Radio in certain urban areas. The FCC has not yet
established rules governing the application procedure for obtaining
authorizations to construct and operate terrestrial repeating transmitters. The
Company cannot predict the outcome of this process. In addition, in connection
with the installation and operation of the terrestrial repeating transmitters,
the Company will need to obtain the rights to use the roofs of certain
structures where the repeating transmitters will be installed. There can be no
assurance that the Company can obtain such roof rights on acceptable terms or in
appropriate locations for the operation of CD Radio. Also, the FCC Licensing
Rules (as defined herein) require that the Company complete frequency
coordination with Canada and Mexico. There can be no assurance that the Company
will be able to coordinate use of this spectrum or will be able to do so in a
timely manner.
Changes in law, FCC regulations or international agreements relating to
communications policy generally or to matters relating specifically to the
services to be offered by the Company could affect the Company's ability to
retain the FCC License and other approvals required to provide CD Radio or the
manner in which CD Radio would be offered or regulated. See
'Business -- Government Regulation.'
The IB Order determined that as a private carrier, the Company is not
subject to the current provisions of the Communications Act restricting
ownership in the Company by non-U.S. private citizens or organizations.
The Executive Branch of the U.S. government has expressed interest in
changing this policy, which could lead to restrictions
on foreign ownership of the Company's shares in the future.
The IB Order stated that its action is subject to being revisited in a
future proceeding.
The FCC has indicated that it may in the future impose public service
obligations, such as channel set-asides for educational programming, on
satellite radio licensees. The Company cannot predict whether the FCC will
impose public service obligations or the impact that any such obligations, if
imposed, would have on the Company.
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DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the services of David Margolese,
Chairman and Chief Executive Officer, who is responsible for the Company's
operations and strategic planning. The loss of the services of Mr. Margolese
could have a material adverse effect upon the business and prospects of the
Company. See 'Business -- Government Regulation' and 'Management.'
APPLICATION OF EXPORT CONTROL REGULATIONS
Shipment of the Company's satellites to territory outside the United States
is subject to U.S. export control regulation. Because Arianespace, the Company's
satellite launch vendor, intends to launch the Company's satellites from an
Arianespace launch facility in French Guiana, a department of France, export
licenses will be required under United States export control regulations. There
can be no assurance, however, that the required export licenses will be
obtained.
RISK OF SIGNAL THEFT
The CD Radio signal, like all broadcasts, is subject to the risk of piracy.
Although the Company plans to use encryption technology to mitigate signal
theft, the Company does not believe that any such technology is infallible.
Accordingly, there can be no assurance that theft of the CD Radio signal will
not occur. Signal theft, if widespread, could have a material adverse effect on
the Company.
COMPETITION
The Company will be seeking market acceptance of its proposed service in a
new, untested market and will compete with established conventional radio
stations, which do not charge subscription fees or require the purchase of radio
cards or S-band radios and associated miniature satellite dish antennas to
receive their services. Many radio stations also offer information programming
of a local nature such as local news or traffic reports which the Company will
be unable to offer. In addition, the Company expects that, prior to the
commercial launch of CD Radio, some traditional FM radio broadcasting stations
will begin to transmit digital, compact disc quality signals. The Company also
expects to compete directly with American Mobile Radio Corporation ('AMRC'), a
subsidiary of American Mobile Satellite Corporation ('AMSC'), which was the
other successful bidder for an FCC License. AMSC, which is owned in part by the
Hughes Electronics Corporation subsidiary of General Motors Corporation, has
financial, management and technical resources that greatly exceed those of the
Company. See 'Business -- Competition.' In addition, the FCC could grant new
licenses which would enable further competition to broadcast satellite radio.
Although successful bidders for such new licenses would face cost and
competition barriers, there can be no assurance that there will not be an
increase in the number of competitors in the satellite radio industry or any
assurance that one or more competitors will not design a satellite radio
broadcast system that is superior to the Company's system, either of which could
have a material adverse effect on the Company.
UNCERTAIN PATENT PROTECTION
The Company has been granted certain U.S. patents covering various types of
satellite radio technology. There can be no assurance, however, that the
Company's U.S. patents will not be challenged, invalidated or circumvented by
others. Litigation, which could result in substantial cost to the Company, may
be necessary to enforce the Company's patents or to determine the scope and
validity of other parties' proprietary rights, and there can be no assurance of
success in any such litigation.
NO DIVIDENDS
The Company has not declared or paid any dividends on its Common Stock
since its inception, and does not currently anticipate paying any such
dividends. The AEF Agreements contain and the Indenture will contain provisions
that limit the Company's ability to pay dividends.
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LIMITED PUBLIC MARKET FOR COMMON STOCK
The Common Stock has been traded in the Nasdaq SmallCap Market since
September 13, 1994. There can be no assurance that an active public market will
continue to exist for the Common Stock or as to the liquidity of any such
market, the ability of holders of the Common Stock to sell their securities or
the price at which such holders would be able to sell. Such price may be
influenced by many factors, including, but not limited to, investor perception
of the Company and its industry and general economic and market conditions.
VOLATILITY OF STOCK PRICE
The trading price of the Common Stock has been volatile, and it may
continue to be so. Such trading price could be subject to wide fluctuations in
response to announcements of business and technical developments by the Company
or its competitors, quarterly variations in operating results, and other events
or factors, including expectations by investors and securities analysts and the
Company's prospects. In addition, stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on the
market prices of development stage companies, at times for reasons unrelated to
their operating performance. Such broad market fluctuations may adversely affect
the price of the Common Stock.
POSSIBLE ADVERSE EFFECT OF STATE BLUE SKY RESTRICTIONS ON SECONDARY TRADING OF
COMMON STOCK
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market. If the application is not approved, it may have an adverse
impact on secondary trading of the Common Stock. The Company believes that its
Common Stock is eligible for sale on a secondary market basis in most states
based on various exemptions to state qualification requirements. Limitations on,
or the absence of, those exemptions will under certain circumstances restrict
the ability of a holder to transfer the Common Stock to non-institutional buyers
in some states. This could adversely affect the liquidity of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to
50,000,000 shares of preferred stock (the 'Preferred Stock') in one or more
series and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. Of that amount,
8,000,000 shares have been designated as 5% Preferred Stock, of which 5,222,608
shares were issued and outstanding as of September 30, 1997. A further 7,000,000
shares of Preferred Stock have been designated New Preferred Stock, of which up
to 1,932,594 shares will be issued and outstanding following the completion of
the Exchange Offer and 7,000,000 shares of Preferred Stock have been designated
Series D Preferred Stock. In addition, the Company intends to adopt a
stockholders rights plan. Any issuance of Preferred Stock, including Preferred
Stock with voting and conversion rights, as well as the New Preferred Stock
which are convertible into shares of Common Stock, may adversely affect the
voting power of the holders of Common Stock. The stockholders rights plan and
any issuance of Preferred Stock may be deemed to have anti-takeover effects and
may delay, deter or prevent a change in control of the Company that a
stockholder might consider to be in his or her best interest. The Company may
also become subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. The effect of these provisions could have the
effect of delaying or preventing a change of control of the Company or adversely
affect the market price of the Company's Common Stock. Furthermore, the
severance provisions of employment agreements with certain members of the
Company's management provide for payments that could discourage an attempted
change in control of the Company.
Any change in the composition of the Company's ownership after Arianespace
Finance S.A. ('AEF') has determined that the Tranche A Loans are eligible for
Conversion (as defined below), which could reasonably be expected to have a
Material Adverse Effect (as defined in the AEF Agreements), would constitute a
default under the AEF Agreements. Therefore, upon the occurrence of such change
in the Company's ownership, AEF would have the right to accelerate its loans to
the
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Company and the Company may be required to prepay all of its outstanding
obligations under the AEF Agreements. See 'Description of Certain
Indebtedness -- Vendor Financing.' There can be no assurance that the Company
will satisfy the conditions for Conversion. However, any other financing
obtained by the Company to repay or refinance the Tranche A Loans likely would
contain restrictions on significant changes in the Company's stock ownership.
Upon the occurrence of any Change of Control (as defined in the Indenture),
or a Change in Control, the Company will be required to make an Offer to
Purchase the Notes, after issuance thereof, and the New Preferred Stock. If such
an offer is made, there can be no assurance that the Company will have available
funds sufficient to pay the purchase price for any or all of the Notes and the
New Preferred Stock that might be delivered by holders of the Notes or the New
Preferred Stock seeking to accept the offer. After the issuance of the Notes,
the failure of the Company to make or consummate such offer or to pay the
purchase price for the Notes when due will give the trustee under the Indenture
and the holders of the Notes the right to require the Company to prepay all of
its outstanding indebtedness and other obligations under the Notes. The failure
of the Company to make or consummate the Offer to Purchase or pay the purchase
price for the New Preferred Stock when due will give the holders of a majority
of the New Preferred Stock the right, voting as a separate class, to elect a
number of directors of the Company equal to the lesser of two directors and the
number of directors constituting at least 25% of the Board of Directors of the
Company.
In addition, a change in control of the Company could require FCC approval.
See 'Business -- Regulation.'
CONTROL BY EXISTING STOCKHOLDERS
David Margolese, the Chief Executive Officer of the Company, currently
beneficially owns approximately 15.1% of the outstanding Common Stock, and upon
consummation of the Stock Offering, is expected to beneficially own
approximately 11.8% of the outstanding Common Stock. In addition, Darlene
Friedland, who currently owns approximately 21.7% of the outstanding Common
Stock has entered into a voting trust agreement pursuant to which all of her
shares of Common Stock have been placed into a voting trust providing Mr.
Margolese, as trustee, with sole power to vote such shares in his discretion.
See 'Principal Stockholders.' Accordingly, Mr. Margolese, either acting alone or
together with other existing stockholders, would be able to exert considerable
influence over the management and policies of the Company. Such a concentration
of ownership may have the effect of delaying, deferring or preventing a change
of control.
INVESTMENT COMPANY ACT OF 1940
On July 22, 1997, the Company filed an application with the Securities and
Exchange Commission for an order declaring that the Company is not an
'investment company' as that term is defined in the Investment Company Act of
1940, as amended (the '1940 Act'). The 1940 Act defines an investment company to
include a company that owns or proposes to acquire 'investment securities' (as
that term is defined in the 1940 Act) exceeding 40% of the value of such
company's assets (exclusive of U.S. government securities and cash items).
Because the Company had temporarily invested the proceeds from its recent public
and private offerings in investment securities prior to their expenditure, the
Company could have fallen within the definition of an investment company.
Investment companies must be registered and are subject to extensive regulation
by the Commission under the 1940 Act.
The filing of the application gave the Company an automatic 60-day
exemption (the final day of which was September 19, 1997) from the provisions of
the 1940 Act pending a final determination of the merits of its application.
Because the Commission has not yet acted on the Company's application, the
Company has now invested in U.S. government securities at least that proportion
of its assets as the Company believes will be sufficient to avoid any
determination that it is an 'investment company' within the meaning of the 1940
Act.
If the requested relief is ultimately denied, the Company may be required
to register as an investment company or, in the alternative, to invest a
substantial portion of the proceeds from the
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Offerings in U.S. government securities, pending expenditure of such proceeds by
the Company for its corporate purposes.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Stock Offering, the Company will have
16,077,884 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, 9,795,896 shares will be freely tradeable without restriction
under the Securities Act unless such shares are purchased in the Stock Offering
by 'affiliates' of the Company, as such term is defined in Rule 144 under the
Securities Act (the 'Affiliates'). Of the remaining 6,281,988 shares of Common
Stock, 3,547,488 shares are 'restricted securities' as that term is defined in
Rule 144 under the Securities Act (the 'Restricted Shares'). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under the
Securities Act. Up to 1,642,000 of the Restricted Shares held by the directors
and certain officers of the Company will be eligible for sale, subject to the
restrictions of Rule 144, upon expiration of certain lock-up agreements entered
into between each of such directors and officers of the Company and the
underwriters of the Stock Offering (the 'Lock-up Agreements'), 180 days after
the effective date of the Stock Offering. The remaining 1,905,488 Restricted
Shares will not become eligible for resale until August 1998, and then only
pursuant to the restrictions under Rule 144. In addition, Darlene Friedland has
entered into a lock-up agreement relating to her 2,734,500 shares lasting for a
period ending, on a cumulative basis, as to 25% of the shares of Common Stock
she owns, on the expiration of the 15th, 18th, 21st and 24th month following
August 26, 1997. As such shares become free of such lock-up, they will be
eligible for sale without restriction.
The Company is unable to predict the effect that sales made under Rule 144,
pursuant to future registration statements, or otherwise, may have on any then
prevailing market price for shares of the Common Stock. Nevertheless, sales of a
substantial amount of Common Stock in the public market, or the perception that
such sales could occur, could adversely affect market prices.
RISK OF INABILITY TO REPURCHASE THE NEW PREFERRED STOCK UPON A CHANGE OF CONTROL
If a Change in Control (as defined herein) occurs and an Offer to Purchase
(as defined herein) is made, there can be no assurance that the Company will
have available funds sufficient to pay the purchase price for any or all of the
shares of New Preferred Stock that might be delivered by holders of the New
Preferred Stock seeking to accept the Offer to Purchase. The failure of the
Company to consummate the Offer to Purchase or pay the purchase price for the
New Preferred Stock when due will give the holders of a majority of the New
Preferred Stock the right, voting as a separate class, to elect a number of
directors of the Company equal to the lesser of two directors and the number of
directors constituting at least 25% of the board of directors of the Company.
See 'Description of New Preferred Stock -- Change of Control' and ' -- Voting
Rights.'
LACK OF ESTABLISHED TRADING MARKET FOR NEW PREFERRED STOCK
The New Preferred Stock constitutes a new issue of securities of the
Company with no established trading market. The liquidity of the New Preferred
Stock will be affected by the number of shares of 5% Preferred Stock accepted in
the Exchange Offer. There can be no assurance that an active market for the New
Preferred Stock will develop or be sustained in the future. Although the Dealer
Manager has indicated to the Company that it intends to make a market in the New
Preferred Stock, it is not obligated to do so and may discontinue any such
market-making at any time without notice. Accordingly, no assurance can be given
as to the liquidity of, or trading markets for, the New Preferred Stock. See
'Market and Trading Information.'
REDUCED TRADING MARKET FOR 5% PREFERRED STOCK
To the extent shares of 5% Preferred Stock are tendered and accepted in the
Exchange Offer or redeemed pursuant to their terms and/or the number of holders
of 5% Preferred Stock is reduced to
33
<PAGE>
<PAGE>
below certain levels, the liquidity and trading market for shares of 5%
Preferred Stock outstanding following the Exchange Offer, and the terms upon
which such shares could be sold, could be adversely affected.
The Company may in the future seek to acquire untendered shares of 5%
Preferred Stock in open market or privately negotiated transactions, through
subsequent exchange offers, redemptions or otherwise. The Company's decision to
make such acquisitions is dependent on many factors, including market conditions
at the time of any contemplated acquisition. Accordingly, the Company cannot
predict whether and to what extent it will acquire any additional shares of 5%
Preferred Stock and the consideration to be paid therefor. See 'The Exchange
Offer -- Consequences of Failure to Exchange.'
PROPOSED FINANCING
In order to raise a portion of the additional funds required to
commercialize its proposed CD Radio service, the Company plans to issue
3,500,000 shares of its Common Stock in a registered public offering
underwritten by Merrill Lynch, Lehman Brothers Inc. and Unterberg Harris and its
Notes for gross proceeds of $150 million in a registered public offering
underwritten by Merrill Lynch and Lehman Brothers Inc. The Offerings will be
made by means of separate prospectuses relating to the Common Stock and the
Notes, respectively, in accordance with the requirements of the Securities Act.
The Common Stock, when issued, would rank junior, and the Notes, when issued,
would rank senior, to the New Preferred Stock in respect of dividends and
distribution of assets of the Company in liquidation.
The net proceeds of the Offerings to the Company are estimated to be
approximately $201.5 million (approximately $58.7 million from the offering of
Common Stock (based on an assumed offering price of $18.44 per share, the
closing price of the Company's Common Stock at September 30, 1997) and
approximately $142.8 million from the offering of the Notes) after deducting
estimated underwriting discounts and commissions and other expenses payable by
the Company.
The Company expects to use the net proceeds of the Offerings to partially
finance the construction and launch of the Company's satellites. In addition,
net proceeds of the Offerings will be used for general corporate purposes,
including marketing and working capital. There can be no assurance that the
Offerings will be completed or as to the terms on which the Company will be able
to sell the Common Stock or Notes that may be offered.
The Company estimates that it will require approximately $660.1 million to
develop and commence commercial operation of CD Radio by the end of 1999. Of
this amount, the Company has raised approximately $266.6 million to date. After
giving effect to the Offerings, the Company will have raised approximately
$491.6 million of funds, leaving anticipated additional cash needs of
approximately $168.5 million to fund its operations through 1999. The Company
anticipates additional cash requirements of approximately $100.0 million to fund
its operations through the year 2000. The Company expects to finance the
remainder of its funding requirements through the issuance of debt or equity
securities, or a combination thereof. In addition, although the Company's
business plan is based upon the deployment of two satellites and the
construction of a third spare satellite, it has the right to exercise an option
under the Loral Satellite Contract to acquire an additional satellite. If the
Company elects to exercise this option, substantial additional funds would be
required and the Company would have to obtain additional regulatory approvals.
Deployment of an additional satellite also could result in a delay in the
introduction of CD Radio. Any decision to deploy a three satellite system would
have to be made prior to the launch of the Company's first satellite.
Under the Company's Amended and Restated Certificate of Incorporation, as
currently in effect, the Company may redeem the 5% Preferred Stock (to the
extent it has not been previously converted), in whole but not in part,
including following a sale by the Company of Common Stock for cash in an amount
of not less than $100 million in a registered underwritten public offering prior
to October 15, 1997. The Company is soliciting the consent of its stockholders,
including the holders of the 5% Preferred Stock, on the Record Date to an
amendment to the Certificate of Designations that would permit the Company to
redeem the 5% Preferred Stock (to the extent not previously converted) in whole
or in part upon the sale of any equity or debt securities in one or more
offerings occurring after
34
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<PAGE>
the date of the initial issuance of the 5% Preferred Stock and on or prior to
December 30, 1997 for gross proceeds in an aggregate cash amount of not less
than $100 million.
The terms of the Preferred Stock Investment Agreement, dated October 23,
1996, as amended, between the Company and each purchaser of 5% Preferred Stock
(the 'Preferred Stock Investment Agreement') require that any additional
financings by the Company be pari passu or junior to the 5% Preferred Stock in
seniority, structure and maturity until the Company completes a Pre-Amendment
Qualifying Offering. If the Proposed Amendment is not approved by the Company's
stockholders and any shares of 5% Preferred Stock remain outstanding after the
Exchange Offer, the Offerings would not constitute a Pre-Amendment Qualifying
Offering and the issuance of the Notes would not be permitted by the terms of
the Preferred Stock Investment Agreement.
35
<PAGE>
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds to the Company from the Exchange Offer.
PRICE RANGE OF COMMON STOCK
The Common Stock began trading on the Nasdaq SmallCap Market on September
13, 1994 under the symbol 'CDRD' and has been trading there since that time. The
following table sets forth the high and low prices for the Common Stock, as
reported by Nasdaq, for the periods indicated below. The prices set forth below
reflect interdealer quotations, without retail markups, markdowns, fees or
commissions and do not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------------- ---------------
<S> <C> <C>
1994:
Third Quarter (commencing September 13, 1994)............................................ $ 4 1/2 $ 3 3/4
Fourth Quarter........................................................................... 3 7/8 1 5/8
1995:
First Quarter............................................................................ 4 5/8 1 7/8
Second Quarter........................................................................... 3 15/16 2 5/8
Third Quarter............................................................................ 4 5/8 2 15/16
Fourth Quarter........................................................................... 4 3/8 2 15/16
1996:
First Quarter............................................................................ 9 1/8 2 15/16
Second Quarter........................................................................... 13 3/4 7 1/8
Third Quarter............................................................................ 9 5/8 6 3/4
Fourth Quarter........................................................................... 8 1/2 3 7/16
1997:
First Quarter............................................................................ 8 3 9/16
Second Quarter........................................................................... 20 1/4 10 3/4
Third Quarter............................................................................ 20 14
</TABLE>
On October 14, 1997, the closing bid price of the Common Stock on the
Nasdaq SmallCap Market was $23.50 per share. On September 30, 1997, there were
approximately 105 record holders of the Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. The AEF
Agreements contain, and the Indenture will contain, provisions that limit the
Company's ability to pay dividends on the Common Stock.
36
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of June 30, 1997 (i) on an historical basis; (ii) on a pro forma basis,
giving effect to the sale in August 1997 of Common Stock to Loral Space for net
proceeds of $24.5 million; (iii) as adjusted for the Exchange Offer (assuming
100% acceptance by holders of 5% Preferred Stock) after deducting Dealer Manager
fees and other estimated expenses; and (iv) as adjusted for the estimated net
proceeds from the sale of 3,500,000 shares of Common Stock pursuant to the Stock
Offering (at an assumed offering price of $18.44 per share, the closing price of
the Company's Common Stock at September 30, 1997, after deducting the
underwriting discounts and commissions and estimated offering expenses) and the
sale of Notes for net proceeds of $142.8 million pursuant to the Notes Offering.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------------------------
PRO FORMA AS PRO FORMA AS
ADJUSTED FOR FURTHER
THE ADJUSTED FOR
EXCHANGE THE
ACTUAL PRO FORMA OFFER OFFERINGS
-------- --------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Cash and cash equivalents................................ $ 30,184 $ 54,684 $ 50,518 $252,022
Designated cash(1)....................................... 66,677 66,677 66,677 66,677
-------- --------- ------------ ------------
Total cash and cash equivalents.......................... $ 96,861 $121,361 $117,195 $318,699
-------- --------- ------------ ------------
-------- --------- ------------ ------------
Senior Discount Notes.................................... $ -- -- $ -- $150,000
5% Delayed Convertible Preferred Stock, 5,400,000 shares
issued and outstanding, actual and pro forma(2)........ 111,855 111,855 -- --
10 1/2% Series C Convertible Preferred Stock, no par
value, 1,932,853 shares issued and outstanding, pro
forma as adjusted and as further adjusted.............. -- -- 193,285 193,285
Common Stock, $.001 par value; 10,313,391 shares issued
and outstanding, actual; 12,218,879 shares issued and
outstanding, pro forma and as adjusted; and 15,718,879
shares issued and outstanding, as further adjusted(3).. 10 12 12 16
Additional paid in capital............................... 75,425 99,923 43,757 102,407
Subscription receivable.................................. (466) (466) (466) (466)
Deficit accumulated during the development stage......... (62,683) (62,683) (92,113) (92,113)
-------- --------- ------------ ------------
Total Capitalization................................ $124,141 $148,641 $144,475 $353,129
-------- --------- ------------ ------------
-------- --------- ------------ ------------
</TABLE>
- ------------
(1) Represents proceeds of the offering of the 5% Preferred Stock which have
been classified as designated cash reflecting the balance due to the FCC for
the Company's FCC License. The Company paid this amount to the FCC in
October 1997.
(2) All capitalization excludes warrants issuable by the Company as of June 30,
1997 to purchase 486,000 shares of 5% Preferred Stock.
(3) All capitalization information excludes: (i) options outstanding as of June
30, 1997 to purchase 1,733,000 shares of Common Stock and (ii) warrants
issuable as of June 30, 1997 to purchase 2,000,000 shares of Common Stock.
37
<PAGE>
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected consolidated financial data for the Company set forth below
with respect to the statements of operations for the years ended December 31,
1994, 1995 and 1996 and with respect to the balance sheets at December 31, 1995
and 1996 are derived from the consolidated financial statements of the Company,
audited by Coopers & Lybrand L.L.P., independent accountants, incorporated
herein by reference. The selected consolidated financial data for the Company
with respect to the balance sheets at December 31, 1992, 1993 and 1994 and with
respect to the statement of operations data for the years ended December 31,
1992 and 1993, are derived from the Company's audited consolidated financial
statements, which are not incorporated herein by reference. The financial
information as of and for the six months ended June 30, 1996 and 1997 is derived
from unaudited consolidated financial statements incorporated herein by
reference. In the opinion of management, the unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
that are necessary for a fair presentation of the financial position and results
of operations for these periods. The selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements and related
notes thereto incorporated herein by reference.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ....................................... $-- $-- $-- $-- $-- $-- $--
Net loss ................................................. (1,551) (6,568) (4,065) (2,107) (2,831) (1,204) (835)
Net loss per share of Common Stock ....................... $ (.23) $ (.79) $ (.48) $ (.23) $ (.29) $ (.13) $ (4.28)(1)
Weighted average shares of Common Stock and
Common Stock equivalents outstanding ................... 6,715 8,284 8,398 9,224 9,642 9,358 10,307
Accretion on 5% Preferred Stock added to
liquidation preference ................................. $-- $-- $-- $-- $-- $-- $ (1,406)
Deemed dividend on 5% Preferred Stock .................... $-- $-- $-- $-- $-- $-- $(43,313)
Deficiency in the coverage of combined
fixed charges and preferred dividends by
earnings before fixed charges and
preferred dividend(2) .................................. $-- $-- $-- $-- $-- $-- $(45,554)
Ratio of earnings to combined fixed charges
and preferred dividends(3) ............................. N.A. N.A. N.A. N.A. N.A. N.A. N.A.
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- --------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents .......... $ 1,883 $ 777 $ 3,400 $ 1,800 $ 4,584 $ 1,371 $ 30,184
Designated cash(4) ................. -- -- -- -- -- -- 66,677
Working capital (deficit) .......... 1,399 (250) 2,908 1,741 4,442 1,293 30,424
Total assets ....................... 2,292 1,663 3,971 2,334 5,065 1,874 124,354
Deficit accumulated during the
development stage ................ (2,965) (9,533) (13,598) (15,705) (18,536) (16,909) (62,683)
Stockholders' equity ............... 1,791 505 3,431 1,991 4,898 1,486 12,286
Book value per share ............... .48 1.19
</TABLE>
- ------------
(1) Includes a deemed dividend on the Company's 5% Preferred Stock of $43.3
million, or $4.20 per share. The deemed dividend relates to the discount
feature associated with the 5% Preferred Stock, computed in accordance with
the Commission's position on accounting for preferred stock which is
convertible at a discount to the market price.
(2) For the purpose of this calculation, the deficiency is computed as the
Company's net loss adjusted for the accretion on the 5% Preferred Stock and
the deemed dividend on the 5% Preferred Stock.
(3) Because the Company has not generated revenues from earnings for the periods
described, the ratio of earnings to fixed charges is not material.
(4) Represents proceeds of the offering of the 5% Preferred Stock which have
been classified as designated cash reflecting the balance due to the FCC for
the Company's FCC License. The Company paid this amount to the FCC in
October 1997.
38
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of certain
events could differ materially from those projected in the forward-looking
statements due to a number of factors, including those set forth under 'Risk
Factors' and elsewhere in this Prospectus. See 'Special Note Regarding
Forward-Looking Statements.'
OVERVIEW
The Company was organized in May 1990 and is in its development stage. The
Company's principal activities to date have included technology development,
pursuing regulatory approval for CD Radio, market research, design, development,
contract negotiations with satellite and launch vehicle contractors, technical
efforts with respect to standards and specifications, strategic planning and
securing adequate financing for working capital and capital expenditures. The
Company does not expect to derive any revenues from operations prior to the
commercial launch of CD Radio, which is expected to occur no earlier than the
end of 1999. The Company has incurred substantial losses to date and expects to
incur substantial losses until at least a year after the commercial launch of CD
Radio. In addition, the Company will require substantial additional capital to
complete development and commence commercial operations of CD Radio.
Upon commencing commercial operations, the Company expects its primary
source of revenues to be monthly subscription fees. The Company currently
anticipates that its subscription fee will be approximately $10 per month to
receive CD Radio broadcasts, with a one time, modest activation fee per
subscriber. To receive CD Radio, subscribers will need to purchase a radio card
or S-band radio together with the associated miniature satellite dish antenna.
The Company does not intend to manufacture these products and thus will not
receive any revenues from their sale. Although the Company holds patents
covering certain technology to be used in the radio cards, S-band radios and
miniature satellite dish antennas, the Company expects to license its technology
to manufacturers at no charge. As the number of subscribers to CD Radio
increases, the Company also may derive revenues from payments from producers of
sports, news and talk programming for providing national distribution of their
programming to subscribers.
The Company expects that the operating expenses associated with commercial
operations will consist primarily of costs to acquire programming; costs to
maintain and operate its satellite broadcasting system and National Broadcasting
Studio; and sales, general and administrative costs. Costs to acquire
programming are expected to include payments to build and maintain an extensive
music library and royalty payments for broadcasting music (calculated based on a
percentage of revenues). Sales, general and administrative costs are expected to
consist primarily of advertising costs, salaries of executives, studio
personnel, program hosts, administrators, technical staff, rent and other
administrative expenses. The Company expects that the number of its employees
will increase from ten to approximately 100 by the time it commences commercial
operations.
In addition to funding initial operating losses, the Company will require
funds for working capital, interest and financing costs on borrowings and
capital expenditures. The Company's interest expense will increase significantly
as a result of its financing plan. However, a substantial portion of its planned
indebtedness will not require cash payments of interest and principal for some
time.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
The Company recorded net losses of $835,000 and $1,204,000 for the six
months ended June 30, 1997 and 1996, respectively, and $354,000 and $687,000 for
the three months ended June 30, 1997 and 1996, respectively. The Company's total
operating expenses were $2,128,000 and $1,239,000 for the six months ended June
30, 1997 and 1996, respectively, and were $1,591,000 for the three months ended
June 30, 1997 compared to $702,000 for the three months ended June 30, 1996.
39
<PAGE>
<PAGE>
Legal, consulting and regulatory fees increased for the six month ended
June 30, 1997 to $1,246,000 from $575,000 for the six months ended June 30,
1996, and increased to $1,009,000 from $347,000 for the three months ended June
30, 1997 and 196, respectively. These levels of expenditures are the result of
increased activity since winning an auction for the FCC License.
Research and development costs were $35,000 and $52,000 for the six months
ended June 30, 1997 and 1996, respectively, and $15,000 and $25,000 for the
three months ended June 30, 1997 and 1996, respectively. The Company completed
the majority of such activities in 1994.
Other general and administrative expenses increased for the six months
ended June 30, 1997 to $847,000 from $612,000 for the six months ended June 30,
1996 and to $566,000 from $330,000 for the three months ended June 30, 1997 and
1996, respectively. General and administrative expenses are expected to continue
to increase as the Company continues to develop its business. The Company also
incurred a non-cash charge of $160,000 for the six month period ended June 30,
1996, attributable to the recognition of compensation expense in connection with
stock options issued to officers of the Company.
The increase in interest income to $1,298,000 for the six months ended June
30, 1997, from $45,000 in the six months ended June 30, 1996 and to $1,237,000
from $20,000 for the three months ended June 30, 1997 and 1996, respectively,
was the result of a higher average cash balance during the second quarter of
1997. The cash and cash equivalents on hand were primarily obtained from the 5%
Preferred Stock offering in April 1997.
YEARS ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
The Company recorded net losses of $2,831,000 ($.29 per share) and
$2,107,000 ($.23 per share) for the years ended December 31, 1996 and 1995,
respectively. The Company's total operating expenses were $2,930,000 in 1996
compared to $2,230,000 in 1995.
Legal, consulting and regulatory fees increased in 1996 to $1,582,000 from
$1,046,000 in 1995, as the result of increased efforts to obtain the FCC
License.
Research and development costs were $117,000 in 1996, compared with
$122,000 in 1995. Non-recurring costs associated with the design and development
of the CD Radio demonstration system were substantially completed in 1993. Costs
incurred in subsequent years relate to the operations of the demonstration
system, including leasing satellite time, taking transmission measurements, and
testing multipath fading.
Other general and administrative expenses increased in 1996 to $1,231,000
from $1,062,000 in 1995. The increase is due to the Company requiring general
administrative support for the effort to obtain the FCC License.
Interest income decreased to $113,000 in 1996 from $143,000 in 1995 as a
result of the Company having a higher average cash balance in 1995. Proceeds
relating to the exercise of stock warrants were not received until late 1996
and, therefore, did not generate a significant amount of interest income.
Interest expense decreased from $20,000 in 1995 to $13,000 in 1996 as a result
of the Company repaying a promissory note due to an officer of the Company in
1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
The Company recorded net loss of $2,107,000 ($.23 per share) and $4,065,000
($.48 per share) for the years ended December 31, 1995 and 1994, respectively.
The Company's total operating expenses were $2,230,000 in 1995 compared to
$4,076,000 in 1994.
Legal, consulting and regulatory fees decreased from $1,245,000 in 1994 to
$1,046,000 in 1995 as the Company continued to reduce costs while awaiting
action by the FCC on the Company's application for an FCC License.
Other general and administrative expenses also decreased from $2,455,000 in
1994 to $1,062,000 in 1995 reflecting a reduction of costs such as payroll, rent
and compensation expense in connection with issuance of stock options.
40
<PAGE>
<PAGE>
The Company completed the majority of the research and development
necessary for product development prior to FCC licensing by 1994 which was
reflected in the decrease of research and development costs from $375,000 in
1994 to $122,000 in 1995.
The increase in interest income from $51,000 in 1994 to $143,000 in 1995
was the result of a higher average cash balance in 1995. The cash and cash
equivalents on hand were originally obtained from the Company's initial public
offering in September 1994, which raised $4.8 million.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of approximately
$30,424,000 compared to $4,442,000 at December 31, 1996. The increase in working
capital was primarily the result of remaining cash proceeds from the preferred
stock offering in April 1997. Approximately $66.7 million of the proceeds from
the preferred stock offering was classified as designated cash reflecting the
balance then due the FCC when the FCC License was awarded.
FUNDING REQUIREMENTS
The Company is a development stage company and as such will require
substantial amounts of continued outside financing to acquire and develop its
assets and commence commercial operations. The Company estimates that it will
require approximately $660.1 million to develop and commence commercial
operation of CD Radio by the end of 1999. Of this amount, the Company has raised
approximately $266.6 million to date. After giving effect to the Offerings, the
Company will have raised approximately $491.6 million of funds, leaving
anticipated additional cash needs of approximately $168.5 million to fund its
operations through 1999. The Company anticipates additional cash requirements of
approximately $100.0 million to fund its operations through the year 2000. The
Company expects to finance the remainder of its funding requirements through the
issuance of debt or equity securities, or a combination thereof. Furthermore, if
the Company were to exercise its option under the Loral Satellite Contract to
purchase and deploy an additional satellite, substantial additional funds would
be required. See 'Proposed Financing.'
In April 1997, the Company was the winning bidder in an FCC auction for one
of two national satellite broadcast licenses with a winning bid of $83.3
million, of which $16.7 million was paid as a deposit. The Company paid the
balance due the FCC in October 1997 and was awarded the FCC License on October
10, 1997.
To build and launch the satellites necessary for the operations of CD
Radio, the Company has entered into the Loral Satellite Contract and the
Arianespace Launch Contract. The Loral Satellite Contract provides for Loral to
construct for the Company three satellites, two of which the Company intends to
launch and the third of which will be kept in reserve as a spare, and for an
option to be granted to the Company to purchase a fourth satellite. Under the
Arianespace Launch Contract, Arianespace has agreed to launch two of the
Company's satellites into orbit. See 'Business -- The CD Radio Delivery System
-- The Satellites.' The Company is committed to make aggregate payments of
$272.8 million under the Loral Satellite Contract and of $176.0 million under
the Arianespace Launch Contract. Under the Loral Satellite Contract, with the
exception of a payment made at the time of the signing of the Loral Satellite
Contract in March 1993, payments are to be made in 22 installments commencing in
April 1997 and ending in November 2000, the expected delivery date for the third
satellite. Approximately half of these payments are contingent on Loral meeting
specified milestones in the manufacture of the three satellites. In addition,
Loral has agreed to defer a total of $20.0 million of the contract price, which
is to be paid in four equal installments of $5.0 million commencing November
2001 until March 2003. See ' -- Sources of Funding.' Amounts due under the
Arianespace Launch Contract, except for payments made for each of the two
launches prior to the execution of the Arianespace Launch Contract, are due
between November 1997 and July 1999 for the first launch, and, for the second
launch, the period between February 1998 and the earlier of October 1999, or ten
days prior to the second launch.
The Company also will require funds for construction of its National
Broadcast Studio, working capital, interest on borrowings, acquisition of
programming, financing costs and operating expenses until
41
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<PAGE>
some time after the commencement of commercial operations of CD Radio. The
Company's interest expense will increase significantly as a result of its
financing plan; however, a substantial portion of its planned indebtedness will
not require immediate cash payments. The Notes are not expected to require cash
payments until 2003. Interest on funds borrowed by the Company under the AEF
Agreements is deferred until repayment of such amounts.
SOURCES OF FUNDING
The Company historically has funded its operations through equity capital.
As of June 30, 1997, the Company had received a total of $186.8 million in
equity capital and had no outstanding indebtedness. A significant portion of the
Company's equity capital was received in April 1997 as a result of the Company's
issuance of 5,400,000 shares of 5% Preferred Stock for aggregate net proceeds of
$120.5 million in a private placement transaction. These proceeds were used
primarily to finance the payment of the purchase price for the FCC License and
for working capital.
On July 22, 1997, the Company entered into two loan agreements
(collectively the 'AEF Agreements') with AEF, a subsidiary of Arianespace, to
finance approximately $105 million of the estimated $176 million price of the
launch services to be provided by Arianespace (the 'AEF Vendor Financing').
Under these agreements, the Company is able to borrow funds to meet the progress
payments due to Arianespace for the construction of each launch vehicle and
other launch costs (the 'Tranche A Loans'). The Company has the opportunity upon
satisfying a variety of conditions specified in the AEF Agreements to extend the
term of the Tranche A Loans. If not extended, the Company will be required to
repay the Tranche A Loans in full, together with accrued interest and all fees
and other amounts due, approximately three months before the applicable launch
date, which will be prior to the time CD Radio commences commercial operations.
There can be no assurance that the Company will have sufficient funds to make
such repayment.
The AEF Agreements impose restrictions on the Company's ability to incur
additional indebtedness, make investments or permit liens on certain assets of
the Company, other than liens in favor of AEF. If AEF determines that the
Tranche A Loans are eligible for conversion into term loans, the Company will
also be subject to provisions restricting its ability to change its capital
structure or organizational documents or to merge, consolidate or combine with
another entity. If the Tranche A Loans are converted, the Company's obligations
to AEF will be secured by a lien on specified assets of the Company, including
the satellites and, to the extent permitted by applicable law, the FCC License.
See 'Description of Certain Indebtedness -- Vendor Financing.'
Pursuant to a Multiparty Agreement among the Company, AEF and Arianespace
in connection with the AEF Agreements, if the Company is unable to obtain
sufficient financing to complete the construction and launch of the satellites,
or if the Company terminates the Arianespace Launch Contract, the Company will
be required to pay Arianespace a termination fee ranging from 5% to 40% of the
launch services price, based on the proximity of the date of termination to the
scheduled launch date. The termination fee will be payable prior to the time the
Company commences commercial operations and there can be no assurance that the
Company will have sufficient funds to pay this fee.
The Loral Satellite Contract provides for payments to be made in
installments, subject to achievement by Loral of certain milestones in the
manufacture of the satellites. Loral has agreed to defer payment of $20 million
from two milestone payments due in June and September of 1998. The deferred
amount will be paid in four installments of $5 million, with the first payment
to be made twenty-seven months after the delivery of the first satellite, the
second payment to be made twenty-seven months after delivery of the second
satellite, the third payment to be made 365 days after the first payment date
and the fourth payment to be made 365 days after the second payment date.
In the event of a satellite or launch failure, Company will be required to
pay Loral the full deferred amount for the affected satellite no later than 120
days after the date of the failure. If the Company should elect to put a
satellite into ground storage, rather than having it shipped to the launch site,
the full deferred amount for the affected satellite will become due within 60
days of such election.
As a condition to the deferred payments, Company has agreed to provide
Loral a security interest in the properties and assets of the Company and its
subsidiaries, of substantially the same nature and
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quality, and of substantially equivalent value relative to the amount of the
secured obligations, and on the same terms and covenants, as the Company has
provided or may provide to any other party under any and all of its loan, credit
and other similar agreements. There currently is no such security interest.
After giving effect to the Offerings and the AEF Agreements, the Company
expects it will require an additional $168.5 million in financing through 1999.
However, there can be no assurance that the Company's actual cash requirements
will not increase. Potential sources of additional financing include the sale of
debt or equity securities in the public or private markets. There can be no
assurance that the Company will be able to obtain additional financing on
favorable terms, or at all, or that it will be able to do so in a timely
fashion. The AEF Agreements contain, the Indenture will contain and documents
governing any indebtedness incurred in the future are expected to contain,
provisions limiting the ability of the Company to incur additional indebtedness.
The issuance by the Company of additional equity securities could cause
substantial dilution of the interest in the Company of holders of 5% Preferred
Stock who receive shares of New Preferred Stock pursuant to the Exchange Offer
and subsequently convert such shares into Common Stock. If additional financing
were not available on a timely basis, the Company would be required to delay
satellite and/or launch vehicle construction in order to conserve cash to fund
continued operations, which would cause delays in the commencement of operations
and increased costs. See 'Risk Factors -- Need for Substantial Additional
Funding.'
The amount and timing of the Company's actual cash requirements will depend
upon numerous factors, including costs associated with the construction and
deployment of its satellite system and the rate of growth of its business
subsequent to commencing service, costs of financing and the possibility of
unanticipated costs. Additional funds would be required in the event of delay,
cost overruns, launch failure, launch services or satellite system change
orders, or any shortfalls in estimated levels of operating cash flow, or to meet
unanticipated expenses.
As a result of the issuance of the Notes and the expected incurrence of
significant additional indebtedness required to meet its capital requirements,
the Company will have substantial indebtedness. The Company's ability to meet
all of its debt service obligations when due may require it to refinance its
then outstanding indebtedness. No assurance can be given that the Company will
be able to generate sufficient cash flow to service its indebtedness or be able
to refinance indebtedness. The Indenture will contain, and debt instruments
governing any future indebtedness of the Company are expected to contain,
restrictions on, among other things, the ability of the Company to incur
additional indebtedness.
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THE EXCHANGE OFFER
GENERAL
Participation in the Exchange Offer is voluntary and holders of shares of
5% Preferred Stock should carefully consider whether to accept. Neither the
Board of Directors of the Company nor the Company makes any recommendation to
holders of shares of 5% Preferred Stock as to whether to tender or refrain from
tendering in the Exchange Offer. Holders of shares of 5% Preferred Stock are
urged to consult their financial and tax advisors in making their own decisions
on what action to take in light of their own particular circumstances.
The Exchange Offer is open to all holders of shares of 5% Preferred Stock.
PURPOSE OF THE EXCHANGE OFFER
The principal purpose of the Exchange Offer is to improve the Company's
capital structure and to prevent dilution to the holders of the Company's Common
Stock by replacing the 5% Preferred Stock, which, particularly after November
1997, may be convertible into an increasing number of shares of Common Stock,
with New Preferred Stock, which has a higher dividend rate, but less favorable
conversion rights. The Exchange Offer is part of the financing transaction that
also includes the Stock Offering and the Notes Offering. The consummation of the
Exchange Offer is not conditioned upon the consummation of either the Notes
Offering or the Stock Offering. Each of the Offerings is conditioned upon
consummation of the Exchange Offer.
Upon consummation of the Exchange Offer, all shares of 5% Preferred Stock
tendered, accepted and not withdrawn will be retired.
PURPOSE OF THE SOLICITATION
The principal purpose of the Solicitation is to amend the Certificate of
Designations to allow the Company to redeem the 5% Preferred Stock (to the
extent not previously converted), in whole or in part, upon the consummation of
one or more Qualifying Offerings occurring after the date of the initial
issuance of the 5% Preferred Stock and on or prior to December 30, 1997 for
gross proceeds in an aggregate cash amount of not less than $100 million. The
Proposed Amendment, if approved by the Company's stockholders, will provide the
Company with additional flexibility in consummating the Offerings. If the
Proposed Amendment is adopted, then upon the consummation of the Qualifying
Offerings, for aggregate proceeds of $100 million the Company will be permitted
to redeem the shares of 5% Preferred Stock held by holders who do not tender
their shares of 5% Preferred Stock in the Exchange Offer.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal, up to 1,932,073
shares of its New Preferred Stock for up to all of the outstanding shares of its
5% Preferred Stock at a rate of one share of New Preferred Stock for each $100
in Exchange Rate Liquidation Preference represented by shares of 5% Preferred
Stock not previously converted. The 'Exchange Rate Liquidation Preference' shall
be the amount determined by dividing (x) the actual liquidation preference of
the shares of 5% Preferred Stock being exchanged (including accrued and unpaid
dividends thereon, if any) by (y) 0.696145. On November 13, 1997, the assumed
expiration date of the Exchange Offer, the Exchange Rate Liquidation Preference
will be approximately $37.00 per share of 5% Preferred Stock. The Liquidation
Preference of each share of New Preferred Stock will be equal to $100.00. The
Company will pay cash to exchanging holders of 5% Preferred Stock in lieu of
issuing fractional shares of New Preferred Stock. The terms of the New Preferred
Stock (including the dividend rate, liquidation preference and conversion and
redemption rights) differ in material respects from the terms of the 5%
Preferred Stock for which it may be exchanged pursuant to this Exchange Offer.
See 'Description of New Preferred Stock' and 'Description of Capital Stock -- 5%
Preferred Stock.' The 5% Preferred Stock was originally issued in April 1997. As
of September 30, 1997, there were 5,222,608 shares of 5% Preferred Stock
outstanding.
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Tendering holders of the shares of 5% Preferred Stock will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of the shares
of 5% Preferred Stock pursuant to the Exchange Offer.
THE SOLICITATION
In conjunction with the Exchange Offer and pursuant to the Consent
Solicitation Statement, the Company is soliciting Consents from the holders of
record on the Record Date of the Common Stock and the 5% Preferred Stock to the
Proposed Amendment.
Under the Company's Amended and Restated Certificate of Incorporation, as
currently in effect, the Company may redeem the shares of 5% Preferred Stock (to
the extent it has not been previously converted), in whole but not in part,
following a sale by the Company of Common Stock for cash in an amount of not
less than $100 million in a registered underwritten public offering prior to
October 15, 1997. The Company is soliciting the consent of its stockholders,
including the holders of the 5% Preferred Stock, on the Record Date to the
Proposed Amendment to the Certificate of Designations (i) to allow the Company
to redeem the shares of 5% Preferred Stock (to the extent not previously
converted), in whole or in part, upon the sale of any equity or debt securities
in one or more offerings occurring after the date of the initial issuance of the
5% Preferred Stock and on or prior to December 30, 1997 for gross proceeds in an
aggregate cash amount of not less than $100 million and (ii) to amend certain of
the redemption provisions relating to the requirements for the delivery of a
notice of redemption in connection therewith. See 'The Proposed Amendment.'
The terms of the Preferred Stock Investment Agreement require that the
Company not undertake to conduct any debt or equity financing that is not pari
passu or junior to the 5% Preferred Stock in seniority, structure and maturity
until the Company completes a Pre-Amendment Qualifying Offering. If the Proposed
Amendment is not approved by the Company's stockholders and any shares of 5%
Preferred Stock remain outstanding after the Exchange Offer, the Company will
not be permitted to issue any debt or equity financing that is senior to the 5%
Preferred Stock. The Company does not intend to commence the Offerings until the
Solicitation is substantially completed and the Notes Offering will not be
consummated unless the Exchange Offer and the Solicitation are completed and no
shares of the 5% Preferred Stock remain outstanding.
The Requisite Consents from the holders of a majority of the issued and
outstanding shares of 5% Preferred Stock and the Common Stock, respectively, on
the Record Date must be obtained in order to adopt the Proposed Amendment. The
Company intends to amend the Certificate of Designations to reflect the Proposed
Amendment as promptly as practicable after it obtains the Requisite Consents. If
the Proposed Amendment is adopted, then each non-exchanging holder will be bound
by the Proposed Amendment regardless of whether such holder consented to the
Proposed Amendment.
THE COMPANY WILL MAKE NO SEPARATE PAYMENT FOR CONSENTS DELIVERED IN THE
SOLICITATION.
EXPIRATION DATE; EXTENSION; AMENDMENTS
The Exchange Offer will expire on the Expiration Date. The term 'Expiration
Date' means 12:00 midnight, New York City time, on November 13, 1997, unless the
Company in its sole discretion extends the period during which the Exchange
Offer is open, in which event the term 'Expiration Date' shall mean the latest
time and date on which the Exchange Offer, as so extended by the Company, shall
expire. The Company reserves the right to extend the Exchange Offer at any time
and from time to time by giving oral or written notice to the Exchange Agent and
making a public announcement thereof. There can be no assurance that the Company
will exercise its right to extend the Exchange Offer. During any extension of
the Exchange Offer, all shares of 5% Preferred Stock previously tendered and not
withdrawn pursuant to the Exchange Offer will remain subject to the Exchange
Offer subject to the right of a tendering holder to withdraw its shares of 5%
Preferred Stock. See ' -- Withdrawal Rights.'
The Company also expressly reserves the right, subject to applicable law,
(i) to delay acceptance for exchange of any shares of 5% Preferred Stock or
terminate the Exchange Offer and not accept for
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exchange any shares of 5% Preferred Stock and promptly return all such shares to
the tendering holders thereof in the event that any of the conditions specified
in ' -- Conditions of the Exchange Offer' below are not satisfied or waived by
the Company or to comply with applicable law, by giving oral or written notice
of such delay or termination to the Exchange Agent, (ii) to waive any condition
to the Exchange Offer and accept all shares of 5% Preferred Stock previously
tendered pursuant thereto, (iii) to amend the Exchange Offer in any respect or
(iv) to terminate, cancel, withdraw or otherwise amend or modify the Exchange
Offer at any time for any reason. If the Exchange Offer is so amended, the term
'Exchange Offer' shall mean the Exchange Offer as so amended. The reservation by
the Company of the right to delay acceptance for exchange of shares of 5%
Preferred Stock is subject to the provisions of Rule 13e-4 and Rule 14e-1(c)
under the Exchange Act, which require that the Company pay the consideration
offered or return the shares of 5% Preferred Stock deposited by or on behalf of
holders thereof promptly after the termination or withdrawal of the Exchange
Offer.
Any extension, delay, termination or amendment of the Exchange Offer will
be followed as promptly as practicable by a public announcement thereof. Without
limiting the manner in which the Company may choose to make a public
announcement of any extension, delay, termination or amendment of the Exchange
Offer, the Company will have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by issuing a release to the
Dow Jones News Service, except in the case of an announcement of an extension of
the Exchange Offer, in which case the Company will have no obligation to
publish, advertise or otherwise communicate such announcement other than by
issuing a notice of such extension by press release or other public
announcement, which notice will be issued no later than 9:00 A.M., New York City
time, on the next business day after the previously scheduled Expiration Date.
TENDER PROCEDURE
The tender to the Company of shares of 5% Preferred Stock by a holder
thereof pursuant to one of the procedures set forth below and the acceptance
thereof by the Company will constitute a binding agreement between such holder
and the Company in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal. This Prospectus, together with
the Letter of Transmittal, will first be sent out on or about October 16, 1997,
to all holders of shares of 5% Preferred Stock known to the Company and the
Exchange Agent.
A holder of shares of 5% Preferred Stock may tender the same by properly
completing and signing the Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to the Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the shares of 5% Preferred Stock being
tendered and any other documents required by the Letter of Transmittal, to the
Exchange Agent at its address set forth on the Letter of Transmittal on or prior
to the Expiration Date (or complying with the procedure for book-entry transfer
described below).
THE METHOD OF DELIVERY OF THE SHARES OF 5% PREFERRED STOCK AND ALL OTHER
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER
INSURANCE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE. NO LETTERS OF TRANSMITTAL OR SHARES OF 5% PREFERRED STOCK
SHOULD BE SENT TO THE COMPANY.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the shares of 5% Preferred
Stock at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of the shares of 5% Preferred Stock by causing such
book-entry transfer facility to transfer such shares of 5% Preferred Stock into
the Exchange Agent's account with respect to the 5% Preferred Stock in
accordance with the book-entry transfer facility's procedures for such transfer.
Although delivery of the shares of 5% Preferred Stock may be effected through
book-entry transfer into the Exchange Agent's
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accounts at the book-entry transfer facility, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth on the Letter of Transmittal on or prior
to the Expiration Date.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the shares of 5% Preferred Stock (or a confirmation of book-entry
transfer of such shares of 5% Preferred Stock into the Exchange Agent's account
at the book-entry transfer facility) is received by the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of shares of 5% Preferred
Stock will be determined by the Company, whose determination will be final and
binding. The Company reserves the absolute right to reject any shares of 5%
Preferred Stock not properly tendered or the acceptance for exchange of which
may, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the absolute right to waive any defect or irregularity in the tender of
any shares of 5% Preferred Stock. Unless waived, any defects or irregularities
in connection with tenders of shares of 5% Preferred Stock for exchange must be
cured within such reasonable period of time as the Company will determine. None
of the Company, the Exchange Agent or any other person will be under any duty to
give notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering shares of 5% Preferred Stock for exchange (the
'Transferor') exchanges, assigns and transfers the shares of 5% Preferred Stock
to the Company and irrevocably constitutes and appoints the Exchange Agent as
the Transferor's agent and attorney-in-fact to cause the shares of 5% Preferred
Stock to be assigned, transferred and exchanged. The Transferor represents and
warrants that it has full power and authority to tender, exchange, assign and
transfer the shares of 5% Preferred Stock and to acquire shares of New Preferred
Stock issuable upon the exchange of such tendered shares of 5% Preferred Stock,
and that, when the same are accepted for exchange, the Company will acquire good
and unencumbered title to the tendered shares of 5% Preferred Stock, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Exchange Agent or the
Company to be necessary or desirable to complete the exchange, assignment and
transfer of tendered shares of 5% Preferred Stock or transfer ownership of such
shares of 5% Preferred Stock on the account books maintained by a book-entry
transfer facility. All authority conferred by the Transferor will survive the
death or incapacity of the Transferor and every obligation of the Transferor
will be binding upon the heirs, legal representatives, successors, assigns,
executors and administrators of such Transferor.
WITHDRAWAL RIGHTS
Tenders of shares of 5% Preferred Stock pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration Date.
To be effective, a written, telegraphic, telex or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the Letter of Transmittal, and with respect to a facsimile
transmission, must be confirmed by telephone and an original delivered by
guaranteed overnight delivery. Any such notice of withdrawal must specify the
person named in the Letter of Transmittal as having tendered shares of 5%
Preferred Stock to be withdrawn, the certificate numbers of the shares of 5%
Preferred Stock to be withdrawn, a statement that such holder is withdrawing his
election to have such shares of 5% Preferred Stock exchanged, and the name of
the registered holder of such shares of 5% Preferred Stock, and must be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal (including any required signature guarantees) or be accompanied by
evidence satisfactory to the Company that the person withdrawing
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the tender has succeeded to the beneficial ownership of the shares of 5%
Preferred Stock being withdrawn. The Exchange Agent will return the properly
withdrawn shares of 5% Preferred Stock promptly following receipt of notice of
withdrawal. If shares of 5% Preferred Stock have been tendered pursuant to the
procedure for book-entry transfer, any notice of withdrawal must specify the
name and number of the account at the book-entry transfer facility to be
credited with the withdrawn shares of 5% Preferred Stock or otherwise comply
with the book-entry transfer procedure. All questions as to the validity of
notices of withdrawals, including time of receipt, will be determined by the
Company, and such determination will be final and binding on all parties.
Any shares of 5% Preferred Stock so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any
shares of 5% Preferred Stock which have been tendered for exchange but which are
not exchanged for any reason will be returned to the holder thereof without cost
to such holder (or, in the case of shares of 5% Preferred Stock tendered by
book-entry transfer into the Exchange Agent's account at the book-entry transfer
facility pursuant to the book-entry transfer procedures described above, such
shares will be credited to an account with such book-entry transfer facility
specified by the holder) as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn shares of 5%
Preferred Stock may be retendered by following one of the procedures described
under ' -- Tender Procedure' above, at any time on or prior to the Expiration
Date.
THE WITHDRAWAL OF TENDERED SHARES OF 5% PREFERRED STOCK WILL BE DEEMED TO
BE A REJECTION OF THE EXCHANGE OFFER.
ACCEPTANCE OF 5% PREFERRED STOCK FOR EXCHANGE; DELIVERY OF NEW PREFERRED STOCK
Upon the satisfaction or waiver of all the terms of the Exchange Offer, the
acceptance for exchange of the shares of 5% Preferred Stock validly tendered and
not withdrawn will be made on the Exchange Date and the issuance of the shares
of New Preferred Stock will be made as promptly as practicable thereafter. For
the purposes of the Exchange Offer, the Company shall be deemed to have accepted
for exchange validly tendered shares of 5% Preferred Stock when, as and if the
Company has given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of shares of
5% Preferred Stock for the purposes of receiving the shares of New Preferred
Stock from the Company and causing the shares of 5% Preferred Stock to be
assigned, transferred and exchanged. Upon the terms of the Exchange Offer,
delivery of shares of New Preferred Stock to be issued in exchange for accepted
shares of 5% Preferred Stock will be made by the Exchange Agent promptly after
the Exchange Date. Tendered shares of 5% Preferred Stock not accepted for
exchange by the Company will be returned without expense to the tendering
holders promptly following the Expiration Date as described above under ' --
Withdrawal and Revocation Rights.'
ACCRUED DIVIDENDS
Holders of shares of 5% Preferred Stock accepted for exchange pursuant to
the Exchange Offer will not receive dividends on such 5% Preferred Stock accrued
from April 10, 1997 (the last regular dividend payment period with respect to
the 5% Preferred Stock) to the date of issuance of New Preferred Stock; such
accrued dividends will be included in the calculation of the Exchange Rate
Liquidation Preference to determine the number of shares of New Preferred Stock
to be received by holders tendering shares of 5% Preferred Stock in the Exchange
Offer.
Dividends on shares of 5% Preferred Stock not exchanged in the Exchange
Offer will continue to accrue and be payable, when and as declared by the Board
of Directors.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company will
not be required to accept for exchange, or, subject to any applicable rules and
regulations of the Commission, including Rule 14e-1(c) (relating to the
Company's obligation to exchange and issue shares of New Preferred
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Stock for or return tendered shares of 5% Preferred Stock promptly after
termination of the Exchange Offer), exchange and issue shares of New Preferred
Stock for any shares of 5% Preferred Stock tendered and may postpone the
acceptance for exchange of or, subject to the restriction set forth above, the
exchange and issuance of, shares of New Preferred Stock for shares of 5%
Preferred Stock tendered and to be exchanged and may terminate or amend the
Exchange Offer if (i) the Requisite Consents to the Proposed Amendment are not
obtained, (ii) a minimum of 95% of the issued and outstanding shares of the 5%
Preferred Stock are not tendered for exchange and not withdrawn prior to the
Expiration Date or (iii) the General Conditions (see below) are not satisfied.
For purposes of the preceding paragraph, all of the 'General Conditions'
shall be deemed to have been satisfied unless any of the following conditions
shall occur on or after the date of this Prospectus and prior to the Expiration
Date:
(a) any change (or any condition, event or development involving a
prospective change) shall have occurred or been threatened in the business,
properties, assets, liabilities, capitalization, stockholders' equity,
financial condition, operations, results of operations or prospects of the
Company, or in the general economic or financial market conditions in the
United States or abroad, which is or may be materially adverse to the
Company or its stockholders or to the value of the shares of 5% Preferred
Stock or there shall have been a significant decrease in the market prices
of or trading in the shares of 5% Preferred Stock, or the Company shall
have become aware of any fact or occurrence which is or may be materially
adverse with respect to the value of the shares of 5% Preferred Stock or
with respect to the contemplated benefits to the Company of the Exchange
Offer or the Proposed Amendment; or
(b) there shall have occurred (1) any general suspension of trading
in, or limitation on prices for, securities on any national securities
exchange or the over-the-counter market, (2) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States, (3) declaration of a national emergency or a commencement of a war,
armed hostilities or other national or international calamity directly or
indirectly involving the United States, (4) any limitation (whether or not
mandatory) by any governmental or regulatory authority on, or any other
event which might affect, the nature or extension of credit by banks or
other financial institutions, (5) any significant adverse change in the
United States securities or financial markets, or (6) in the case of any of
the foregoing existing at the time of the commencement of the Exchange
Offer, a material acceleration, escalation or worsening thereof; or
(c) there shall have been any action taken or threatened, or any
statute, rule, regulation, judgment, order or injunction proposed, sought,
promulgated, enacted, entered, enforced or deemed applicable to the
Exchange Offer or the Proposed Amendment by any local, state, federal or
foreign government or governmental authority or by any court, domestic or
foreign, that might, directly or indirectly, (1) make the acceptance for
exchange of some or all of the shares of 5% Preferred Stock or the issuance
of shares of New Preferred Stock in exchange therefor illegal or otherwise
restrict or prohibit consummation of the Exchange Offer, (2) result in a
delay in, or restrict the ability of the Company, or render the Company
unable, to accept for exchange some or all of the shares of 5% Preferred
Stock or to issue some or all of the shares of New Preferred Stock in
exchange therefor, (3) otherwise adversely affect the Company or the
Exchange Offer or (4) result in a material limitation in the benefits
expected to be derived by the Company from, or as a result of the
transactions contemplated by, the Exchange Offer or the Proposed Amendment;
or
(d) there shall be threatened, instituted or pending any action,
proceeding or claim by or before any court or governmental, administrative
or regulatory agency or authority or any other person or tribunal, domestic
or foreign, challenging the making of the Exchange Offer, the acquisition
by the Company of any shares of 5% Preferred Stock or the adoption of the
Proposed Amendment, or seeking to obtain any material damages as a result
thereof, or otherwise adversely affecting the Company or the value of the
5% Preferred Stock which makes it inadvisable to proceed with the Exchange
Offer, the acceptance for exchange of shares of 5% Preferred Stock or the
issuance of the shares of New Preferred Stock in exchange therefor.
All of the foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
such condition and may be waived by the
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Company, in whole or in part, at any time and from time to time, in the sole
discretion of the Company. The failure by the Company at any time to exercise
any of the foregoing rights will not be deemed a waiver of any such right, and
each such right will be deemed an ongoing right which may be asserted at any
time and from time to time. Any determination by the Company concerning the
foregoing conditions will be final and binding.
If any of the foregoing conditions shall not be satisfied (or, with respect
to the above enumerated events, shall have occurred), the Company may, subject
to applicable law, (i) terminate the Exchange Offer and return all shares of 5%
Preferred Stock tendered pursuant to the Exchange Offer to tendering security
holders as described above under ' -- Withdrawal Rights;' (ii) extend the
Exchange Offer and retain all tendered shares of 5% Preferred Stock until the
Expiration Time for the extended Exchange Offer; or (iii) waive the unsatisfied
conditions with respect to the Exchange Offer and accept all shares of 5%
Preferred Stock tendered pursuant to the Exchange Offer. In addition, the
Company reserves the right to amend or modify any or all of the Exchange Offer
at any time for any reason.
DISSENTERS' RIGHTS
Holders of the shares of 5% Preferred Stock do not have any appraisal or
dissenters' rights under the Delaware General Corporation Law or the Certificate
of Designations in connection with the Exchange Offer.
DEALER MANAGER
The Company has retained Merrill Lynch to act as Dealer Manager in
connection with the Exchange Offer. Additionally, Merrill Lynch is acting as an
underwriter in connection with the Offerings. Merrill Lynch is also acting as
financial advisor to the Company and, as such, is advising the Company with
respect to, among other things, the terms and timing of the Exchange Offer. In
its capacity as Dealer Manager, Merrill Lynch may contact holders of shares of
5% Preferred Stock regarding the Exchange Offer and may request brokers, dealers
and other nominees to forward this Prospectus and related materials to
beneficial owners of shares of 5% Preferred Stock. Questions and requests for
assistance may be directed to the Dealer Manager at its address and telephone
number set forth on the back cover of this Prospectus.
The Company has agreed to pay Merrill Lynch for its services as Dealer
Manager and financial advisor in connection with the Exchange Offer a fee equal
to 2.0% of: (i) the aggregate Liquidation Preference of all New Preferred Stock
issued in the Exchange Offer and (ii) cash or other consideration paid as
consideration pursuant to the Exchange Offer. In addition, the Company will
reimburse the Dealer Manager for its reasonable out-of-pocket expenses,
including without limitation, attorneys' fees. The Company also has agreed to
indemnify the Dealer Manger and its affiliates against certain liabilities
caused by, relating to, arising out of or in connection with the Exchange Offer
or the engagement of Merrill Lynch as financial advisor. Other than as described
above, the Company will not make any payments to brokers, dealers or others for
soliciting acceptance of the Exchange Offer.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. The Company will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses. Letters of Transmittal must be addressed to the Exchange
Agent at its address set forth on the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE
A VALID DELIVERY.
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TRANSFER TAXES
Holders who tender their shares of 5% Preferred Stock for exchange will not
be obligated to pay any transfer taxes in connection with the transfer and
exchange.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of shares of 5% Preferred Stock who do not exchange their shares of
5% Preferred Stock for shares of New Preferred Stock pursuant to the Exchange
Offer or whose 5% Preferred Stock is not accepted for exchange will continue to
hold such shares of 5% Preferred Stock and will be entitled to all the rights
and preferences, and subject to all of the limitations, applicable thereto.
Assuming the Company obtains the Requisite Consents, however, the terms of the
5% Preferred Stock will have been revised pursuant to the Proposed Amendment. To
the extent that shares of 5% Preferred Stock are tendered and accepted in the
Exchange Offer, the liquidity and trading market for untendered shares of 5%
Preferred Stock, and the terms upon which such shares could be sold, could be
adversely affected.
ACCOUNTING TREATMENT
For accounting purposes, the Company expects to exchange the 5% Preferred
Stock for which the Company received $135.0 million in gross proceeds for New
Preferred Stock with an expected value of approximately $193.3 million. The 5%
Preferred Stock was originally issued with a beneficial conversion feature which
will result in the Company recording a deemed dividend of $58 million,
representing the difference between the original value of the 5% Preferred Stock
and the expected value of the consideration given in the Exchange Offer. As of
June 30, 1997, the Company recorded approximately $43.3 million of the deemed
dividend. See the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1997 incorporated herein by reference.
MARKET AND TRADING INFORMATION
There is no established trading market for the shares of 5% Preferred
Stock. The New Preferred Stock will be a new issue of securities with no
established trading market. The Company has been advised by the Dealer Manager
that it intends to make a market in the New Preferred Stock but is not obligated
to do so and may discontinue marketmaking at any time without notice. No
assurance can be given as to the liquidity of the trading market for the shares
of New Preferred Stock. The trading market for the shares of 5% Preferred Stock
generally has not been liquid.
Until the Exchange Offer is completed, rules of the Commission may limit
the ability of the Dealer Manager to bid for and purchase the New Preferred
Stock and the Common Stock. As an exception to these rules, the Dealer Manager
is permitted to engage in certain transactions that stabilize the price of the
New Preferred Stock and the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the New
Preferred Stock and the Common Stock.
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence of
such purchases.
The Dealer Manager and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, the Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
Common Stock during a specified two-month prior period or 200 shares, whichever
is greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the Common Stock above
independent market levels. The Dealer Manager and dealers are not required to
engage in passive market making and may end passive market making activities at
any time.
Neither the Company nor the Dealer Manager makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the New Preferred Stock and the Common
Stock. In addition, neither the Company nor the Dealer
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Manager makes any representation that the Dealer Manager will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
THE PROPOSED AMENDMENT
The Certificate of Designations, as currently in effect, provides that the
Company is authorized to redeem the shares of 5% Preferred Stock, in whole but
not in part, upon a registered underwritten public offering in which the Company
sells Common Stock for net cash proceeds to the Company in an amount not less
than $100 million prior to October 15, 1997.
The Company is soliciting the consent of its stockholders, including the
holders of the shares of 5% Preferred Stock, on the Record Date to the Proposed
Amendment to the Certificate of Designations (i) to allow the Company to redeem
the shares of 5% Preferred Stock (to the extent not previously converted), in
whole or in part, upon the sale of any equity or debt securities in one or more
offerings occurring after the date of the initial issuance of shares of 5%
Preferred Stock and on or prior to December 30, 1997 for gross proceeds in an
aggregate cash amount of not less than $100 million and (ii) to amend certain of
the redemption provisions relating to the requirements for the delivery of a
notice of redemption in connection therewith. The Proposed Amendment does not
affect any terms or rights of the Common Stock.
If the Proposed Amendment is approved by the Company's stockholders, the
Company will file a Certificate of Amendment to the Certificate of Designations
with the Secretary of State of the State of Delaware as promptly as practicable
after it obtains the Requisite Consents and will take any other action necessary
to effect the Proposed Amendment.
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BUSINESS
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of certain
events could differ materially from those projected in the forward-looking
statements due to a number of factors, including those set forth under 'Risk
Factors' and elsewhere in this Prospectus. See 'Special Note Regarding
Forward-Looking Statements.'
GENERAL
CD Radio Inc. was founded in 1990 to pioneer and commercialize a compact
disc quality, multi-channel radio service broadcast directly from satellites to
vehicles. In October 1997, the Company received one of two licenses from the FCC
to build, launch and operate a national satellite radio broadcast system. The
Company has recently begun construction of two satellites that it plans to
launch into geosynchronous orbit to broadcast its radio service throughout the
United States. The Company's service, which will be marketed under the brand
name 'CD Radio,' is expected to consist of 30 channels of commercial-free,
compact disc quality music programming and 20 channels of news, sports and talk
programming. CD Radio will be broadcast over a frequency band, the 'S-band',
that will augment traditional AM and FM radio bands. Under its FCC license, the
Company has the exclusive use of a 12.5 megahertz portion of the S-band for this
purpose. The Company currently expects to commence CD Radio broadcasts in late
1999 at a subscription price of $10 per month.
The Company is positioning itself as an entertainment company and
accordingly plans to design and originate programming on each of its 30 music
channels. Each channel will be operated as a separate radio station, with a
distinct format. Certain music channels will offer continuous music, while
others will have program hosts, depending on the type of music programming. CD
Radio will offer a wide range of music categories, such as:
Symphonic Classic Rock Soft Rock
Chamber Music 50's Oldies Singers & Songs
Opera 60's Oldies Beautiful Instrumentals
Today's Country Folk Rock Album Rock
Traditional Country Latin Ballads Alternative Rock
Contemporary Jazz Latin Rhythms New Age
Classic Jazz Reggae Broadway's Best
Blues Rap Gospel
Big Band/Swing Dance Children's Entertainment
Top of the Charts Urban Contemporary World Beat
The Company's 50 music and non-music stations will be housed at the
National Broadcast Studio. The National Broadcast Studio will contain the
Company's music library, facilities for programming origination, programming
personnel and program hosts, as well as facilities to uplink programming to the
satellites, to activate or deactivate service to subscribers and to perform the
tracking, telemetry and control of the orbiting satellites.
THE CD RADIO OPPORTUNITY
The Company believes that there is a significant market for music and other
radio programming delivered through advanced radio technology. While television
technology has advanced steadily -- from black and white to color, from
broadcast to cable, and from ordinary to high-definition television -- the last
major advance in radio technology was the introduction of FM broadcasts. CD
Radio will provide a new generation of radio service, offering a wide variety of
music formats available on demand, 'seamless' signal coverage throughout the
United States and commercial-free, compact disc quality programming. The
Company's planned multiplicity of formats currently is not available to
motorists in any market within the United States.
CD Radio is primarily a service for motorists. The Yankee Group, a market
research organization, estimates that there will be approximately 198 million
registered private motor vehicles in the United States by the end of 1999, when
the Company expects to commence broadcasting. At present, approximately 89% of
all private vehicles have a radio that could easily be utilized to receive
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CD Radio's broadcasts, with this number estimated to be approximately 182
million vehicles in 1999, and approximately 199 million in 2004. CD Radio will
initially target a number of demographic groups among the drivers of these
vehicles, including 110 million commuters, 34 million of whom spend between one
and two hours commuting daily, three million truck drivers and three million
owners of recreational vehicles, among other groups.
According to Arbitron, in 1996, despite the fact that almost all vehicles
contain either a cassette or compact disc player, 87% of automobile commuters
listened to the radio an average of 50 minutes a day while commuting. According
to the Radio Advertising Bureau, each week radio reaches approximately 95% of
all Americans over the age of 12, with the average listener spending more than
three hours per weekday and more than five hours per weekend listening to the
radio. More than 40% of all radio listening is done in cars. In addition, in
1996, approximately 79% of total radio listening was to FM stations, which
primarily provides music programming, as compared with AM stations which devote
a greater proportion of their programming to talk and news.
The Company believes that its ability to offer a wide variety of musical
formats simultaneously throughout the United States will enable it to tap
significant unmet consumer demand for specialized musical programming. The
economics of the existing advertiser supported radio industry dictate that
conventional radio stations generally program for the greatest potential
audience. Even in the largest metropolitan areas, station formats are limited.
Nearly half of all commercial radio stations in the United States offer one of
only three formats: country, adult contemporary and news/talk, and the next
three most prevalent formats account for another 30 percent of all stations.
Although niche music categories such as classical, jazz, rap, gospel, oldies,
soundtracks, new age, children's programming and others accounted for
approximately 27% of sales of recorded music in 1996, such formats generally are
unavailable on existing radio stations in many markets. Even in New York City,
the nation's largest radio market, there are no radio stations devoted solely to
such programming as opera, blues, chamber music, soundtracks, reggae, children's
programming and many others. CD Radio's wide choice of formats is expected to
appeal to a large number of currently underserved listeners.
In addition, the limited coverage area of conventional radio broadcasting
means that listeners often travel beyond the range of any single station. Unlike
conventional FM stations, which have an average range of only approximately 30
miles before reception fades, CD Radio's signal will cover the entire
continental United States enabling listeners to always remain within its
broadcast range. The Company's satellite delivery system is designed to permit
CD Radio to be received by motorists in all outdoor locations where the vehicle
has an unobstructed line-of-sight with one of the Company's satellites or is
within range of one of the Company's terrestrial repeating transmitters.
The ability to broadcast nationwide will also allow the Company to serve
currently underserved radio markets. In the United States, there are more than
45 million people aged 12 and over living in areas with such limited radio
station coverage that the areas are not monitored by Arbitron. Of these, the
Company believes approximately 22 million people receive five or fewer FM
stations, 1.6 million receive only one FM station and at least one million
people receive no FM stations. This segment of the population also has a limited
choice of radio music formats and is one of CD Radio's primary target markets.
The Company also believes that CD Radio will have a competitive advantage
over conventional radio stations due to its music channels being
commercial-free. In contrast, conventional radio stations interrupt their
broadcasts with up to 18 minutes of commercials in every hour of music
programming, and most stations also frequently interrupt programming with news,
promotional announcements, public service announcements and miscellaneous
information. The Company believes that consumers dislike frequent radio
commercial interruptions and that 'station surfing' to avoid them is common.
PROGRESS TO DATE AND SIGNIFICANT DEVELOPMENT MILESTONES
The following chart sets forth the Company's past and projected development
milestones. There can be no assurance that the Company will commence commercial
operations in late 1999 as planned. See 'Risk Factors -- Possible Delays and
Adverse Effect of Delay on Financing Requirements.'
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<TABLE>
<S> <C>
1990: CD Radio Inc. incorporated
CD Radio proposes FCC create satellite radio service and files license application
1991: Stationary service simulation conducted
Nationwide focus groups conducted
1992: Satellite radio spectrum allocated at WARC-92
Radio manufacturer discussions conducted
1993: Satellite contract with Loral executed
Launch slots with Arianespace reserved
Additional nationwide focus groups conducted
Miniature satellite dish antenna developed
1994: Initial public offering of Common Stock completed
Mobile service simulation conducted
1995: Loral satellite design completed
Orbital slot registrations filed
1996: Radio card designed
1997: CD Radio wins auction for FCC License
Raised $135 million of 5% Preferred Stock
Satellite construction commenced
Radio manufacturer memoranda of understanding executed
Arranged $105 million AEF Vendor Financing
Sale of $25 million of Common Stock to Loral Space completed
Award of FCC License
1998: Radio card manufacturer to be selected
Non-music channel content providers to be selected
Assembly of music library to continue
Terrestrial repeating transmitter build-out to begin
1999: Construction of National Broadcast Studio to be completed
Commercial production of radio cards to begin
Satellite launches to be completed
Commercial operations to begin
</TABLE>
THE CD RADIO SERVICE
CD Radio will offer motorists (i) a wide choice of finely focused music
formats; (ii) nearly seamless signal coverage throughout the continental United
States; (iii) commercial-free music programming; and (iv) plug and play
convenience.
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Wide Choice of Programming. Each of CD Radio's 30 music channels will have
a distinctive format, such as opera, reggae, classic jazz and children's
entertainment, intended to cater to specific subscriber tastes. In most markets,
radio broadcasters target their programming to broad audience segments. Even in
the largest metropolitan markets the variety of station formats generally is
limited, and many of the Company's planned formats are unavailable.
'Seamless' Signal Coverage. CD Radio will be available throughout the
continental United States, enabling listeners almost always to be within its
broadcast range. The Company expects its nearly seamless signal will appeal to
motorists who frequently travel long distances, including truck drivers and
recreational vehicle owners, as well as commuters and others who outdrive the
range of their FM signals. In addition, the Company expects its broadcasts will
appeal to the 45 million consumers who live in areas that currently receive only
a small number of FM stations.
Commercial-Free Music Programming. The Company will provide commercial-free
music programming. The Company's market research indicates that a principal
complaint of radio listeners concerning conventional broadcast radio is the
frequency of commercials. Because CD Radio, unlike most commercial AM and FM
stations, will be a subscription and not an advertiser-supported service, its
music channels will not contain commercials.
Plug and Play Convenience. Consumers will be able to receive CD Radio
broadcasts by acquiring a radio card and an easily attachable, silver
dollar-sized satellite dish antenna. Listeners will not be required to replace
their existing car radios and will be able to use the radio card by plugging it
into their radio's cassette or compact disc slot. CD Radio listeners using a
radio card will be able to push a button to switch between AM, FM and CD Radio.
Radio cards will be portable and will be able to be moved from car to car. Radio
card activation will be accomplished directly via satellite by calling the
Company's customer service center at 888-CD-RADIO.
The Company intends to offer 30 channels of commercial-free, all-music
programming and 20 additional channels of other formats that do not require
compact disc quality audio, such as all-news, all-sports and all-talk
programming. Each music channel will have a distinctive format, intended to
cater to specific subscriber tastes. The Company expects the initial
subscription fee for CD Radio, which will entitle subscribers to receive all CD
Radio channels, will be $10 per month.
The Company intends to recruit program managers from the recording,
broadcasting and entertainment industries to manage the development of daily
programming for each CD Radio channel. In order to be accessible to these
industries, the Company plans to locate its programming operations and the
National Broadcast Studio in the New York area. Program managers also will
coordinate the Company's continuing market research to measure audience
satisfaction, refine channel definitions and themes and select program hosts for
those channels that have hosts.
Music programming will be selected from the Company's music library. The
Company intends to create an extensive music library which will consist of a
deep range of recorded music in each genre broadcast. In addition to updating
its music library with new recordings as they are released, the Company will
seek to acquire recordings that in certain cases are no longer commercially
available. The Company recently began acquiring selected recordings for its
music library.
The Company believes that CD Radio will provide an opportunity for the
recording industry to expose and promote new releases and artists to targeted
listener groups nationwide. The Company plans to solicit promotional copies of
new recordings, and contemplates showcasing these releases as part of a service
to be developed for record companies. The Company intends to work with the
recording industry and performing artists to develop innovative programming
formats.
In connection with its music programming, the Company will be required to
negotiate and enter into royalty arrangements with performing rights societies,
such as ASCAP, BMI and SESAC. These organizations collect royalties and
distribute them to songwriters and music publishers. Copyright users negotiate a
fee with these organizations based on a percentage of revenues. Broadcasters
currently pay a combined total of approximately 3% of their revenues to the
performing rights societies. The Company also will be required to negotiate
similar arrangements, pursuant to the Digital Recordings Act, with the owners of
the sound recordings. The determination of certain royalty arrangements with the
owners of sound recordings under the Digital Recordings Act currently are
subject to arbitration
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proceedings. The Company believes that it will be able to negotiate satisfactory
royalty arrangements with the above organizations and the owners of sound
recordings, but there can be no assurance as to the terms of any such royalty
arrangements ultimately negotiated or established by arbitration.
In addition to its music channels, the Company expects to offer 20 channels
of news, sports and talk programming. The Company does not intend to produce the
programming for these non-music channels. The Company believes, based on its
discussions to date, that there is sufficient interest on the part of providers
of news, sports and talk programming in CD Radio to permit the Company to offer
a variety of non-music programming. News, talk and sports programming obtained
from third party sources will include commercial advertising. To date, the
Company has not reached any understandings or entered into any agreements with
respect to the supply of such programming.
MARKETING STRATEGY
The Company plans to offer a high quality broadcast service with targeted
music formats, nearly seamless signal coverage throughout the continental United
States, commercial-free music programming and compact disc quality fidelity. The
Company's marketing strategy for CD Radio has three interrelated components: (i)
the strategy for creating consumer awareness of CD Radio, (ii) the strategy for
generating subscriptions to CD Radio and (iii) the strategy for generating
purchases of radio cards and S-band radios and their associated miniature
satellite dish antennas.
CREATING CONSUMER AWARENESS
The Company believes that the introduction of CD Radio will have high news
value, which it expects will result in significant national and local publicity
prior to and during the initial launch of the service. In addition, the Company
plans to engage in extensive marketing, advertising and promotional activities
to create consumer awareness of CD Radio. This includes an ongoing major
advertising campaign funded principally by the Company, together with expected
significant manufacturer and retailer cooperative advertising. A major national
umbrella campaign will utilize a full mix of media, including network and cable
television, radio, print and billboard.
GENERATING SUBSCRIPTIONS TO CD RADIO
The Company also intends to focus its initial efforts on a number of
demographic groups that it believes represent potential target markets for CD
Radio, including commuters, niche music listeners, truck drivers, recreational
vehicle owners, consumers in areas with sparse radio coverage and operators of
rental car fleets. In addition, the Company intends to aggressively target early
adopters of new technologies, who it believes are likely to have a high level of
interest in CD Radio.
Commuters. Of the 110 million commuters, the Company has identified 34
million as highly addressable by virtue of their commute times averaging between
one and two hours daily. To reach these commuters, the Company plans to purchase
radio advertising spots on stations with frequent traffic reports, purchase
outdoor billboard advertising on long commute roads and place inserts in
gasoline credit card bills.
Niche Music Listeners. Niche music categories, such as classical, jazz,
rap, gospel, soundtracks, oldies and children's programming, constitute
approximately 27% of the market for recorded music sales. To reach niche music
listeners, the Company intends to work with the recording industry to include
print material about CD Radio inside niche music compact disc packaging, place
print advertising in specialty music magazines targeted to niche music listeners
and members of fan clubs, conduct direct mailings to specialized music mailing
lists of record clubs and sponsor and advertise at certain music events.
Truck Drivers. According to the U.S. Department of Transportation, there
are approximately three million professional truck drivers in the United States,
of whom approximately 1.1 million are long-distance haulers. The Company intends
to place sampling displays at truck stops and to advertise in publications and
on internet sites which cater to truck drivers.
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Recreational Vehicle Owners. There are approximately three million
recreational vehicles in the United States. The Company plans to advertise in
magazines targeted to recreational vehicle enthusiasts, conduct direct mailings
targeted to these individuals and place sampling displays at recreational
vehicle dealerships.
Sparse Radio Zones. More than 45 million people aged 12 and over live in
areas with such limited radio station coverage that the areas are not monitored
by Arbitron. The Company believes that of these people, approximately 22 million
people receive five or fewer FM stations, 1.6 million receive only one FM
station and at least one million people receive no FM stations. To reach these
consumers, the Company plans to utilize local newspaper advertisements during
the Company's initial launch period and target direct mailings to music
enthusiasts in these areas.
Rental Car Fleets. The Company intends to conduct a major promotional
effort with car rental companies to provide CD Radio in the approximately 1.4
million rental cars in the United States. The Company has begun discussions with
car rental companies in this regard.
SALES OF RADIO CARDS AND S-BAND RADIOS
Consumers will receive CD Radio through radio cards or S-band radios and
associated miniature satellite dish antennas. Although the Company does not
intend to manufacture or distribute radio cards, S-band radios or miniature
satellite dish antennas, their availability will be critical to the Company
because they are the only means by which to receive CD Radio. Accordingly, the
Company has devised strategies to make radio cards and S-band radios together
with their associated miniature satellite dish antennas widely available to
consumers.
Sales of Radio Cards. The Company believes that the availability of radio
cards will be critical to the Company's market penetration for a number of years
following the introduction of CD Radio. The Company expects that radio cards
will be sold at retail outlets and mass merchandisers that sell consumer
electronics. The retail price of the radio card together with the miniature
satellite dish currently is expected to be approximately $200.
Sales of S-band Radios. Distribution of S-band radios is an important
element in the Company's marketing strategy. In 1996, U.S. consumers spent
approximately $3 billion on autosound equipment for aftermarket installation in
their vehicles, which the Company believes included approximately 4.6 million
new AM/FM radios. The Company believes that this autosound equipment market is
comprised largely of young, music oriented early adopters of new technology and
that, in the course of purchasing a new car radio, some of these consumers would
select one with built-in S-band capability. The Company expects S-band radios to
be sold at retail outlets that sell consumer electronics, as well as at
autosound specialty dealers. Like existing autosound equipment, S-band radios
will require installation by the retailer or a third party.
The Company's long term objective is to promote the adoption of S-band
radios as standard equipment or a factory-installed option in every vehicle sold
in the United States. The Company, however, expects sales of radio cards and
S-band radios through the consumer electronics retail distribution system to be
the primary distribution channel for receivers capable of receiving CD Radio for
many years.
SUBSCRIPTION AND BILLING
The Company intends to contract out customer service and billing functions
to a national teleservices company, whose functions will include the handling of
orders from subscribers, establishing and maintaining customer accounts, inbound
telemarketing, billing and collections.
Access to the Company's customer service center will be via the Company's
toll-free number, 888-CD-RADIO, with all interaction with subscribers being
conducted under the CD Radio name. Payment to the Company's selected
teleservices company is expected to be based on transaction volumes, and the
Company plans to charge subscribers a modest one-time activation fee to cover
certain transaction costs. The Company will require payment for CD Radio with a
national credit or debit card.
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THE CD RADIO DELIVERY SYSTEM
The Company has designed the CD Radio delivery system to transmit an
identical signal from two satellites placed in geosynchronous orbit. The two
satellite system will permit CD Radio to provide 'seamless' signal coverage
throughout the continental United States. This means that listeners will always
be within the broadcast range of CD Radio, unlike current FM radio broadcasts,
which have an average range of only approximately 30 miles. The CD Radio system
is designed to provide clear reception in most areas despite variations in
terrain, buildings and other obstructions. The system is designed to enable
motorists to receive CD Radio in all outdoor locations where the vehicle has an
unobstructed line-of-sight with one of the Company's satellites or is within
range of one of the Company's terrestrial repeating transmitters.
The portion of the S-band located between 2320 MHz and 2345 MHz has been
allocated by the FCC exclusively for national satellite radio broadcasts, and
will augment traditional AM and FM radio bands. This portion of the spectrum was
selected because there are virtually no other users of this frequency band in
the United States, thus minimizing potential signal interference. In addition,
this frequency band is relatively immune to weather related attenuation, which
is not the case with higher frequencies.
The Company expects to use 12.5 MHz of bandwidth in the 7025.0-7075.0 MHz
band (or some other suitable frequency) for uplink transmissions from the
National Broadcast Studio to the Company's satellites. Downlink transmission
from the satellites to subscribers' radio cards or S-band radios will use 12.5
MHz of bandwidth in the 2320-2332.5 MHz frequency band.
The CD Radio delivery system will consist of three principal components:
(i) the satellites; (ii) the receivers; and (iii) the National Broadcast Studio.
THE SATELLITES
Satellite Design. The Company's satellites are of the Loral FS-1300 model
series. This family of satellites has a total in-orbit operation time of 270
years, and to date more than 62 such satellites have been built or ordered,
including 24 that are currently in production. The satellites are designed to
have a useful life of approximately 15 years. To ensure the durability of its
satellites, the Company has selected components and subsystems that have a
demonstrated track record on operational FS-1300 satellites, such as N-STAR,
INTELSAT VII and TELSTAR. In addition, a full series of ground tests will be
performed on each of the Company's satellites prior to launch in order to detect
assembly defects and avoid premature satellite failure.
The satellites will utilize a three-axis stabilized design. Each satellite
will contain an active attitude and position control subsystem, a telemetry,
command and ranging subsystem, a thermal control subsystem and an electrical
power subsystem. Power will be supplied by silicon solar arrays and, during
eclipses, by nickel-hydrogen batteries. Each satellite after deployment will be
27.2 meters long, 8.65 meters wide and 3.8 meters tall.
Simple Design ('Bent Pipe'). The Company's satellites will incorporate a
repeater design which will act essentially as a 'bent pipe,' relaying received
signals directly to the ground. The Company's satellites will not contain
on-board processors or switches. All of the Company's processing operations will
be on the ground where they are accessible for maintenance and continuing
technological upgrade without the need to launch replacement satellites.
Spread Spectrum (Code Division Multiplex). The Company's radio transmission
system will utilize Code Division Multiplex ('CDM') and spread spectrum
technology which permits a large number of program channels to utilize a single
radio frequency band. The system, incorporating CDM and spread spectrum
modulation, combined with multiple satellite coverage and terrestrial repeating
transmitters, is designed to provide a high capacity, high quality service.
Signal Diversity. The Company believes that two satellites are the minimum
number required to provide nearly seamless signal coverage throughout the
continental United States. The Company plans to position its two satellites in
complementary orbital locations so as to achieve efficient signal diversity and
thereby mitigate service interruptions which can result from signal blockage and
fading. The
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Company currently expects that its two satellites will be placed in a
geosynchronous orbit at equatorial crossings of 80[d] W and 110[d] W longitude.
Each of the Company's satellites will broadcast the same signal. The Company's
transmission design also incorporates the use of a memory reception buffer
contained within radio cards and S-band radios, designed to work in conjunction
with signal diversity.
As with any wireless broadcast service, the Company expects to experience
occasional 'dead zones' where the service from one satellite will be interrupted
by nearby tall buildings, elevations in topography, tree clusters, highway
overpasses and similar obstructions; however, in most such places the Company
expects subscribers will continue to receive a signal from its other satellite.
In certain areas with high concentrations of tall buildings, such as urban
cores, or in tunnels, however, signals from both satellites will be blocked and
reception will be adversely affected. In such urban areas, the Company plans to
install terrestrial repeating transmitters to rebroadcast its satellite signals,
improving the quality of reception. The FCC has not yet established rules
governing such terrestrial repeaters, and the Company cannot predict the outcome
of the FCC's current rule making on this subject. See 'Business -- Government
Regulation.' The Company also will need to obtain the rights to use of roofs of
certain structures where the repeaters will be installed. There can be no
assurance that the Company can obtain such roof rights on acceptable terms or in
appropriate locations for the operation of CD Radio.
Satellite Construction. The Company has entered into the Loral Satellite
Contract, pursuant to which Loral is building three satellites, two of which the
Company intends to launch and one of which it intends to keep in reserve as a
spare. Loral has agreed to deliver the first satellite to the launch site in
Kourou, French Guiana by August 11, 1999, to deliver the second satellite to the
launch site five months after the delivery of the first satellite and to deliver
the third satellite to a Company designated storage site within eleven months of
delivery of the second satellite. Loral has also agreed to endeavor to
accelerate delivery of the second satellite to October 1999 and of the third
satellite to April 2000. There can be no assurance, however, that Loral will be
able to meet such an accelerated schedule. Although the Loral Satellite Contract
provides for certain late delivery payments, Loral will not be liable for
indirect or consequential damages or lost revenues or profits resulting from
late delivery or other defaults. Under the Loral Satellite Contract, the Company
has an option to order, at any time prior to March 10, 1999, a fourth satellite
identical to the first three on preset price and delivery terms.
Title and risk of loss for the first and second satellites are to pass to
the Company at the time of launch. Title for the third satellite is to pass to
the Company at the time of shipment of the satellite to the designated storage
site. The satellites are warranted to be in accordance with the performance
specifications in the Loral Satellite Contract and free from defects in
materials and workmanship at the time of delivery. After delivery, no warranty
coverage applies, unless a satellite is not launched, in which case the warranty
extends two years from the date of delivery. In the event of any delay in the
construction of the satellites that is caused by the Company, the Loral
Satellite Contract provides that the terms of the contract will be equitably
adjusted.
Following the launch of each satellite, Loral will conduct in-orbit
performance verification. In the event that such testing shows that a satellite
is not meeting the satellite performance specifications contained in the Loral
Satellite Contract, Loral and the Company have agreed to negotiate an equitable
reduction in the final payment to be made by the Company for the affected
satellite.
Launch Services. The Company entered into the Arianespace Launch Contract
for two satellite launches with Arianespace on July 22, 1997. The initial launch
period for the first launch extends from August 1, 1999 to January 31, 2000. The
initial launch period for the second launch extends from October 1, 1999 to
March 31, 2000. These initial launch periods will be reduced to three-month
periods at least twelve months prior to the start of the respective initial
launch periods. One-month launch slots will be selected for each of the launches
at least eight months prior to the start of the respective shortened launch
periods. Launch dates will be selected for each of the launches at least four
months prior to the start of the respective launch periods. The Company is
entitled to accelerate the second launch by shipping the satellite to the launch
base and preparing the satellite for launch at the next available launch
opportunity.
If the Company's satellites are not available for launch during the
prescribed periods, the Company will arrange to launch the satellites on the
first launch dates available after the satellites are completed. While the
Company has been able to reschedule its reserved launch dates with Arianespace
in the past,
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there can be no assurance that it will be able to do so in the future. If the
Company postpones a launch for more than 12 months, or postpones a launch within
12 months of a scheduled launch, postponement fees may be charged under the
terms of the Arianespace Launch Contract.
Satellite launches are subject to significant risks, including satellite
destruction or damage during launch or failure to achieve proper orbital
placement. Launch failure rates vary depending on the particular launch vehicle
and contractor. Arianespace, one of the world's leading commercial satellite
launch service companies, has advised the Company that as of August 8, 1997, 84
of 89 Arianespace launches (approximately 94%) have been completed successfully
since May 1984. See 'Risk Factors -- Dependence upon Satellites,' 'Risk
Factors -- Dependence upon Satellite and Launch Contractors' and 'Risk
Factors -- Satellite Launch Risks.' However, the Ariane 5, the particular launch
vehicle being planned for the launch of the Company's satellites, has had only
one launch, which was a failure, and is untested in flight. The next launch of
the Ariane 5 currently is planned for October 1997. There is no assurance that
Arianespace's launches of the Company's satellites will be successful. If the
second and third qualification flights of the Ariane 5 launch vehicle result in
a failure, or if for any reason there have not been at least two successful
Ariane 5 launches prior to each of Company's scheduled launches, or if
Arianespace postpones one of Company's launches for more than six months due to
a delay in the development of the Ariane 5 program, then, under the terms of the
Arianespace Launch Contract, the Company has the right to require Arianespace to
negotiate in good faith an amendment to the Arianespace Launch Contract to
provide for launches using the Ariane 4 launch vehicle, with launch dates on the
first available Ariane 4 launch opportunities after the scheduled launch dates,
unless the Company agrees to earlier launch dates.
Assuming use of an Ariane 5 launch vehicle, if a Company satellite is lost
or destroyed during launch, or if, due to an anomaly occurring during launch
caused by the launch vehicle or a co-passenger satellite, a Company satellite
loses more than 50% of its operational capacity, Arianespace has agreed to
perform a replacement launch at no cost. If, under the same circumstances, the
Company satellite loses more than 20% but not more than 50% of its operational
capacity, Arianespace is required to pay Company an amount based on the percent
of lost capacity. If the Company purchases launch insurance on the commercial
market, these percentages will be amended to match those contained in the
insurance policy. If, following launch, a satellite should fail for any reason,
including reasons unrelated to the launch, within 27 months after launch, the
Company is entitled to purchase at the then applicable price a replacement
launch from Arianespace with a one-month launch slot that falls within ten
months of the request for the replacement launch.
The Company will rely upon Arianespace for the timely launch of the
satellites. Failure of Arianespace to launch the satellites in a timely manner
could materially adversely affect the Company's business. The Arianespace Launch
Contract entitles Arianespace to postpone either of Company's launches for a
variety of reasons, including technical problems, lack of co- passenger(s) for
the Company's launch, the need to conduct a replacement launch for another
customer, a launch of a scientific satellite whose mission may be degraded by
delay, or a launch of another customer's satellite whose launch was postponed.
Although the Arianespace Launch Contract provides liquidated damages for delay,
depending on the length of the delay, and entitles the Company to terminate the
agreement for delay exceeding 12 months, there can be no assurance that these
remedies will adequately mitigate any damage to the Company's business caused by
launch delays.
Under the terms of the Arianespace Launch Contract, the Company and
Arianespace each agree to bear any damage to property or bodily injury that it
or its associates may sustain caused by a launch or satellite failure.
Arianespace is required to take out launch and in-orbit insurance policies to
protect itself and the Company against liability for losses that third parties
may sustain caused by a launch vehicle or any satellite on the launch vehicle,
and to indemnify the Company against any such losses that exceed the limits of
the insurance policy.
Arianespace has assisted the Company in securing financing for the launch
service prices through its subsidiary, AEF. The Company and AEF have entered
into the AEF Agreements, which govern the provisions of such financing. See
'Description of Certain Indebtedness -- Vendor Financing.'
Risk Management and Insurance. Two custom-designed, fully dedicated
satellites are required to broadcast CD Radio. The Company has selected a launch
service supplier that has achieved the most
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reliable launch record in its class in the industry. Each of the Company's two
operational satellites will be launched separately. The Arianespace Launch
Contract contains a provision entitling the Company to a replacement launch in
the event of a launch failure caused by the Arianespace launch vehicle. In such
event, the Company would utilize the spare satellite that will be constructed.
Thus, the Company does not intend to insure for this contingency. The Company
intends to insure against other contingencies, including a failure during launch
caused by factors other than the launch vehicle and/or a failure involving the
second satellite in a situation in which the spare satellite has been used to
replace the first satellite. If the Company is required to launch the spare
satellite due to failure of the launch of one of the operational satellites, its
operational timetable would be delayed for approximately six months or more. The
launch or in-orbit failure of two satellites would require the Company to
arrange for additional satellites to be built and could delay the commencement
or continuation of the Company's operations for three years or more. See 'Risk
Factors -- Dependence upon Satellites,' 'Risk Factors -- Dependence upon
Satellite and Launch Contractors' and 'Risk Factors -- Satellite Launch Risks.'
Once properly deployed and operational, the historical risk of premature
total satellite failure has been less than one percent for U.S. geosynchronous
commercial communication satellites. Insurance against in-orbit failure is
currently available and typically is purchased after the satellite is tested in
orbit and prior to the expiration of launch insurance. In recent years, annual
premiums have ranged from 1.3% to 2.5% of coverage. After the Company has
launched the satellites and begun to generate revenues, the Company will
evaluate the need for business interruption insurance.
Satellites are designed to minimize the adverse effects of transmission
component failure through the incorporation of redundant components which
activate automatically or by ground command upon failure. If multiple component
failures occur as the satellite ages, and the supply of redundant components is
exhausted, the satellite generally will continue to operate, but at reduced
capacity. In that event, signal quality may be preserved by reducing the number
of channels broadcast until a replacement satellite can be launched.
Alternatively, the number of broadcast channels may be preserved by reducing the
signal quality until a replacement satellite can be launched.
THE RECEIVERS
Subscribers to CD Radio will not need to replace their existing AM/FM car
radios. Instead, they will be able to receive CD Radio in their vehicles using a
radio card that has been designed to plug easily into the cassette or compact
disc slot of their existing radio. Customers also will be able to receive CD
Radio using an S-band radio. CD Radio reception with either a radio card or an
S-band radio will be via a miniature silver dollar-sized satellite dish antenna
mounted on a small base housing a wireless transmitter that will relay the CD
Radio signal to the vehicle's radio card or S-band radio. Neither the radio
cards, S-band radios nor the miniature satellite dish antennas currently are
available and the Company is unaware of any manufacturer currently developing
such products.
The Company anticipates that radio cards will be easy to install because
they will require no wiring or other assembly and will be installed simply by
inserting the card into the radio's cassette or compact disc slot. Upon
insertion of the card into the radio, listeners will be able to switch between
AM, FM and CD Radio. The radio card can be removed by pushing the radio's
'eject' button. Radio cards are portable and will be able to be moved from car
to car, if desired. S-band radios will be capable of receiving AM, FM and S-band
radio transmissions. The Company anticipates that S-band radios will be similar
to conventional AM/FM radios in size and appearance. Like existing conventional
radios, a number of these radios may also incorporate cassette or compact disc
players.
In addition to a radio card or S-band radio, a vehicle must be equipped
with a miniature satellite dish antenna in order to receive CD Radio. To satisfy
this requirement, the Company has designed a miniature satellite dish antenna.
The battery powered satellite dish antenna is approximately the size and shape
of a silver dollar, measuring 2 in diameter and 1/8 thick. The base of the
satellite dish antenna will have an adhesive backing, so that consumers will be
able to easily attach the satellite dish antenna to a car's rear window.
Miniature satellite dish antennas will also be sold separately, so that
consumers will be able to receive CD Radio in a vehicle that has a satellite
dish antenna attached to it
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simply by moving a radio card. The radio card, the S-band radio and the
satellite dish antenna all use proprietary technology developed by the Company.
The Company's miniature satellite dish antenna design is substantially
'non-directional,' meaning it does not need to be pointed directly at a
satellite in order to receive CD Radio broadcasts. All that is required is that
the satellite dish antenna be positioned upward on an unobstructed line-of-sight
with one of the Company's satellites or be within range of a terrestrial
repeating transmitter. The satellite dish antenna will be mounted on a small
base housing a solar recharging battery and wireless transmitter that will relay
the CD Radio signal to a vehicle's radio card or S-band radio. The CD Radio
system is designed to permit CD Radio to be received by motorists in all outdoor
locations where the vehicle has an unobstructed line-of-sight with one of the
Company's satellites. In certain areas with high concentrations of tall
buildings, such as urban cores, or in tunnels, signals from both satellites will
be blocked and reception will be adversely affected. In such cases, the Company
plans to install terrestrial repeating transmitters to broadcast CD Radio.
A radio card or S-band radio tuned to CD Radio will have a visual display
that will indicate the channel and format selected, as well as the title,
recording artist and album title of the song being played. In order to reduce
fraud, each radio card and S-band radio will contain a security circuit with an
electronically encoded identification number. Upon verification of subscriber
billing information, the Company will transmit a digital signal to activate the
radio's S-band operation. This feature will enable the Company to protect
against piracy of the CD Radio signal. Through this feature, the Company can
directly via satellite discontinue CD Radio and deactivate radio cards or S-band
radios of subscribers who are delinquent in paying the monthly subscription fee.
The Company expects radio cards, S-band radios and miniature satellite dish
antennas to be sold through a variety of retail outlets, including consumer
electronics, car audio, department and music stores. The Company currently
expects that the radio card together with the satellite dish antenna can be sold
at a retail price of approximately $200. Radio card or S-band activation will be
accomplished directly via satellite by calling the Company's customer service
center at 888-CD-RADIO. The Company currently expects to begin offering CD Radio
in late 1999 at an initial subscription price of $10 per month.
The Company believes that, when manufactured in quantity, S-band radios
will be incrementally more expensive than today's car radios, while radio cards,
which will have no installation costs if the customer has a radio with a
cassette or compact disc slot, will be substantially less expensive. The Company
expects that the satellite dish antenna will be substantially less expensive
than the radio card for consumers wishing to purchase additional dish antennas
separately. The Company believes that the availability and pricing of plug and
play radio cards will be of prime importance to the Company's market penetration
for a number of years.
Neither the radio cards, S-band radios nor miniature satellite dish
antennas currently are available, and the Company is unaware of any manufacturer
currently developing such products. The Company has entered into non-binding
memoranda of understanding with two major consumer electronics manufacturers,
and has commenced discussions with several other such manufacturers, regarding
the manufacture of radio cards, S-band radios and miniature satellite dish
antennas for retail sale in the United States. The Company currently intends to
select one manufacturer to manufacture radio cards, S-band radios and miniature
satellite dish antennas for retail sale in the United States on an exclusive
basis for the first year of CD Radio broadcasts. There can be no assurance that
these discussions will result in a binding commitment on the part of any
manufacturer to produce radio cards, S-band radios and miniature satellite dish
antennas in a timely manner so as to permit the widespread introduction of CD
Radio in accordance with the Company's business plan or that sufficient
quantities of these will be available to meet anticipated consumer demand.
Failure to have at least one manufacturer develop and widely market radio cards
and the associated miniature satellite dish antennas, and to a lesser extent
S-band radios, at affordable prices, or to develop and widely market such
products upon the launch of CD Radio, would have a material adverse effect on
the Company's business.
In addition, the IB Order conditions the Company's license on certification
by the Company that its final receiver design is interoperable with respect to
the final receiver design of the other licensee, which has proposed to use a
significantly different transmission technology from that of the Company. The
Company believes that it can design an interoperable receiver, but there can be
no assurance that this effort will be successful or result in a commercially
feasible receiver.
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THE NATIONAL BROADCAST STUDIO
The Company plans to originate its 50 channels of programming from its
National Broadcast Studio, to be located in the New York area. The National
Broadcast Studio will house the Company's music library, facilities for
programming origination, programming personnel and program hosts, as well as
facilities to uplink programming to the satellites, to activate or deactivate
service to subscribers and to perform the tracking, telemetry and control of the
orbiting satellites.
The Company's music library will be located at the National Broadcast
Studio. The Company intends to create an extensive music library which will
consist of a deep range of recorded music. In addition to updating its music
library with new recordings as they are released, the Company will seek to
acquire recordings that in certain cases are no longer commercially available.
The Company recently began purchasing collections of recordings for its music
library.
Programming will be originated at the National Broadcast Studio and
transmitted to the Company's two satellites for broadcast to CD Radio
subscribers. The Company expects that its broadcast transmissions will be
uplinked to its satellites at frequencies in the 7025.0-7075.0 MHz band. The
satellites will receive and convert the signal to the 2320.0-2332.5 MHz band.
The satellites then will broadcast the signal to the United States, at a power
sufficient to enable its receipt directly by the miniature satellite dish
antennas to be used by subscribers.
Service-related commands also will be relayed from the National Broadcast
Studio to the Company's satellites for retransmission to subscribers' radio
cards and S-band radios. These service-related commands include those required
to (i) initiate and suspend subscriber service, (ii) change the encryption
parameters in radio cards and S-band radios to reduce piracy of CD Radio and
(iii) activate radio card and S-band radio displays to show program-related
information.
Tracking, telemetry and control operations for the Company's orbiting
satellites also will be performed from the National Broadcast Studio. These
activities include controlling the routine station keeping, which involves
twice-monthly satellite orbital adjustments and the continuous monitoring of the
satellites.
The Company expects that the National Broadcast Studio, which will include
its executive offices, will be approximately 30,000 square feet in size. The
Company currently is searching for appropriate space to lease in the New York
area and has commenced development of plans for its facility with a broadcast
studio design firm.
DEMONSTRATIONS OF THE CD RADIO SYSTEM
In support of the Company's application for the FCC License, the Company
conducted a demonstration of its proposed radio service from November 1993
through November 1994. The demonstration involved the transmission of S-band
signals to a prototype S-band radio and miniature satellite dish antenna
installed in a car to simulate certain transmission techniques the Company
intends to employ. Because there currently are no commercial satellites in orbit
capable of transmitting S-band frequencies to the United States, the Company
constructed a terrestrial simulation of its planned system. For this purpose,
the Company selected a test range covering several kilometers near Washington,
D.C. which included areas shadowed by buildings, trees and overpasses. The
Company placed S-band transmitters on the rooftops of a number of tall buildings
in such a way as to simulate the signal power and angle of arrival of satellite
transmissions to be used for its proposed service. The Company also modified the
standard factory installed sound system of a Lincoln Mark VIII automobile to
create a radio receiving AM, FM and S-band, and integrated the Company's
satellite dish antenna into the car roof. The demonstrations included the
reception of 30 channels of compact disc quality stereo music by the prototype
radio while the car was driven throughout the range. Prior to testing with
orbiting satellites, miniature satellite dish antennas and radio cards or S-band
radios suitable for commercial production, there can be no assurance that the CD
Radio system will function as intended. See 'Risk Factors -- Reliance on
Unproven Technology.'
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COMPETITION
The Company expects to face competition from two principal sources: (i)
conventional AM/FM radio broadcasting, including, when available, terrestrial
digital radio broadcasting; and (ii) AMRC, the other successful bidder for an
FCC License.
The AM/FM radio broadcasting industry is very competitive. Radio stations
compete for listeners and advertising revenues directly with other radio
stations within their markets on the basis of a variety of factors, including
program content, on-air talent, transmitter power, assigned frequency, audience
characteristics, local program acceptance and the number and characteristics of
other radio stations in the market. Many of the Company's radio broadcasting
competitors have substantially greater financial, management and technical
resources than the Company.
Unlike the Company, the radio industry has a well established market for
its services and generally offers 'free' broadcast reception paid for by
commercial advertising rather than by a subscription fee. In addition, certain
AM and FM stations, such as National Public Radio, offer programming without
commercial interruption. Many radio stations also offer information programming
of a local nature, such as local news or traffic reports, which the Company will
be unable to offer. CD Radio will compete with conventional radio stations on
the basis of its targeted programming formats, nearly seamless signal coverage,
freedom from advertising and compact disc quality sound, features which are
largely unavailable on conventional broadcast radio.
The Company believes that cassettes and compact discs generally are used in
automobiles as supplements to radio rather than as substitutes, and that these
media are used primarily as backup when radio reception is unavailable or
unsatisfactory, or when desired programming is unavailable or unsatisfactory.
Cassettes and compact discs lack the convenience of radio, as well as the
spontaneity and freshness that characterize radio programming. According to a
1996 market study, although almost all vehicles contain either a cassette or
compact disc player, 87% of automobile commuters listened to the radio an
average of 50 minutes a day while commuting. Accordingly, the Company does not
view its service as directly competitive with these media.
Currently, radio stations broadcast by means of analog signals, as opposed
to digital transmission. The Company believes, however, that prior to the
commencement of CD Radio, terrestrial broadcasters may be able to place digital
audio broadcasts into the bandwidth occupied by current AM and FM stations and
simultaneously transmit both analog and digital signals on the AM and FM bands.
The limited bandwidth assigned to AM stations will result in lower quality
digital signals than can be broadcast by FM stations. As a result, the Company
expects that the use of this technology will permit digital AM sound quality to
approach monaural FM sound quality and permit digital FM broadcasts to approach
compact disc sound quality. In order to receive these digital AM/FM broadcasts,
listeners will need to purchase new digital radios which currently are not
commercially available. While the development of digital broadcasting would
eliminate one of the advantages of CD Radio over FM radio, the Company does not
believe it would affect broadcasters' ability to address the other advantages of
CD Radio. In addition, the Company views the growth of terrestrial digital
broadcasting as a positive force that would be likely to encourage radio
replacement and thereby facilitate the introduction of S-band radios.
Although certain existing satellite operators currently provide music
programming to customers at fixed locations, these operators are incapable of
providing CD Radio type service to vehicles as a result of some or all of the
following reasons: (i) these operators do not broadcast on radio frequencies
suitable for reception in a mobile environment; (ii) CD Radio type service
requires fully dedicated satellites; (iii) CD Radio type service requires a
custom satellite system design and (iv) CD Radio type service requires
regulatory approvals, which existing satellite operators do not have.
AMRC, a subsidiary of AMSC, was the other successful bidder for an FCC
License. AMRC, in which WorldSpace, Inc. (a company that plans to provide
satellite radio service outside of the United States) has a 20 percent interest,
and AMSC, which is owned in part by the Hughes Electronics Corporation
subsidiary of General Motors Corporation, have financial, management and
technical resources that greatly exceed those of the Company. In addition, the
FCC could grant new licenses which would enable further competition to broadcast
satellite radio. Although successful bidders for
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such new licenses would face cost and competition barriers, there can be no
assurance that there will not be an increase in the number of competitors in the
satellite radio industry. See 'Risk Factors -- Competition.'
TECHNOLOGY AND PATENTS
The Company has been granted certain U.S. patents on various types of
satellite radio technology. There can be no assurance, however, that any U.S.
patent issued to the Company will not be circumvented or infringed by others, or
that if challenged would be held to be valid. The Company has filed patent
applications covering CD Radio system technology in Argentina, Australia,
Brazil, Canada, China, France, Germany, India, Italy, Japan, South Korea,
Mexico, the Netherlands, Spain, Switzerland and the United Kingdom, and has been
granted patents in a number of these countries. There can be no assurance that
additional foreign patents will be awarded to the Company or, if any such
patents are granted, that the laws of foreign countries where the Company
receives patents will protect the Company's proprietary rights to its technology
to the same extent as the laws of the United States. Although the Company
believes that obtaining patent protection may provide benefits to the Company,
the Company does not believe that its business is dependent on obtaining patent
protection or successfully defending any such patents that may be obtained
against infringement by others.
Certain of the Company's know-how and technology are not the subject of
U.S. patents. To protect its rights, the Company requires certain employees,
consultants, advisors and collaborators to enter into confidentiality
agreements. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure. In
addition, the Company's business may be adversely affected by competitors who
independently develop competing technologies.
The Company's proprietary technology was developed by Robert D. Briskman,
the Company's co-founder, and was assigned to the Company. The Company believes
that Mr. Briskman independently developed the technology covered by the
Company's issued patents and that it does not violate the proprietary rights of
any person. There can be no assurance, however, that third parties will not
bring suit against the Company for patent infringement or for declaratory
judgment to have any patents which may be issued to the Company declared
invalid.
If a dispute arises concerning the Company's technology, litigation might
be necessary to enforce the Company's patents, to protect the Company's trade
secrets or know-how or to determine the scope of the proprietary rights of
others. Any such litigation could result in substantial cost to, and diversion
of effort by, the Company, and adverse findings in any proceeding could subject
the Company to significant liabilities to third parties, require the Company to
seek licenses from third parties or otherwise adversely affect the Company's
ability to successfully develop and market CD Radio.
GOVERNMENT REGULATION
COMMUNICATIONS LAWS
As an operator of a privately owned satellite system, the Company is
subject to the regulatory authority of the FCC under the Communications Act. The
FCC is the government agency with primary authority in the United States over
satellite radio communications. The Company is currently subject to regulation
by the FCC principally with respect to (i) the licensing of its satellite
system; (ii) preventing interference with or to other users of radio
frequencies; and (iii) compliance with rules that the FCC has established
specifically for United States satellites and rules that the FCC has established
for providing satellite radio service.
On May 18, 1990, the Company proposed that the FCC establish a satellite
radio service and applied for an FCC License.
Pursuant to the FCC Licensing Rules, an auction was held among the
applicants on April 1 and 2, 1997. The Company was a winning bidder for one of
the two FCC Licenses with a bid of $83 million. After payment of the full amount
by the Company, the FCC's International Bureau issued the FCC License to the
Company on October 10, 1997. Although the FCC License is effective immediately,
it is subject to reconsideration at
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the International Bureau, and review by the full Commission. Thereafter, any
party may appeal the decision to the U.S. Court of Appeals. The Company cannot
predict the ultimate outcome of any such proceedings.
Pursuant to the FCC Licensing Rules, the Company is required to meet
certain progress milestones. Licensees are required to begin satellite
construction within one year of the grant of the FCC License; to launch and
begin operating their first satellites within four years; and to begin operating
their entire system within six years. The IB Order states that failure to meet
those milestones will render the FCC License null and void. On May 6, 1997, the
Company notified the FCC that it had begun construction on the first of its
satellites. On March 27, 1997, a third party requested reconsideration of the
FCC Licensing Rules, seeking, among other things, that the time period allotted
for these milestones be shortened. The Company cannot predict the outcome of
this petition.
The term of the FCC License for each satellite is eight years, commencing
from the time each satellite is declared operational after having been inserted
into orbit. Upon the expiration of the term with respect to each satellite, the
Company will be required to apply for a renewal of the relevant FCC License.
Although the Company anticipates that, absent significant misconduct on the part
of the Company, the FCC Licenses will be renewed in due course to permit
operation of the satellites for their useful lives, and that a license would be
granted for any replacement satellites, there can be no assurance of such
renewal or grant.
Satellite orbit locations are registered internationally for each country.
To the Company's knowledge, no other nations in the Western Hemisphere are
seeking to use the S-band for satellite radio, and the Company does not
anticipate difficulty in obtaining international registration, or renewing or
extending such registrations. There can be no assurance, however, that such
registrations will be obtained.
The spectrum allocated for satellite radio is used in Canada and Mexico for
terrestrial microwave links, mobile telemetry, and other purposes. The United
States government must coordinate the United States' use of this spectrum with
the Canadian and Mexican governments before any United States satellite may
become operational. The Company has performed analyses which show that its
proposed use will not cause undue interference to most Canadian stations and can
be coordinated with others by various techniques. The FCC Licensing Rules
require that the licensees successfully complete detailed frequency coordination
with existing operations in Canada and Mexico, and the IB Order conditions the
FCC License on such coordination. There can be no assurance that the
licensees will be able to coordinate the use of this spectrum with Canadian or
Mexican operators or will be able to do so in a timely manner.
In order to operate its satellites, the Company also will have to obtain a
license from the FCC to operate its uplink facility. Normally, such approval is
sought after issuance of the FCC License. Although there can be no assurances
that such licenses will be granted, if the Company obtains the FCC License, the
Company does not expect difficulties in obtaining a feeder link frequency and
ground station approval in the ordinary course.
In the future any assignments or transfers of control of the FCC License
must be approved by the FCC. There can be no assurance that the FCC would
approve any such transfer or assignment.
The CD Radio system is designed to permit CD Radio to be received by
motorists in all outdoor locations where the vehicle has an unobstructed
line-of-sight with one of the Company's satellites. In certain areas with high
concentrations of tall buildings, such as urban cores, or in tunnels, signals
from both satellites will be blocked and reception will be adversely affected.
In such cases, the Company plans to install terrestrial repeating transmitters
to broadcast CD Radio. The FCC has not yet established rules governing the
application procedure for obtaining authorizations to construct and operate
terrestrial repeating transmitters. A rule making on the subject was initiated
by the FCC on March 3, 1997. The deadline for the public to file comments was
June 13, 1997 and the deadline for filing reply comments was June 27, 1997.
Several comments were received by the FCC that sought to cause the FCC to
consider placing restrictions on the Company's ability to deploy its terrestrial
repeating transmitters. However, the Company believes that the FCC will neither
prohibit it from deploying such transmitters nor place unreasonable requirements
upon such deployment.
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The Communications Act prohibits the issuance of a license to a foreign
government or a representative thereof, and contains limitations on the
ownership of common carrier, broadcast and certain other radio licenses by
non-U.S. citizens. Pursuant to the FCC Licensing Rules, the Company is regulated
as a private carrier. The IB Order determined that, as a private carrier, the
Company is not subject to the current provisions of the Communications Act
restricting ownership in the Company by non-U.S. private citizens or
organizations. The Executive Branch of the U.S. government has expressed
interest in changing this policy, which could lead to restrictions on foreign
ownership of the Company's shares in the future. The IB Order stated that its
action is subject to being revisited in a future proceeding. As a private
carrier, the Company is free to set its own prices and serve customers according
to its own business judgment, without economic regulation.
The other successful applicant for an FCC License has proposed to use a
significantly different transmission technology from that of the Company. The IB
Order conditions the Company's license on certification by the Company that its
final receiver design is interoperable with respect to the final receiver design
of the other licensee. The Company believes that it can design an interoperable
receiver, but there can be no assurance that this effort will be successful or
result in a commercially feasible receiver.
The foregoing discussion reflects the application of current communications
law, FCC regulations and international agreements to the Company's proposed
service in the United States. Changes in law, regulations or international
agreements relating to communications policy generally or to matters affecting
specifically the services proposed by the Company could adversely affect the
manner in which the Company's proposed service would be regulated. Further,
actions of the FCC are subject to judicial review and there can be no assurance
that if challenged, such actions would be upheld.
OTHER REGULATORY MATTERS
The Company's business operations as currently contemplated may require a
variety of permits, licenses and authorizations from governmental authorities
other than the FCC, but the Company has not identified any such permit, license
or authorization that it believes could not be obtained in the ordinary course
of business.
PERSONNEL
As of October 1, 1997, the Company had ten employees, of whom three were
involved in technology development, three in business development and four in
administration. In addition, the Company relies upon a number of consultants and
other advisors. During 1997, the Company expects to increase the number of its
employees to approximately 20. By commencement of operations, the Company
expects to have approximately 100 employees. The extent and timing of the
increase in staffing will depend on the availability of qualified personnel and
other developments in the Company's business. None of the Company's employees is
represented by a labor union, and the Company believes that its relationship
with its employees is good.
PROPERTY
The Company's executive offices are located at Sixth Floor, 1001 22nd
Street, N.W., Washington, D.C. 20037, and are leased pursuant to a lease
agreement that will expire on October 31, 1998.
LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the directors,
executive officers and certain key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
- ------------------------------------- --- ---------------------------------------------------------------------
<S> <C> <C>
David Margolese...................... 39 Chairman, Chief Executive Officer and Director
Robert D. Briskman................... 64 Executive Vice President, Engineering and Operations and Director
Andrew J. Greenebaum................. 35 Executive Vice President and Chief Financial Officer
Keno V. Thomas....................... 39 Executive Vice President, Marketing
Joseph S. Capobianco................. 48 Executive Vice President, Content
Paul Sharma.......................... 49 Executive Director, Space Segment
Brian Stockwell...................... 61 Executive Director, Launch Services
Lawrence F. Gilberti................. 46 Director and Secretary
Peter K. Pitsch...................... 45 Director
Jack Z. Rubinstein................... 48 Director
Ralph V. Whitworth................... 41 Director
</TABLE>
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Officers are elected by and
serve at the discretion of the Board of Directors.
David Margolese. Mr. Margolese was elected Chief Executive Officer of the
Company in November 1992 and Chairman in August 1993 and has served as a
director since August 1991. In 1991, Mr. Margolese founded a consortium with
AT&T Corp. and Hutchison Telecommunications Ltd., a subsidiary of Hutchison
Whampoa Limited, a diversified conglomerate based in Hong Kong, to bid for
Israel's national cellular telephone license and served as Chairman of this
consortium until June 1993. From 1987 until August 1991, Mr. Margolese was a
private investor. In 1982, Mr. Margolese co-founded Cantel Inc., Canada's
national cellular telephone company, and served as Vice President, RCC
Operations, there until 1984. In 1980, Mr. Margolese co-founded Canadian Telecom
Inc., a radio paging company, and served as that company's President until its
sale in 1987.
Robert D. Briskman. Mr. Briskman has served as Executive Vice President,
Engineering and Operations and as a director of the Company since October 1991
and as President of Satellite CD Radio, Inc., a subsidiary of the Company, since
September 1994. In addition, Mr. Briskman served as Chief Executive Officer of
the Company from April to November 1992. From March 1991 to June 1992, Mr.
Briskman was President of Telecommunications Engineering Consultants, which
provided engineering and consulting services to the Company. From March 1986 to
March 1991, Mr. Briskman was Senior Vice President, Engineering and Operations
at Geostar Corporation, a satellite company, responsible for the development,
design, implementation and operation of a nationwide satellite message
communication service. Prior to 1986, Mr. Briskman held senior management
positions at Communications Satellite Corporation ('COMSAT'), a satellite
operator, where he was employed for over 20 years. Prior to joining COMSAT, Mr.
Briskman was a communications specialist with IBM and the National Aeronautics
and Space Administration. Mr. Briskman holds a bachelor's degree in engineering
from Princeton and a master's degree in electrical engineering from the
University of Maryland. He has published over 50 technical papers, holds a
number of U.S. patents, and is a Fellow of the Institute of Electrical and
Electronics Engineers and the American Institute of Aeronautics and
Astronautics.
Andrew J. Greenebaum. Mr. Greenebaum has served as Executive Vice President
and Chief Financial Officer of the Company since August 1997. From August 1989
to August 1997, he held a variety of senior management positions with The Walt
Disney Company. From March 1996 to August 1997, Mr. Greenebaum was Vice
President, Corporate Finance in charge of corporate and project finance. From
May 1995 to March 1996, he was Corporate Strategic Planning Director, Corporate
Development. From October 1992 to May 1995, he was Director, Corporate Finance
and from April 1991 to October 1992, he was Manager, Corporate Finance. From
August 1989 to April 1991, he was a Senior Treasury
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Analyst, Foreign Exchange. From October 1984 to June, 1987, Mr. Greenebaum was a
financial analyst with L.F. Rothschild & Co., Inc., an investment bank.
Keno V. Thomas. Mr. Thomas has served as Executive Vice President,
Marketing of the Company since April 1997. From July 1995 to April 1997, he was
an independent management consultant to the media and entertainment industry.
From January 1994 to July 1995, Mr. Thomas was Executive Vice President,
Marketing at DMX Inc., a cable radio company. From February 1992 to January
1994, he served as Vice President of Programming at DIRECTV, a satellite
television company. From December 1986 to February 1992, he held senior
management positions, including Vice President, International at ESPN
Enterprises, Inc., a cable television sports network. From May 1982 to December
1986, he held senior management positions, including Vice President, Marketing
at Times Mirror Cable, an operator of cable television systems and a subsidiary
of the Times Mirror Company.
Joseph S. Capobianco. Mr. Capobianco has served as Executive Vice
President, Content of the Company since April 1997. From 1981 to April 1997, he
was an independent consultant providing programming, production, marketing and
strategic planning consulting services to media and entertainment companies,
including Home Box Office, a cable television service and a subsidiary of Time
Warner Entertainment Company, L.P., and the ABC Radio Networks. From May 1990 to
February 1995, he served as Vice President of Programming at Music Choice, which
operates a 40-channel music service available to subscribers to DIRECTV, and is
partially owned by Warner Music Group Inc., Sony Music Entertainment Inc. and
EMI.
Paul Sharma. Mr. Sharma has served as Executive Director, Space Segment of
the Company since April 1997. From November 1988 to April 1997, he was an
independent consultant providing project management services for numerous major
satellite programs worldwide. From 1982 to 1988, he served as Deputy Projects
Director for the Direct Broadcast Satellite program at COMSAT, a satellite
operator.
Brian Stockwell. Mr. Stockwell has served as Executive Director, Launch
Services of the Company since April 1997. He has provided management consulting
services to the space industry since 1992. From June 1981 to January 1992, he
served as President of Willis Corroon Inspace, an aerospace insurance company.
From January 1979 to May 1981, he was Deputy Head of the Ariane Launch Vehicle
Program for the European Space Agency. Prior to that, he was Communications
Satellite Systems Manager with the European Space Agency from September 1969.
Lawrence F. Gilberti. Mr. Gilberti was elected Secretary of the Company in
November 1992 and has served as a director since September 1993. Since December
1992, he has been the Secretary and sole director of, and from December 1992 to
September 1994 was the President of, Satellite CD Radio, Inc. Mr. Gilberti has
been a partner in the law firm of Fischbein Badillo Wagner Harding since August
1994, and has provided legal services to the Company since 1992. From 1987 to
August 1994, Mr. Gilberti was an attorney with the law firm of Goodman Phillips
& Vineberg.
Peter K. Pitsch. Mr. Pitsch became a director of the Company in January
1995. Since September 1989, Mr. Pitsch has been the principal of Pitsch
Communications, a telecommunications law and economic consulting firm that has
rendered legal services to the Company since 1991. From April 1987 to August
1989, he served as Chief of Staff at the Federal Communications Commission. From
November 1981 to April 1987, he served as Chief of the Office of Plans and
Policy at the Federal Communications Commission. He is an adjunct fellow at the
Hudson Institute, Inc.
Jack Z. Rubinstein. Mr. Rubinstein became a director of the Company in
January 1995. Since May 1991, Mr. Rubinstein has been the General Partner of
Dica Partners, L.P., a hedge fund based in Hartsdale, New York. From September
1988 to October 1990, Mr. Rubinstein was a consultant to institutional clients
at Morgan Stanley & Co. Incorporated, an investment bank. From February 1978 to
September 1988, he was an Associate Director at Bear Stearns & Co. Inc., an
investment bank, responsible for corporate insider portfolio management.
Ralph V. Whitworth. Mr. Whitworth became a director of the Company in March
1994. Since April 1996, he has been a managing member at Relational Investors,
LLC, a financial management firm. In January 1997, Mr. Whitworth became a
partner of Batchelder & Partners, Inc., a financial advisory firm. From August
1988 to December 1996, he was President of Whitworth and Associates, a
Washington,
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D.C.-based consulting firm. Mr. Whitworth was President of United Shareholders
Association, a shareholders' association, from its founding in 1986 to 1993.
From 1989 to 1992, he served as President of Development of United Thermal
Corporation, the owner of the district heating systems for the cities of
Baltimore, Philadelphia, Boston and St. Louis.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS
The following table sets forth the compensation for services rendered
during the three-year period ending December 31, 1996 for the executive officers
of the Company whose 1996 salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------ SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- -------------------------------------------------- ------ -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
David Margolese .................................. 1996 $ 95,833 $ -- $ -- 400,000
Chairman of the Board and Chief Executive 1995 100,000 -- -- --
Officer 1994 122,000(1) -- 26,052(2) 300,000
Robert D. Briskman ............................... 1996 106,249 20,000 190,938 60,000
Executive Vice President, Engineering and 1995 100,000 -- 1,340 --
Operations 1994 122,000 -- -- 192,500
</TABLE>
- ------------
(1) In October 1994, Mr. Margolese waived his base salary payable for the three
month period ended December 31, 1994.
(2) The Company reimbursed Mr. Margolese for the following expenses incurred in
establishing residency in the United States: $18,521 for tax advice, $2,311
for moving expenses and $5,220 for real estate commissions.
DIRECTORS
Commencing in 1994, directors of the Company who are not full time
employees of the Company were entitled to receive a director's fee of $20,000
per year for serving on the Company's Board of Directors. In June 1994, all
directors entitled to receive directors' fees agreed to forego any payments for
their services as directors of the Company. Pursuant to the Company's 1994
Directors' Nonqualified Stock Option Plan (the 'Directors' Plan'), each director
who is not a full-time employee of the Company is entitled to an option to
purchase 15,000 shares of Common Stock upon becoming a director (or upon the
effective date of the plan in the case of non-employee directors who become
directors prior to the effective date) and to an automatic annual grant of an
option to purchase 10,000 shares of Common Stock. The exercise price for annual
grants is fair market value of the Company's Common Stock on the date of grant.
Prior to the implementation of the Directors' Plan, the Company from time to
time granted options to certain non-employee directors. See ' -- Employee and
Director Stock Options.' The Company reimburses each director for reasonable
expenses incurred in attending meetings of the Board of Directors.
The Company has retained Pitsch Communications to provide legal services to
the Company for a monthly retainer of $5,000. The retainer may be terminated by
either party at any time. The principal of Pitsch Communications, Peter K.
Pitsch, is a director of the Company. The monthly retainer was terminated in May
1997.
The Company has retained Jack Z. Rubinstein to provide consulting services
to the Company for a monthly retainer of $5,000. The retainer may be terminated
by either party at any time. Jack Z. Rubinstein is a director of the Company.
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EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its executive
officers.
Effective January 1, 1994, the Company entered into an employment agreement
to employ David Margolese as Chairman and Chief Executive Officer of the Company
for a term of five years. The agreement provided for an annual base salary of
$300,000, subject to increase from time to time by the Board of Directors. An
amendment to this agreement, dated as of June 8, 1994, provided for an annual
base salary of $100,000, effective June 8, 1994. Subsequently, Mr. Margolese
waived his base salary payable for the three-month period ended December 31,
1994. In January 1997, the Board of Directors increased Mr. Margolese's annual
base salary to $150,000. In July 1997, the Board of Directors increased Mr.
Margolese's annual base salary to $400,000. Under his original employment
agreement and pursuant to the Company's 1994 Stock Option Plan, the Company
granted to Mr. Margolese an option to purchase 300,000 shares of Common Stock at
$5.00 per share, which option is fully vested and exercisable. If Mr. Margolese
is terminated without Cause, as defined in the agreement, or if Mr. Margolese
resigns for 'Good Reason,' as defined in the agreement, the Company is obligated
to pay to Mr. Margolese the sum of $800,000. In January 1994, Mr. Margolese was
paid $162,000 for deferred salary earned in 1993 and $216,000 in recognition of
his service without pay in 1992. The employment agreement restricts Mr.
Margolese from engaging in any business involving the transmission of radio
entertainment programming in North America for a period of two years after the
termination of his employment.
Effective January 1, 1994, the Company entered into an agreement to employ
Robert D. Briskman as the Vice President and Chief Technical Officer of the
Company. The agreement provided for an annual base salary of $150,000. An
amendment to this agreement, dated as of June 8, 1994, provided for an annual
base salary of $100,000, effective June 8, 1994. In October 1996, the Board of
Directors increased Mr. Briskman's annual base salary to $150,000 and in January
1997, extended the term of the agreement until January 1, 1998. In addition,
under his original employment agreement and pursuant to the Company's 1994 Stock
Option Plan, the Company granted to Mr. Briskman an option to purchase 80,000
shares of Common Stock at $1.00 per share, which option is fully vested and
exercisable. In May 1997, the Board of Directors named Mr. Briskman the
Company's Executive Vice President, Engineering and Operations and extended the
term of the agreement until December 31, 2000. The Board of Directors also
increased Mr. Briskman's annual base salary to $235,000, effective May 1, 1997,
with an additional increase to $260,000, effective January 1, 1998. The original
employment agreement also provides for the grant to Mr. Briskman of options to
purchase 112,500 shares of Common Stock at $1.00 per share upon completion of
certain milestones prior to December 31, 1994. Such options were granted to Mr.
Briskman on December 23, 1994 and are fully vested and exercisable. In January
1996, Mr. Briskman exercised options to purchase 80,000 shares of the Company's
Common Stock. On July 9, 1997, the Board of Directors granted Mr. Briskman
further options to purchase up to 57,500 shares of Common Stock at a price per
share of $14.50. The options will vest and become exercisable in two stages
contingent upon Mr. Briskman's continued employment with the Company and the
replenishment of the 1994 Stock Option Plan by the Company. If Mr. Briskman's
employment is terminated for any reason other than cause, as defined in the
agreement, the Company is obligated to pay to Mr. Briskman a sum equal to 50% of
his then annual salary and, at Mr. Briskman's option, to repurchase all of the
shares of Common Stock then owned by him at a price of $1.25 per share. The
Company also has entered into a proprietary information and non-competition
agreement with Mr. Briskman. Under this agreement, Mr. Briskman may not (i)
disclose any proprietary information of the Company during or after his
employment with the Company or (ii) engage in any business directly competitive
with any business of the Company in North America for a period of one year after
termination of his employment.
Effective August 25, 1997, the Company entered into an employment agreement
with Andrew J. Greenebaum which provides for his employment as Executive Vice
President and Chief Financial Officer of the Company. The agreement has a term
of three years. Pursuant to the agreement with Mr. Greenebaum, the Company will
pay Mr. Greenebaum an annualized base salary of $250,000 per year for the period
of his employment with the Company through December 31, 1997 and thereafter an
annualized base salary of $275,000, subject to any increases approved by the
Board of Directors. Upon
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the commencement of his employment with the Company, the Company paid Mr.
Greenebaum an additional sum of $90,000. The Company has also granted Mr.
Greenebaum options to purchase up to 175,000 shares of Common Stock at a price
per share of $15.125, however the options relating to 10,500 of such shares are
subject to replenishment of the Plan by the Company. The options will vest and
be exercisable in three stages contingent upon the commencement and continued
employment of Mr. Greenebaum with the Company at predetermined dates. The
dismissal of Mr. Greenebaum other than for Cause, as defined in the agreement,
subsequent to the passing of certain milestones, however, will cause the options
otherwise exercisable only at the end of that stage to vest immediately
notwithstanding the dismissal. If Mr. Greenebaum's employment is terminated for
any reason other than by the Company for Cause, as defined in the agreement, or
by Mr. Greenebaum voluntarily, Mr. Greenebaum will be entitled to receive, in
addition to any other sums then due to him, an amount equal to his annualized
base salary then in effect. The Company and Mr. Greenebaum also have entered
into a proprietary information and non-competition agreement. Under this
agreement, Mr. Greenebaum may not (i) during his employment with the Company and
for three years thereafter disclose any proprietary information of the Company
or (ii) during his employment with the Company and for one year thereafter
engage in any business involving any satellite radio broadcast service or any
subscription-based digital audio radio service delivered to cars or other mobile
vehicles in North America.
The Company has entered into employment and noncompetition agreements to
employ Joseph S. Capobianco as Executive Vice President, Content, and Keno V.
Thomas as Executive Vice President, Marketing, both for terms of three years.
The agreement with Mr. Capobianco, effective April 16, 1997, provided for an
annual base salary of $200,000, subject to increase from time to time by the
Board of Directors. The agreement with Mr. Thomas, effective April 28, 1997,
provided for an annualized base salary of $225,000 through December 31, 1997,
increasing to an annualized base salary of $250,000 thereafter through the term
of the agreement, subject to increase from time to time by the Board of
Directors. The Company has granted each of Mr. Capobianco and Mr. Thomas an
option to purchase 50,000 shares of Common Stock at $13 and $12.875 per share,
respectively, each such option to vest pursuant to the schedule set forth in the
applicable option agreement. On July 9, 1997, the Company granted each of
Messrs. Capobianco's and Thomas further options to purchase up to 25,000 shares
of Common Stock at a price per share of $14.50. These options will vest and
become exercisable in two stages contingent upon Messrs. Capobianco's and
Thomas' respective continued employment with the Company and the replenishment
of the 1994 Stock Option Plan by the Company. If either Mr. Capobianco or Mr.
Thomas is terminated except by the Company for 'Cause,' as defined in the
agreement, or by the applicable executive voluntarily, the Company will be
obligated to pay to Mr. Capobianco an amount equal to one-third of his then
annual salary if the termination is on or prior to October 16, 1997 and one-half
of his then annual salary thereafter, and to pay to Mr. Thomas an amount equal
to one-half of his then annual salary. The Company also has entered into a
proprietary information and non-competition agreement with each of Mr.
Capobianco and Mr. Thomas. Under these agreements each of Mr. Capobianco and Mr.
Thomas may not (i) disclose any proprietary information of the Company during
his employment with the Company and for three years thereafter or (ii) engage in
any business involving any satellite radio broadcast service or any
subscription-based digital audio radio service delivered to cars or other mobile
vehicles in North America.
EMPLOYEE AND DIRECTOR STOCK OPTIONS AND STOCK GRANTS
In February 1994, the Company adopted its 1994 Stock Option Plan (the '1994
Plan') and its Director's Plan. The Director's Plan was amended by the Board of
Directors in December 1994 and January 1995 and approved at the annual meeting
of stockholders on June 27, 1995 to extend the exercise period of the option
after termination for reason other than death or disability and to increase the
initial option grants and annual option grants to non-employee directors.
The 1994 Plan, as amended, provides for options to purchase Common Stock
and is administered by the Plan Administrator, which may be either the Company's
Board of Directors or a committee designated by the Board of Directors. In
accordance with the 1994 Plan, the Plan Administrator determines the employees
to whom options are granted, the number of shares subject to each option,
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the exercise price and the vesting schedule of each option. Options generally
vest over a four-year period, but may vest over a different period at the
discretion of the Plan Administrator. Under the 1994 Plan, outstanding options
vest, unless they are assumed by an acquiring entity, upon the occurrence of
certain transactions, including certain mergers and other business combinations
involving the Company. Options granted under the 1994 Plan are exercisable for a
period of ten years from the date of grant, except that incentive stock options
granted to persons who own more than 10% of the Common Stock terminate after
five years. Unless otherwise provided at the time of grant, vested options
terminate 90 days after the optionee's termination of employment with the
Company for any reason other than death or disability, and one year after
termination upon death or disability. Unless otherwise determined by the Plan
Administrator, the exercise price of options granted under the 1994 Plan must be
equal to or greater than the fair market value of the Common Stock on the date
of grant. Upon exercise, the aggregate exercise price may be paid to the Company
(i) in cash, (ii) upon approval of the Plan Administrator, by delivering to the
Company shares of Common Stock previously held by such Optionee, or (iii) by
complying with any other payment mechanism approved by the Plan Administrator
from time to time.
The Directors' Plan provides that current non-employee directors of the
Company and persons who become non-employee directors of the Company shall be
granted options to purchase 15,000 shares of Common Stock upon becoming
directors (or upon the effective date of the Director's Plan in the case of
non-employee directors who became directors prior to the effective date), and
thereafter shall annually be granted options to purchase 10,000 shares of Common
Stock on the first business day following the Company's annual meeting. The
exercise price for annual grants is the fair market value of the Company's
Common Stock on the date of grant. Options granted under the Directors' Plan
vest immediately upon grant and are exercisable for a period of ten years from
the date of grant. Options terminate 18 months after a director's termination as
a director of the Company for any reason other than death or disability, and one
year after termination upon death or disability. Upon exercise, the exercise
price may be paid (i) in cash, (ii) in shares of Common Stock, or (iii) by the
Company withholding that number of shares of Common Stock with a fair market
value on the date of exercise equal to the aggregate exercise price of the
option.
In June 1995, the Company adopted its 1995 Stock Compensation Plan (the
'Stock Compensation Plan'). Pursuant to the terms of the Stock Compensation
Plan, all employees of the Company or a Related Company (as defined in the Stock
Compensation Plan) are eligible to receive awards under the Stock Compensation
Plan. Bonuses granted pursuant to the Stock Compensation Plan are made by a plan
administrator. The plan administrator, in its absolute discretion, determines
the employees to whom, and the time or times at which, Common Stock awards are
granted, the number of shares within each award and all other terms and
conditions of the awards. The terms, conditions and restrictions applicable to
the awards made under the Stock Compensation Plan need not be the same for all
recipients, nor for all awards. The plan administrator may grant to any officer
of the Company the authority to make awards or otherwise administer the Stock
Compensation Plan solely with respect to persons who are not subject to the
reporting and liability provisions of Section 16 of the Exchange Act.
In September 1996, the Stock Compensation Plan was amended to allow the
plan to be administered by the entire Board of Directors, and if so authorized
by the Board of Directors, a committee of at least two non-employee directors.
Prior to this amendment, the plan permitted the administration only by a
committee of the Board of Directors. The purpose of the amendment was to more
readily comply with the new rules under Section 16 of the Securities Act, which
changed the eligibility requirements for these committees. The new rules under
Section 16 allow either the entire Board of Directors or a committee composed of
two or more 'non-employee' directors to act as Plan Administrator. Amending the
Stock Compensation Plan provided more flexibility for the Company in the
administration of the Stock Compensation Plan.
Awards under the Stock Compensation Plan may not exceed 175,000 shares of
Common Stock in the aggregate, subject to certain adjustments. Shares awarded
may be from authorized but unissued shares or from Company treasury shares of
Common Stock. All shares of Common Stock received by employees pursuant to
bonuses under the Stock Compensation Plan (except for shares received by
executive officers or other persons who are subject to the reporting and
liability provisions of Section 16
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of the Exchange Act) are freely transferable. Nevertheless, the shares of Common
Stock granted to recipients may be subject to such terms and conditions as the
Committee, in its sole discretion, deems appropriate. During 1996, 67,500 shares
of the Company's Common Stock were issued pursuant to this Compensation Plan.
As of December 31, 1996, 162,500 shares of Common Stock have been issued
under the Stock Compensation Plan, and 12,500 shares of Common Stock remain
available for issuance thereunder.
An aggregate of 1,600,000 shares of Common Stock were available for
issuance pursuant to the 1994 Plan and the Directors' Plan. As of July 31, 1997,
options to purchase all of the 1,600,000 shares of Common Stock had been granted
pursuant to the 1994 Plan and the Directors' Plan and a further 133,000 options
have been issued subject to the replenishment of these Plans by the Company
prior to any of such options vesting.
STOCK OPTION INFORMATION
In April 1996, the Company granted to David Margolese pursuant to the 1994
Plan a stock option to purchase 400,000 shares of Common Stock which are now
exercisable following the grant of the FCC License. In April 1996, the Company
also granted to Robert Briskman pursuant to the 1994 Plan a stock option to
purchase 60,000 shares of Common Stock, 30,000 shares of which are exercisable
upon the FCC's grant of a license to the Company and the remaining 30,000 shares
of which were exercisable on September 18, 1997 if, as of such date, the FCC had
granted the FCC License and Mr. Briskman was still employed by the Company.
The following table sets forth certain information for the fiscal year
ended December 31, 1996, with respect to options granted to the individuals
named in the Summary Compensation table above.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR STOCK TERM
---------------------------------------- -----------------------
PERCENT OF
TOTAL
OPTIONS EXERCISE
NUMBER OF GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- -------------------------------------- ---------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David Margolese....................... 400,000 87% $8.5625 4/24/06 $2,398,624 $5,848,148
Robert Briskman....................... 60,000 13 8.5625 4/24/06 359,794 877,222
</TABLE>
The following table sets forth certain information with respect to the
number of shares covered by both exercisable and unexercisable stock options
held by the individuals named in the Summary Compensation table above as of the
fiscal year ended December 31, 1996. Also reported are values for 'in-the-money'
stock options that represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of the Common
Stock as of December 31, 1996 ($4.125 per share).
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR END YEAR END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ----------- -------- ----------------- -----------------
<S> <C> <C> <C> <C>
David Margolese........................................ 0 $ 0 300,000/400,000 $0/$0
Robert Briskman........................................ 80,000 202,500 132,500/60,000 $414,063/$0
</TABLE>
75
<PAGE>
<PAGE>
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
As permitted by the Delaware General Corporation Law, the Company's Amended
and Restated Certificate of Incorporation provides that directors of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derives an improper personal benefit. In addition, the Company's
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws provide that the Company may, to the full extent permitted by law,
purchase and maintain insurance on behalf of any director, officer, employee or
agent of the Company against any liability which may be asserted against him or
her and the Company currently maintains such insurance. In addition, the
Company's Amended and Restated By-Laws provide that the Company shall indemnify
all directors and officers and may indemnify employees and certain other persons
to the full extent and in the manner permitted by Section 145 of the Delaware
General Corporation Law, as amended from time to time. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and, therefore, is unenforceable.
PRINCIPAL STOCKHOLDERS
The following tables set forth certain information regarding beneficial
ownership of the Company's Common Stock and 5% Preferred Stock, as of September
30, 1997, by (i) each stockholder known by the Company to be the beneficial
owner of more than 5% of the outstanding Common Stock or 5% Preferred Stock,
(ii) in relation to the Common Stock, each director of the Company, (iii) in
relation to the Common Stock, each executive officer of the Company and (iv) all
directors and officers as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock and 5% Preferred Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable. The footnotes to the 5% Preferred Stock table
set forth information concerning the number of shares of Common Stock issuable
upon conversion of shares of the Company's 5% Preferred Stock to certain holders
of the 5% Preferred Stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES OF TOTAL OF
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OF COMMON STOCK(1) OWNED OWNED(2)
- ---------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Directors, Executive Officers and 5% Stockholders of Common Stock
Darlene Friedland(3) ................................................................... 2,734,500 21.7%
110 Wolseley Road
Point Piper 2027
Sydney, Australia
Loral Space & Communications Ltd.(4) ................................................... 1,905,488 15.2
600 Third Avenue
New York, New York 10017
David Margolese(5) ..................................................................... 1,900,000 15.1
c/o CD Radio Inc.
Sixth Floor
1001 22nd Street, N.W.
Washington, D.C. 20037
Robertson, Stephens & Company LLC, et al.(6) ........................................... 1,467,000 11.7
555 California Street, Suite 2600
San Francisco, CA 94104
</TABLE>
(table continued on next page)
76
<PAGE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES OF TOTAL OF
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OF COMMON STOCK(1) OWNED OWNED(2)
- ---------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Robert D. Briskman(7)................................................................... 132,500 1.1
Jack Z. Rubinstein(8)................................................................... 227,000 1.8
Peter K. Pitsch(9)...................................................................... 70,000 *
Lawrence F. Gilberti(10)................................................................ 35,000 *
Ralph V. Whitworth(11).................................................................. 35,000 *
Joseph S. Capobianco(12)................................................................ 0 *
Keno V. Thomas(13)...................................................................... 0 *
Andrew J. Greenebaum(14)................................................................ 59,000 *
All Executive Officers and Directors as a Group(15) (9 persons)......................... 2,458,500 19.5
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES OF TOTAL OF
PREFERRED PREFERRED
STOCK STOCK
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OF PREFERRED STOCK(16) OWNED OWNED(2)
- ---------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Directors, Executive Officers and 5% Holders of 5% Preferred Stock
Everest Capital International, Ltd.(17) ................................................ 1,137,155 21.8
c/o Morgan Stanley & Co.
One Pierpont Plaza, 10th Floor
Brooklyn, NY 11201
Continental Casualty Company(18) ....................................................... 1,114,630 21.3
c/o Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2477
Mackay-Shields Financial Corporation(19) ............................................... 678,350 13.0
9 West 57th Street
New York, NY 10019
Grace Brothers, Ltd.(20) ............................................................... 450,536 8.6
Bradford Whitmore
1560 Sherman Avenue, Suite 900
Evanston, IL 60201
Everest Capital Fund, L.P.(21) ......................................................... 427,020 8.2
c/o Morgan Stanley & Co.
One Pierpont Plaza, 10th Floor
Brooklyn, NY 11201
Jess M. Ravich(22) ..................................................................... 408,500 7.8
c/o Libra Investments, Inc.
11766 Wilshire Blvd.
Suite 870
Los Angeles, CA 90025
All Executive Officers and Directors
as a Group(23) (9 persons)............................................................ 0 *
</TABLE>
- ------------
* Less than 1%
(footnotes continued on next page)
77
<PAGE>
<PAGE>
(footnotes continued from previous page)
(1) This table is based upon information supplied by directors, officers and
principal stockholders. Percentage of ownership is based on 12,577,884
shares of Common Stock outstanding on September 30, 1997. Unless otherwise
indicated, the address of the beneficial owner is the Company.
(2) Determined in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, as amended. Under this rule, a person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from September 30, 1997 upon the exercise of options, and each
beneficial owner's percentage ownership is determined by assuming that
options that are held by such person (but not those held by any other
person) and that are exercisable within 60 days from September 30, 1997
have been exercised. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
(3) Darlene Friedland is the spouse of Robert Friedland. Robert Friedland was a
director of the Company from June 1993 until October 1993. From May 1992,
Mr. Friedland, and Ivanhoe Capital Corporation, a venture capital firm he
controls, collectively were the Company's largest shareholder until their
shares were transferred to Darlene Friedland in October 1993.
(4) Subject to demand registration rights after the Company's two satellites
are launched and operational.
(5) Includes 300,000 shares issuable pursuant to stock options that are
exercisable within 60 days. Does not include 400,000 shares issuable
pursuant to stock options that are not exercisable within 60 days. Pursuant
to a voting trust agreement entered into by Darlene Friedland, as grantor,
David Margolese, as trustee, and the Company, Mr. Margolese will have the
power to vote in his discretion all shares of Common Stock owned or
hereafter acquired by Darlene Friedland and certain of her affiliates
(currently 2,734,500 shares) for a period of five years commencing on the
first to occur of the closing date of the Stock Offering or the Notes
Offering or the consummation of the Exchange Offer.
(6) Shares are owned by a group including the following: The Robertson Stephens
Orphan Fund (which has shared voting and shared dispositive power over
1,069,200 shares), The Robertson Stephens Orphan Offshore Fund (with shared
voting and shared dispositive power over 226,800 shares), The Robertson
Stephens Global Low-Priced Stock Fund (with shared voting and shared
dispositive power over 70,000 shares), The Robertson Stephens & Company
Investment Management L.P. (with shared voting and shared dispositive power
over 1,366,000 shares), Bayview Investors, LTD (with shared voting and
shared dispositive power over 1,069,200 shares), Robertson, Stephens &
Company, Incorporated ('RS&Co.') (with shared voting and shared dispositive
power over 1,366,000 shares), and RS&Co.'s five shareholders, namely Paul
H. Stephens (with sole voting and sole dispositive power over 96,880
shares, and shared voting and shared dispositive power over 1,366,000
shares), Sanford R. Robertson (with sole voting and sole dispositive power
over 11,620 shares, and shared voting and shared dispositive power over
1,366,000 shares), Michael G. McCaffery, G. Randy Hecht, and Kenneth R.
Fitzsimmons (the three of whom have shared voting and shared dispositive
power over 1,366,000 shares). Messrs. Stephens, Robertson, McCaffery,
Hecht, and Fitzsimmons disclaim any beneficial ownership with respect to
shares of the Company that RS&Co. may be deemed to beneficially own. The
source of the information in this footnote is the Schedule 13D dated August
13, 1997 filed by Robertson, Stephens & Company LLC, et al.
(7) Represents 132,500 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days. Does not include 117,500 shares
issuable pursuant to stock options that are not exercisable within 60 days
of such date.
(8) Includes 195,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days and 7,700 shares of Common Stock held in trust
for his daughters. Excludes 20,000 shares held by DICA Partners, L.P. of
which Mr. Rubinstein is the General Partner.
(9) Includes 60,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(10) Represents 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(11) Represents 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(12) Does not include 75,000 shares issuable pursuant to stock options that are
not exercisable within 60 days.
(13) Does not include 75,000 shares issuable pursuant to stock options that are
not exercisable within 60 days.
(14) Represents 59,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Does not include 116,000 shares of Common Stock
issuable pursuant to stock options not exercisable within 60 days.
(15) Includes 732,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Does not include 857,000 shares issuable
pursuant to options that are not exercisable within 60 days.
(16) This table is based upon information supplied by directors, officers and
principal stockholders. Percentage of ownership is based upon 5,222,608
shares of 5% Preferred Stock outstanding on September 30, 1997. The
information concerning the number of shares of Common Stock issuable upon
conversion of shares of 5% Preferred Stock is estimated solely for the
purposes of this table. Such beneficial ownership represents an estimate of
the number of shares of Common Stock issuable upon the conversion of shares
of 5% Preferred Stock beneficially owned by such person, assuming a
conversion date of September 30, 1997 and all dividends on shares of the 5%
Preferred Stock are paid, in lieu of cash, in additional shares of 5%
Preferred Stock. (See 'Description of Capital Stock -- 5% Preferred Stock'
for definitions of capitalized terms.) The number of shares of Common Stock
issuable upon conversion of the shares of the 5% Preferred Stock would
equal the Liquidation Preference of the shares being converted plus any
Cash Payments divided by the then-effective conversion price applicable to
(footnotes continued on next page)
78
<PAGE>
<PAGE>
(footnotes continued from previous page)
the Common Stock (the 'Conversion Price'). The Conversion Price, as of any
date up to and including November 15, 1997, is determined in accordance
with a formula based on market prices of the Common Stock or actual prices
at which the converting holder sold the Common Stock, in either case
multiplied by an amount equal to 1 minus the Applicable Percentage. The
actual number of shares of Common Stock upon conversion is subject to
adjustment and could be materially less or more than the estimated amount
indicated depending upon factors which cannot be predicted by the Company
at this time, including, among others, application of the conversion
provisions based on market prices prevailing at the actual date of
conversion and whether dividends on shares of 5% Preferred Stock are paid
in cash or added to the Liquidation Preference. This presentation is not
intended to constitute a prediction as to the future market price of the
Common Stock or as to when holders will elect to convert shares of the 5%
Preferred Stock into shares of Common Stock. See 'Description of Capital
Stock -- 5% Preferred Stock.'
(17) Equivalent to 2,194,368 shares of Common Stock if converted on September
30, 1997. The following limitations (the 'Standstill Agreement') apply to
Everest Capital International, Ltd. and Everest Capital Fund, L.P. (the
'Everest Funds') and their affiliates, and to certain transferees. Until
the date one year after execution of a certain Commitment Term Sheet
between such Funds and the Company, the Everest Funds and their
affiliates (i) shall not acquire Common Stock, including by means of
conversion of the 5% Preferred Stock or exercise of any other right, if,
upon such acquisition, the Everest Funds and their affiliates will have or
share, directly or indirectly, voting or investment power over ten percent
or more of the Common Stock (for purposes of this clause (i), a right to
acquire upon exercise or conversion will not be deemed to confer voting or
investment power over the underlying security in the absence of an exercise
or conversion), and (ii) shall not sell or otherwise dispose of warrants,
or 5% Preferred Stock to any one purchaser if, following such sale or
disposition, the purchaser and its affiliates would be beneficial owners of
ten percent or more of the Common Stock, except for a sale or disposition
of warrants or 5% Preferred Stock to a purchaser who, for itself and its
affiliates, agrees to be bound by the limitations set forth in the
Standstill Agreement.
(18) Held on its own behalf and on behalf of its Designated A/C High Yield Fund.
Equivalent to 2,150,881 shares of Common Stock if converted on September
30, 1997.
(19) Held by The Mainstay Funds, on behalf of its High Yield Corporate Bond Fund
Series (the 'Fund'), on behalf of which Mackay-Shields Financial
Corporation acts as financial advisor (the 'Advisor'). The Fund and the
Advisor share investment and voting power with respect to such shares.
Equivalent to 1,309,012 shares of Common Stock if converted on September
30, 1997. The Fund has agreed that it will not, following any conversion of
its shares, be the beneficial owner of more than 9.99% of the outstanding
Common Stock unless it chooses to waive this restriction upon two days
prior notice to the Company. If it waives this restriction upon proper
notice.
(20) Equivalent to 869,399 shares of Common Stock if converted on September 30,
1997. Grace Brothers, Ltd. has agreed that it will not, following any
conversion of its shares, be the beneficial owner of more than 9.99% of the
outstanding Common Stock unless it chooses to waive this restriction upon
61 days prior notice to the Company.
(21) Equivalent to 824,020 shares of Common Stock if converted on September 30,
1997. Does not include shares of Common Stock issuable pursuant to warrants
issuable to Everest Capital Master Fund, L.P., an affiliate of Everest
Capital Fund, L.P., to purchase 1,740,000 shares of Common Stock at a
purchase price of $50.00 per share. The warrants are exercisable from June
15, 1998 through and including June 15, 2005. See also (17) above.
(22) Represents 146,800 shares of 5% Preferred Stock that are issuable pursuant
to warrants to be issued to Libra Investments, Inc. ('Libra') and 261,700
shares of 5% Preferred Stock that are issuable to The Ravich Revocable
Trust of 1989 (the 'Ravich Trust'). Jess M. Ravich is the Chairman, Chief
Executive Officer and controlling shareholder of Libra and a trustee of the
Ravich Trust. Mr. Ravich disclaims beneficial ownership in the shares
issuable to Libra except to the extent of his ownership interest in Libra.
Equivalent to 788,282 shares of Common Stock if converted on September 30,
1997. Libra and the Ravich Trust have agreed that they will not, following
any conversion of their shares of 5% Preferred Stock, be the beneficial
owner of more than 4.99% of the outstanding common stock unless they choose
to waive this restriction upon 61 days prior notice to the Company. Amount
does not include warrants to purchase 60,000 shares of Common Stock issued
to the Ravich Trust at a purchase price of $50.00 per share. The warrants
are exercisable from June 15, 1998 through and including June 15, 2005.
(23) No Executive Officer or Director of the Company beneficially owns any
shares of 5% Preferred Stock.
VOTING TRUST AGREEMENT
The Company is a party to a voting trust agreement dated August 26, 1997
(the 'Voting Trust Agreement') by and among Darlene Friedland, as grantor, David
Margolese, as the voting trustee thereunder, and the Company. The following
summary description of the Voting Trust Agreement does not purport to be
complete and is qualified in its entirety by reference to the complete text
thereof, a copy of which has been filed with the SEC as an exhibit to the
Schedule 13E-4.
The Voting Trust Agreement provides for the establishment of a trust (the
'Trust') into which shall be deposited (i) all of the shares of Common Stock
owned by Mrs. Friedland on the closing date of the
79
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<PAGE>
first to occur of the Exchange Offer and the Stock Offering and (ii) any shares
of Common Stock acquired by Mrs. Friedland, her spouse Mr. Robert Friedland, any
member of either of their immediate families or any entity directly or
indirectly controlled by Mrs. Friedland, her spouse or any member of either of
their immediate families (the 'Friedland Affiliates') between the date shares
are initially deposited and the termination of the Trust. The voting trust will
terminate on the fifth anniversary of the initial deposit of shares into the
Trust.
The Voting Trust Agreement does not restrict the ability of Mrs. Friedland
or any of the Friedland Affiliates to sell, assign, transfer or pledge any of
the shares deposited into the Trust, nor does it prohibit Mrs. Friedland or the
Friedland Affiliates from purchasing additional shares of Common Stock, provided
those shares become subject to the Trust, as described above.
Under the Voting Trust Agreement, the trustee will have the power to vote
shares held in the Trust in relation to any matter upon which the holders of
such stock would have a right to vote, including without limitation the election
of directors. For so long as David Margolese remains trustee of the Trust, he
may exercise such voting rights in his discretion. Any successor trustee or
trustees of the Trust must vote as follows: (i) on the election of directors,
the trustee(s) must vote the entire number of shares held by the Trust, with the
number of shares voted for each director (or nominee for director) determined by
multiplying the total number of votes held by the Trust by a fraction, the
numerator of which is the number of votes cast for such person by other
stockholders of the Company and the denominator of which is the sum of the total
number of votes represented by all shares casting any votes in the election of
directors; (ii) if the matter under Delaware law or the Certificate of
Incorporation or the Bylaws of the Company requires at least an absolute
majority of all outstanding shares of common stock of the Company in order to be
approved, the trustee(s) must vote all of the shares in the Trust in the same
manner as the majority of all votes that are cast for or against the matter by
all other stockholders of the Company; and (iii) on all other matters, including
without limitation any amendment of the Voting Trust Agreement for which a
stockholder vote is required, the trustee(s) must vote all of the shares in the
Trust for or against the matter in the same manner as all votes that are cast
for or against the matter by all other stockholders of the Company.
The Voting Trust Agreement may not be amended without the prior written
consent of the Company, acting by unanimous vote of the Board of Directors, and
approval of the Company's stockholders, acting by the affirmative vote of
two-thirds of the total voting power of the Company, except in certain limited
circumstances where amendments to the Voting Trust Agreement are required to
comply with applicable law.
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DESCRIPTION OF NEW PREFERRED STOCK
GENERAL
The following description of the New Preferred Stock set forth herein does
not purport to be complete and is subject to, and qualified in its entirety by,
the provisions of the Company's Amended and Restated Certificate of
Incorporation filed as an exhibit to the Registration Statement, and the
Certificate of Designations relating to the New Preferred Stock, the form of
which is filed as an exhibit to the Registration Statement and which will be
filed with the Secretary of State of the State of Delaware prior to the issuance
of the New Preferred Stock.
RANK
The New Preferred Stock, with respect to dividend rights and rights upon
liquidation, winding up or dissolution, ranks (i) senior and prior to the Common
Stock and to any other stock issued by the Company designated as junior to the
New Preferred Stock, (ii) junior to the 5% Preferred Stock and (iii) on a parity
with any class or series of stock of the Company, the terms of which do not
designate such class or series as either junior or senior to the New Preferred
Stock.
DIVIDENDS
The annual dividend rate per share of the New Preferred Stock will be an
amount equal to 10.5% of the sum of (x) the liquidation preference of the New
Preferred Stock and (y) all accrued and unpaid dividends, if any, whether or not
declared, from the date of issuance of the shares of New Preferred Stock to the
applicable dividend payment date. Dividends on the shares of New Preferred Stock
will be cumulative, accruing quarterly and, when and as declared by the Board of
Directors of the Company, will be payable quarterly initially on November 15,
2002 (the 'First Scheduled Dividend Payment Date') and on February 15, May 15,
August 15 and November 15 of each year (each, a 'Dividend Payment Date') in each
year thereafter. In addition, accrued dividends on the shares of New Preferred
Stock will be paid on the redemption date of any share of New Preferred Stock
redeemed by the Company, on the purchase date of any share of New Preferred
Stock purchased by the Company pursuant to an Offer to Purchase (as defined
herein) or on the conversion date of any share of New Preferred Stock converted
into shares of Common Stock on or after the First Scheduled Dividend Payment
Date. No accrued dividends will be paid on any shares of New Preferred Stock
that are converted by the holders thereof prior to the First Scheduled Dividend
Payment Date, unless such shares of New Preferred Stock are converted on or
prior to a redemption date by holders thereof electing to convert such shares
after having received a notice of redemption for such shares. Dividends may be
paid in cash, shares of Common Stock or any combination thereof, at the option
of the Company. Common Stock issued to pay dividends will be valued at the
average closing price of the Common Stock as reported in The Wall Street Journal
for the 20 consecutive trading days immediately preceding the date of such
payment. Dividends with respect to any share of New Preferred Stock will
accumulate from November 15, 1997.
If and so long as any full cumulative dividends payable on the shares of
New Preferred Stock in respect of all prior dividend periods will not have been
paid or set apart for payment, the Company will not pay any dividends or make
any distributions of assets on or redeem, purchase or otherwise acquire for
consideration shares of capital stock of the Company ranking junior to or on a
par with the New Preferred Stock in payment of dividends.
Dividends on the shares of New Preferred Stock are payable to the holders
of record thereof as they appear on the stock register of the Company on such
record date, not more than 40 days nor fewer than 10 days preceding the payment
date thereof, as will be fixed by the Board of Directors. Dividends on account
of arrears for any past dividend periods may be declared and paid at any time,
without reference to any Dividend Payment Date, to the holders of record on such
date, not exceeding 40 days nor less than 10 days preceding the payment date
thereof, as may be fixed by the Board of Directors. Dividends paid in cash will
be paid to each holder of record in United States dollars by check mailed to
such holder at its address appearing on the books of the Company. Any shares of
Common Stock issued, at the option of the Company, to pay any dividends on
shares of New Preferred Stock will
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thereupon be duly authorized, validly issued, fully paid and non-assessable. No
fractional shares of Common Stock will be issued as dividends.
REDEMPTION
Except as described below, the shares of New Preferred Stock may not be
redeemed by the Company at its option prior to November 15, 2002. From and after
November 15, 1999 and prior to November 15, 2002, the Company may redeem shares
of New Preferred Stock, in whole or in part, at any time at a redemption price
of 100% of the Liquidation Preference of the shares of New Preferred Stock
redeemed, plus accrued and unpaid dividends, if any, whether or not declared, to
the redemption date, if the average closing price of the Common Stock as
reported in The Wall Street Journal for the 20 consecutive trading days prior to
the notice of redemption thereof equals or exceeds $31.50 per share (subject to
adjustments). From and after November 15, 2002, the Company may redeem shares of
New Preferred Stock, in whole or in part, at the following redemption prices per
share, expressed as percentages of the Liquidation Preference thereof, if
redeemed during the 12-month period beginning November 15 in the year indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------- ----------
<S> <C>
2002................................................................... 105.25%
2003................................................................... 102.63%
2004................................................................... 101.81%
2005 and thereafter.................................................... 100.00%
</TABLE>
plus, in each case, accrued and unpaid dividends, if any, to the redemption
date.
Following the issuance of the New Preferred Stock, within 30 days of the
closing date of the first offering by the Company of debt securities in excess
of $50,000,000 pursuant to a registration statement filed with the Commission
under the Securities Act or pursuant to Rule 144A under the Securities Act (the
'Debt Offering'), the Company may redeem up to 50% of the outstanding shares of
New Preferred Stock at a redemption price of 100% of the Liquidation Preference
of the shares of New Preferred Stock redeemed, plus accrued and unpaid
dividends, if any, whether or not declared, to the redemption date. On November
15, 2012 (the 'Mandatory Redemption Date'), the Company is required to redeem
all outstanding shares of New Preferred Stock at a redemption price of 100% of
the Liquidation Preference of the shares of New Preferred Stock, plus accrued
and unpaid dividends, if any, whether or not declared, to the Mandatory
Redemption Date.
The amount paid to the holders of shares of New Preferred Stock upon
redemption which is allocable to the Liquidation Preference of the shares of New
Preferred Stock shall be paid in cash and the amount of any accrued and unpaid
dividends to be paid on the shares of New Preferred Stock redeemed shall be paid
in cash, shares of Common Stock or any combination thereof at the option of the
Company.
The Company is required to give notice of any proposed redemption of shares
of New Preferred Stock upon not less than 15 days nor more than 40 days (such
date to be determined by the Company, the 'Redemption Record Date') prior to the
date of redemption, to the holders of record on the Redemption Record Date of
the shares to be redeemed at their addresses appearing on the books of the
Company. Each such notice will specify the shares of New Preferred Stock called
for redemption, the redemption price and the time, place and date of redemption.
Neither failure to mail such notice, nor any defect therein or in the mailing
thereof, to any particular holder shall affect the sufficiency of the notice or
the validity of the proceedings for redemption with respect to the other
holders. On or after the redemption date, each holder of shares of New Preferred
Stock being redeemed will present and surrender such holder's certificate or
certificates evidencing such shares to the Company at the place set forth in the
redemption notice, whereupon the Company will cancel such shares and will pay to
such holders the redemption price for such surrendered shares, plus accrued and
unpaid dividends, if any, to the redemption date. If fewer than all the shares
of New Preferred Stock represented by any holder's certificate are redeemed, the
Company will issue a new certificate representing the unredeemed shares of New
Preferred Stock.
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In the event fewer than all of the outstanding shares of New Preferred
Stock are being redeemed, the shares to be redeemed will be selected pro rata or
by lot or in such other manner as the Board of Directors of the Company may
determine, provided that only whole shares shall be selected for redemption.
Any shares of New Preferred Stock which have been called for redemption may
be converted into shares of Common Stock before being redeemed provided that the
holder thereof gives written notice to the Company, prior to the close of
business on the business day immediately preceding the date of redemption, of
such holder's election to convert such shares of New Preferred Stock into shares
of Common Stock, together with the certificate or certificates evidencing such
shares, duly endorsed or assigned to the Company, and any necessary transfer tax
payment as described below. See ' -- Conversion.'
CHANGE IN CONTROL
Upon the occurrence of a Change in Control, the Company must make an offer
to purchase (an 'Offer to Purchase') all then outstanding shares of New
Preferred Stock at a purchase price (the 'Change in Control Purchase Price') in
cash equal to 101% of their Liquidation Preference, plus all accrued and unpaid
dividends (paid in cash), if any, whether or not declared, to the date such
shares are purchased (the 'Change in Control Purchase Date'). A 'Change in
Control' is defined as the occurrence of any of the following events: (a) any
'person' or 'group' (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), other than Loral Space, Arianespace or David Margolese is or
becomes the 'beneficial owner' (as defined in Rules 13d-3 and 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),
directly or indirectly, of more than 40% of the total outstanding voting stock
of the Company; (b) the Company consolidates with, or merges with or into
another person or conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person consolidates with
or merges with or into the Company, in any such event, pursuant to a transaction
in which the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than, at all times when
the Notes are outstanding, those transactions that are not deemed a 'Change of
Control' under the terms of the Indenture; (c) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election to such
Board of Directors, or whose nomination for election by the stockholders of the
Company, was approved by a vote of 66 2/3% of the directors then still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office;
or (d) the Company is liquidated or dissolved or a special resolution is passed
by the shareholders of the Company approving the plan of liquidation or
dissolution, other than, at all times when the Notes are outstanding, those
transactions that are not deemed a 'Change of Control' under the terms of the
Indenture.
Within 30 days following any Change in Control, the Company must give
written notice of such Change in Control to each holder of shares of New
Preferred Stock by first-class mail, postage prepaid, at his address appearing
in the stock register of the Company, stating, among other things, the purchase
price and that the purchase date shall be a business day no earlier than 30 days
nor later than 60 days from the date such notice is mailed, or such later date
as is necessary to comply with requirements under the Exchange Act; that any
shares of New Preferred Stock not tendered will continue to accumulate
dividends; that, unless the Company defaults in the payment of the purchase
price, any shares of New Preferred Stock accepted for payment pursuant to the
Offer to Purchase shall cease to accumulate dividends after the Change in
Control Purchase Date; and certain other procedures that a holder of shares of
New Preferred Stock must follow to accept an Offer to Purchase or to withdraw
such acceptance.
If an Offer to Purchase is made, there can be no assurance that the Company
will have available funds sufficient to pay the Change in Control Purchase Price
for any or all of the shares of New Preferred Stock that might be delivered by
holders thereof seeking to accept the Offer to Purchase and,
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accordingly, none of the holders of the shares of New Preferred Stock may
receive the Change in Control Purchase Price for their New Preferred Stock in
the event of a Change in Control.
The existence of a holder's right to require the Company to repurchase such
holder's New Preferred Stock upon a Change in Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change in
Control. Furthermore, the possibility that a third party would be deterred from
acquiring the Company may have an adverse effect on the market price of the
Company's Common Stock.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with an Offer to Purchase.
CONVERSION
Each share of New Preferred Stock may be converted at any time, at the
option of the holder, unless previously redeemed, into a number of shares of
Common Stock calculated by dividing the Liquidation Preference of the New
Preferred Stock (without accrued and unpaid dividends) by a conversion price
(the 'Conversion Price') equal to (x) prior to the date of the first
underwritten public offering of the Company's Common Stock following the initial
issuance of the New Preferred Stock, $21.00 and (y) thereafter, the lower of
$21.00 per share or the issue price per share of the Common Stock in such
underwritten public offering. The Conversion Price will not be adjusted at any
time for accrued and unpaid dividends on the shares of New Preferred Stock, but
will be subject to adjustment for the occurrence of certain corporate events
affecting the Common Stock. Upon conversion, at any time after the First
Scheduled Dividend Payment Date, holders of the New Preferred Stock will be
entitled to receive all accrued and unpaid dividends upon the shares of New
Preferred Stock converted payable in cash or shares of Common Stock, or a
combination thereof, at the option of the Company. No accrued dividends will be
paid on any shares of New Preferred Stock that are converted by the holders
thereof prior to the First Scheduled Dividend Payment Date, unless such shares
of New Preferred Stock are converted prior to a redemption date by holders
thereof electing to convert such shares after having received a notice of
redemption for such shares. Common Stock issued to pay dividends will be valued
at the average closing price of the Common Stock as reported in The Wall Street
Journal for the 20 consecutive trading days immediately preceding the date of
such payment.
To convert shares of New Preferred Stock into Common Stock, the registered
holder of such shares of New Preferred Stock must give written notice to the
Company that it elects to convert such shares and surrender at the office of the
Transfer Agent, or at such other office or offices, if any, as the Board of
Directors may designate, the certificate or certificates therefor, duly endorsed
or assigned to the Company or in blank, together with any payment for stamp or
similar taxes that may be required to be paid by the holder, as described below.
Shares of New Preferred Stock will be deemed to have been converted
immediately prior to the close of business on the day of the surrender of such
shares for conversion, and the person or persons entitled to receive the Common
Stock issuable upon such conversion will be treated for all purposes as the
record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Company will issue and deliver
a certificate or certificates for the number of full shares of Common Stock
issuable upon such conversion, together with any payment in lieu of issuing any
fractional shares of Common Stock, to the person or persons entitled to receive
the same. In case shares of New Preferred Stock are called for redemption, the
right to convert such shares will terminate at the close of business on the
business day immediately preceding the redemption date, unless default shall be
made in payment of the redemption price.
The Conversion Price for shares of New Preferred Stock is subject to
adjustment in certain events, including (i) dividends and other distributions
payable in Common Stock on any class of capital stock of the Company, (ii) the
issuance to all holders of Common Stock of rights or warrants entitling them to
subscribe for or purchase Common Stock at less than fair market value, (iii)
subdivisions, combinations and reclassifications of the Common Stock, (iv)
distributions to all holders of Common Stock of
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evidences of indebtedness of the Company or assets and (v) a consolidation or
merger to which the Company is a party or the sale or transfer of all or
substantially all of the assets of the Company.
The Company will pay any and all stamp or other similar taxes that may be
payable in respect of the issue or delivery of shares of Common Stock upon
conversion of shares of New Preferred Stock or the issue or delivery of shares
of Series D Preferred Stock upon an Automatic Exchange of shares of New
Preferred Stock. The Company will not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that in which the shares of New
Preferred Stock so converted or exchanged were registered, and no such issue or
delivery will be made unless and until the person requesting such issue has paid
to the Company the amount of any such tax, or has established to the
satisfaction of the Company that such tax has been paid. All shares of Common
Stock issued upon conversion of shares of New Preferred Stock shall be validly
issued, fully paid and nonassessable.
AUTOMATIC EXCHANGE
If the Company has not consummated one or more Qualifying Offerings
yielding gross proceeds in an aggregate cash amount of at least $100 million by
May 15, 1998 (the 'Automatic Exchange Date'), all outstanding shares of New
Preferred Stock shall be exchanged automatically (the 'Automatic Exchange') for
shares of the Series D Preferred Stock, with an initial liquidation preference
of $102.50 on the Automatic Exchange Date, at an exchange rate of one share of
Series D Preferred Stock for each $100 of Automatic Exchange Rate Liquidation
Preference represented by the shares of New Preferred Stock held by any holder.
The 'Automatic Exchange Rate Liquidation Preference' for the shares of New
Preferred Stock shall be $69.6145 per share (the amount determined by
multiplying (x) the Liquidation Preference for the New Preferred Stock, (without
accrued and unpaid dividends thereon) by (y) 0.696145.) The Company will pay
cash to holders of New Preferred Stock in lieu of issuing fractional shares of
Series D Preferred Stock in the Automatic Exchange. Although holders of New
Preferred Stock will not be entitled to receive accrued dividends thereon on or
after the Automatic Exchange Date, shares of Series D Preferred Stock will be
issued with an initial liquidation preference equal to $102.50. For a
description of the terms, preferences and rights of the Series D Preferred
Stock, see 'Description of Series D Preferred Stock.'
In the event of an Automatic Exchange, the Company will give written notice
to the holders of record on the Automatic Exchange Date of shares of New
Preferred Stock at their addresses appearing on the books of the Company that
the shares of New Preferred Stock have been automatically exchanged into shares
of Series D Preferred Stock. The notice of exchange will specify the number of
shares of Series D Preferred Stock into which the shares of New Preferred Stock
have been automatically exchanged and the place where the holders are to deliver
the certificates evidencing shares of New Preferred Stock in exchange for
certificates evidencing shares of Series D Preferred Stock. Thereafter, the
holders will surrender their certificates evidencing shares of New Preferred
Stock at the place designated in the notice of exchange. As promptly as
practicable after receipt of such certificates, the Company will issue and
deliver to each holder a certificate or certificates for the number of shares of
Series D Preferred Stock to which such holder is entitled. Shares of Series D
Preferred Stock will be deemed to have been exchanged immediately prior to the
close of business on the Automatic Exchange Date and the holders of the New
Preferred Stock of record on such date shall be treated for all purposes as the
record holders of the Series D Preferred Stock at such time.
No fractional shares of Series D Preferred Stock will be issued upon the
Automatic Exchange and, in lieu thereof, the Company will pay a cash adjustment
to holders in respect of such fraction in an amount equal to the amount of
Automatic Exchange Rate Liquidation Preference represented by shares of New
Preferred Stock held by a holder which are not exchanged.
The Company will pay any documentary, stamp or similar issue or transfer
tax due on the issue of Series D Preferred Stock upon the Automatic Exchange.
The holders, however, will pay any such tax that may be due in the event that
any shares of the Series D Preferred Stock are issued in a name other than the
name of the record holder, as requested by such holder. All shares of Series D
Preferred Stock issued upon the Automatic Exchange will be validly issued, fully
paid and nonassessable.
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VOTING RIGHTS
Other than the consent rights described below with respect to certain
corporate actions, and except as otherwise provided by applicable law, holders
of shares of New Preferred Stock will have no voting rights. Consent of the
holders of a majority of the outstanding shares of New Preferred Stock will be
required before the Company may take certain corporate actions, including (i)
any amendment, alteration or repeal of any of the provisions of the Company's
Certificate of Incorporation or Bylaws which affects adversely the voting
powers, rights or preferences of the holders of the shares of New Preferred
Stock, (ii) the authorization or creation of, or the increase in authorized
amount of, any shares of any class or series of of equity securities that ranks
senior to or on a parity with the New Preferred Stock with respect to dividend
rights and rights upon liquidation, winding up or dissolution and (iii) the
merger or consolidation of the Company with or into any other entity, unless the
resulting corporation will thereafter have no class or series of shares and no
other securities either authorized or outstanding ranking prior to, or on a
parity with, the New Preferred Stock in the payment of dividends or the
distribution of its assets on liquidation, dissolution or winding up. In
addition, in the event that (i) after the First Scheduled Dividend Payment Date,
dividends payable on the shares of New Preferred Stock shall be in arrears in an
aggregate amount equal to at least six quarterly dividend payments, (ii) the
Company fails to redeem all of the outstanding shares of New Preferred Stock on
the Mandatory Redemption Date, or (iii) the Company fails to make an Offer to
Purchase upon a Change in Control, the holders of a majority of the outstanding
shares of New Preferred Stock, voting as a class, will be entitled to elect (i)
one director in the event that there are seven or less directors on the Board of
Directors at such time or (ii) two directors in the event that there are eight
or more directors on the Board of Directors at such time.
In exercising the voting rights set forth herein or when otherwise granted
voting rights by operation of law, each share of New Preferred Stock will be
entitled to one vote per share.
No consent of the holders of the New Preferred Stock will be required for
(i) the creation of any indebtedness of any kind of the Company or (ii) the
authorization or issuance of any class of capital stock of the Company ranking
junior to the New Preferred Stock in payment of dividends or upon liquidation,
dissolution or winding up of the Company.
LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, before any distribution of the assets of the Company
to the holders of shares of Common Stock or any other capital stock of the
Company ranking junior to the New Preferred Stock upon liquidation, dissolution
or winding up of the Company, the holders of shares of New Preferred Stock will
be entitled to receive out of the assets of the Company available for
distribution to its stockholders, whether from capital, surplus or earnings, an
amount per share of New Preferred Stock equal to $100.00, plus accrued and
unpaid dividends on such share of New Preferred Stock, if any, to the date of
final distribution.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, before any distribution of assets of the Company to
the holders of shares of New Preferred Stock or any capital stock of the Company
ranking on a par with the shares of New Preferred Stock, the holders of any
shares of capital stock of the Company ranking senior to the New Preferred Stock
and such parity stock (including the shares of 5% Preferred Stock in the event
not all shares of 5% Preferred Stock are exchanged or otherwise redeemed) shall
be entitled to receive out of the assets of the Company available for
distribution to its stockholders, whether from capital, surplus or earnings, an
amount per share of such senior stock equal to the liquidation preference
thereof, plus accrued and unpaid dividends thereon, if any, to the date of final
distribution.
If, upon any liquidation, dissolution or winding up of the Company, the
amounts payable with respect to the shares of New Preferred Stock or any capital
stock ranking on a par with the shares of New Preferred Stock are not paid in
full, then such holders will share ratably in any such distribution of assets,
or proceeds thereof, in proportion to the full respective preferential amounts
to which they are entitled. Neither a consolidation nor a merger of the Company
with one or more other corporations, nor a sale or a transfer of all or
substantially all of the assets of the Company, will be deemed to be a voluntary
or involuntary liquidation, dissolution or winding up of the Company.
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RESTRICTIONS ON TRANSFER
Subject to certain exceptions, the holders of New Preferred Stock and the
holders of New Preferred Stock who convert shares of New Preferred Stock into
shares of Common Stock ('Converted Stock') will not be permitted to sell, grant
any option to purchase or otherwise transfer or dispose of (collectively,
'Transfer') any New Preferred Stock or Converted Stock, as the case may be,
until the later to occur of (i) the 181st day following the Stock Offering or
(ii) the 181st day following consummation of the Exchange Offer (such later date
being herein referred to as the 'Lock-Up Expiration Date'); provided, however,
that if a holder is prevented by applicable law from owning assets subject to
such restrictions on Transfer, such restrictions shall be inapplicable to such
holder and the Company will have a right of first refusal with respect to all
shares of New Preferred Stock held by such holder that is exercisable for a
period of 90 days from the date an agreement to sell shares of New Preferred
Stock is reached with a potential buyer at any time on or prior to the Lock-Up
Expiration Date.
SINKING FUND; OTHER MATTERS
The New Preferred Stock will not be subject to any mandatory sinking fund
redemption. Holders of shares of New Preferred Stock will have no pre-emptive
rights. Shares of New Preferred Stock, when issued pursuant to the terms of the
Exchange Offer, will be fully paid and nonassessable.
TRANSFER AGENT
The transfer agent for the New Preferred Stock is Continental Stock
Transfer & Trust Company, New York, New York.
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DESCRIPTION OF SERIES D PREFERRED STOCK
GENERAL
The Series D Preferred Stock will be issued pursuant to a certificate of
designations (the 'Series D Certificate of Designations'). The provisions of the
Series D Preferred Stock are substantially similar to those of the 5% Preferred
Stock, except that certain milestones, deadlines and other reference dates
included in the certificate of designations for the 5% Preferred Stock are, due
to the passage of time, not applicable with respect to the Series D Preferred
Stock and are, thus, not included in the Series D Certificate of Designations.
The following description of the Series D Preferred Stock set forth herein
does not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of the Company's Amended and Restated Certificate of
Incorporation filed as an exhibit to the Registration Statement, and the Series
D Certificate of Designations, the form of which is filed as an exhibit to the
Registration Statement and which will be filed with the Secretary of State of
the State of Delaware prior to the issuance of the Series D Preferred Stock.
RANK
The Series D Preferred Stock, with respect to dividend rights and rights
upon liquidation, winding up or dissolution, ranks (i) senior and prior to the
Common Stock and to any other class or series of capital stock hereafter issued
by the Company and (ii) junior to the 5% Preferred Stock.
DIVIDENDS
Each share of the Series D Preferred Stock is entitled to receive dividends
at the rate of $5.00 per annum, payable semi-annually on April 15 and October 15
of each year, when and as declared by the Board of Directors, in preference and
priority to any payment of any dividends on the Common Stock or any other class
or series of stock of the Company (except dividends on the 5% Preferred Stock).
Such dividends shall accrue on any given share from the date of original
issuance of the Series D Preferred Stock and shall accrue from day to day
whether or not earned or declared, based on the actual days elapsed and a
360-day year of 12 30-day months. Any dividend payable on the Series D Preferred
Stock may be paid, at the option of the Company, either (i) in cash or (ii) by
adding the amount of such dividend to the liquidation preference of the Series D
Preferred Stock.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of the Series D Preferred Stock
shall be entitled to receive, prior and in preference to any distribution of any
assets of the Company to the holders of any other class or series of shares
(except holders of shares of 5% Preferred Stock), the amount of $102.50 per
share plus any accrued but unpaid dividends.
REDEMPTION
The Series D Preferred Stock may be redeemed in whole but not in part at a
redemption price equal to the sum of the liquidation preference for the Series D
Preferred Stock plus any Series D Cash Payments (as defined herein) by the
Company at any time, provided, however, that the Company may not exercise its
right of redemption unless the average closing price of the Common Stock as
reported in The Wall Street Journal for the twenty consecutive trading days
prior to the notice of redemption shall equal or exceed $18 per share (subject
to adjustment for stock dividends, stock splits and reverse stock splits).
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CONVERSION
The Series D Preferred Stock is convertible into shares of Common Stock at
any time, provided that the Company is not obligated to honor any request for
conversion of the Series D Preferred Stock at any time to the extent that
approval of the FCC of the issuance of shares of Common Stock upon such
conversion is or would be required and has not been obtained. If such FCC
approval (other than with respect to a conversion resulting in a holder or group
of holders holding more than 50% of the voting securities of the Company) has
not been obtained, the Company is required, at the request of any holder of
Series D Preferred Stock, to repurchase the shares of Series D Preferred Stock
held by such holder at a purchase price per share equal to the sum of the
liquidation preference of the Series D Preferred Stock plus any Series D Cash
Payments due to such holder, divided by 0.72125 (the 'Series D Maximum Price').
The number of shares of Common Stock issuable upon conversion of the shares
of the Series D Preferred Stock will equal the liquidation preference of the
shares being converted plus any Series D Cash Payments divided by the
then-effective conversion price applicable to the Common Stock (as defined
below, the 'Series D Preferred Conversion Price').
The Company must make a cash payment in an amount per share equal to 3% of
the liquidation preference of the shares of Series D Preferred Stock per month
to each holder if the Company fails (i) to honor any request for conversion of
the Series D Preferred Stock as permitted by the terms and conditions of the
Series D Preferred Stock or (ii) to maintain the listing of the Common Stock on
the Nasdaq SmallCap Market, the Nasdaq National Market, the New York Stock
Exchange or the American Stock Exchange. In addition, if the Company fails at
any time to reserve a sufficient number of shares of Common Stock for issuance
upon conversion of the shares of Series D Preferred Stock, it must make a cash
payment per share equal to 3% of the liquidation preference of the Series D
Preferred Stock (proportionately reduced by the amount of shares that are so
authorized and reserved) per month to the holders of the shares of Series D
Preferred Stock. The cash payments referred to in this paragraph are,
collectively, 'Series D Cash Payments.'
'Series D Preferred Conversion Price' equals 0.72125 multiplied by the
lowest of (i) the average of the daily means between the low trading price of
the Common Stock and the closing price of the Common Stock for all the trading
days between October 15, 1997 and November 15, 1997, (ii) the average of the
daily means between the low trading price of the Common Stock and the closing
price of the Common Stock during the three consecutive trading days immediately
preceding the date of conversion and (iii) the weighted-average (based upon the
number of shares sold) of the actual selling price (but not less than the low
trading price on the date of such trade as reported on the principal market for
the Common Stock), at which the holder shall have sold shares of Common Stock
received or receivable upon conversion of the Series D Preferred Stock, reduced
by any trading commissions or underwriting spreads paid by such holder, as
certified to the Company by such holder and subject to the meeting of certain
notice requirements by such holder.
In the event that during any period of consecutive trading days provided
for above, the Company shall declare or pay any dividend on the Common Stock
payable in Common Stock or in rights to acquire Common Stock, or shall effect a
stock split or reverse stock split, or a combination, consolidation or
reclassification of the Common Stock, then the Series D Preferred Conversion
Price shall be proportionately decreased or increased, as appropriate, to give
effect to such event.
FORCED CONVERSION
After April 15, 2000, the Company may require the holders of the Series D
Preferred Stock to convert such shares into Common Stock at the then applicable
Series D Preferred Conversion Price and all Series D Cash Payments due on a date
specified in the notice of forced conversion. However, the Company will not have
the right to require such conversion if the Company has commenced bankruptcy
proceedings, has ceased operations or is in default for money borrowed in excess
of $50 million.
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REQUIRED REDEMPTION
The Company must reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Series D Preferred Stock, at least such number of shares of
its Common Stock that is the greater of (i) ten million shares and (ii) 1.5
times the number as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series D Preferred Stock. If the
Company does not have sufficient shares of Common Stock reserved to effect the
conversion of all outstanding shares of Series D Preferred Stock, then at any
time at the request of any holder of shares of the Series D Preferred Stock, the
Company must purchase from such holder the number of shares of Series D
Preferred Stock equal to such holder's pro-rata share of the number of shares of
Series D Preferred Stock that would not be able to be converted due to an
insufficient number of shares of Common Stock reserved for such purpose at the
Series D Maximum Price.
In addition, if, prior to April 21, 1998, the FCC awards more than two
licenses (including any license awarded to the Company) permitting the licensee
to provide satellite digital audio radio services and more than two licensees
(including the Company) commence or announce an intention to commence satellite
digital audio radio services, then after issuance of the Series D Preferred
Stock, upon the request of the holders of more than one-third of the outstanding
shares of the Series D Preferred Stock, the Company must purchase one-half of
the shares of the Series D Preferred Stock held by each requesting shareholder
at the Series D Maximum Price.
If a Reorganization occurs or is proposed, each holder of the Series D
Preferred Stock may require the Company to redeem the Series D Preferred Stock
at the Series D Maximum Price. A 'Reorganization' is defined with respect to the
Series D Preferred Stock as any reorganization or any reclassification of the
Common Stock or other capital stock of the Company or any consolidation or
merger of the Company with or into any other corporation or corporations or a
sale of all or substantially all of the assets of the Company to any other
person. If the holder of Series D Preferred Stock chooses not to require the
Company to redeem such holder's shares, the shares will be convertible into the
number of shares of stock or other securities or property (including cash) to
which a holder of the number of shares of Common Stock deliverable upon
conversion of such share of Series D Preferred Stock not so redeemed would have
been entitled upon the Reorganization.
VOTING RIGHTS
The Company shall not undertake the following actions without the consent
of the holders of a majority of the Series D Preferred Stock: (i) modify its
Certificate of Incorporation or Bylaws so as to amend or change any of the
rights, preferences or privileges of the Series D Preferred Stock; or (ii)
purchase or otherwise acquire for value any Common Stock or other equity
security of the Company or any non-wholly-owned subsidiary thereof not held by
the Company or any wholly-owned subsidiary while there exists any arrearage in
the payment of cumulative dividends on the Series D Preferred Stock or any
Series D Cash Payments due or the liquidation preference of the Series D
Preferred Stock exceeds $102.50. The Company shall not, in connection with a
repurchase of any shares of Series D Preferred Stock undertake any of the
following actions without the consent of all holders of the Series D Preferred
Stock: (i) reduce the amount of Series D Preferred Stock whose holders must
consent to an amendment or waiver, (ii) reduce the rate of, or change the time
for payment of, dividends on the Series D Preferred Stock or alter the
liquidation preference thereof or (iii) alter the conversion provisions with
respect to the Series D Preferred Stock.
Other than the consent rights described above, holders of the Series D
Preferred Stock have no voting rights.
ADDITIONAL FINANCINGS
The Series D Certificate of Designations prohibits the Corporation from
undertaking to conduct any debt or equity financing that is not either pari
passu or junior, in seniority, structure and maturity, to the Series D Preferred
Stock.
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ANTI-DILUTION
The Series D Preferred Stock is at all times subject to customary
anti-dilution adjustments for events such as stock splits, stock dividends,
reorganizations and certain mergers affecting the Common Stock.
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR DISCOUNT NOTES DUE 2007
The Notes are expected to have the following terms when issued. The Notes
will mature in 2007, are expected to be issued for approximately $150 million
gross proceeds and will be unsecured obligations of the Company. The Notes will
accrete the original issue discount for five years at a rate to be determined,
and thereafter will bear interest at the same rate, payable in cash semiannually
in arrears. The Indenture will not provide for a sinking fund. The Notes will be
subject to redemption at any time on or after a date to be determined in 2002,
at the option of the Company, in whole or in part, in amounts of principal at
maturity of $1,000 or an integral multiple of $1,000 at declining redemption
prices set forth in the Indenture. Notwithstanding the foregoing, during the
first 36 months after the date of the Indenture, the Company will be permitted
to redeem up to 33% of the initial accreted value of the Notes with the net
proceeds of any public equity offerings at a redemption price to be determined.
Upon a change of control of the Company, or in the event of asset sales in
certain circumstances, the Company will be required by the terms of the
Indenture to make an offer to purchase the outstanding Notes at a purchase price
equal to, or at a premium to, the accreted value thereof.
The indebtedness of the Company evidenced by the Notes will rank senior in
right of payment to all existing and future subordinated indebtedness of the
Company and pari passu in right of payment with all other existing and future
unsubordinated indebtedness of the Company. The Indenture will contain a number
of covenants restricting the operations of the Company and its subsidiaries,
including those restricting the incurrence of indebtedness; the making of
restricted payments (in the form of the declaration or payment of certain
dividends or distributions, the purchase, redemption or other acquisition of any
capital stock of the Company, the voluntary prepayment of pari passu or
subordinated indebtedness and the making of certain investments, loans and
advances); transactions with stockholders and affiliates; the incurrence of
liens; the transfer of assets; issuances and sales of capital stock of
subsidiaries; the incurrence of guarantees by subsidiaries; dividend and other
payment restrictions affecting subsidiaries; and consolidation, merger or sale
of substantially all of the Company's assets and requiring the purchase of
Notes, at the option of the holder, upon the occurrence of a change in control.
The events of default under the Indenture will include provisions that are
typical of senior debt financings, including a cross-acceleration to a default
by the Company or any material subsidiary of any indebtedness that has an
aggregate principal amount in excess of certain levels. Upon the occurrence of
such an event of default, the trustee or the holders of not less than 25% in
principal amount at maturity of the outstanding Notes may immediately accelerate
the maturity of all the Notes as provided in the Indenture.
VENDOR FINANCING
On July 22, 1997, the Company entered into the AEF Agreements with AEF to
finance approximately $105 million of the estimated $176 million price of the
launch services to be provided by Arianespace for the Company's two satellites.
Under the AEF Agreements, the Company is able to borrow funds to meet the
progress payments due to Arianespace for the construction of each launch vehicle
and other launch costs (the 'Tranche A Loans'). Interest on the Tranche A Loans
will be capitalized and will accrue at a rate of 3% per annum above the rate at
which dollar deposits are offered in the London interbank market for three
months or, during a certain time period following the Conversion Commitment Date
(defined below), one month (the 'Interest Basis'). Unless the Company satisfies
the conditions for conversion of the Tranche A Loans to long-term loans, the
Company will be
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required to repay the Tranche A Loans in full, together with accrued interest
and all fees and other amounts due, approximately three months before the
applicable launch date, which will be prior to the time CD Radio commences
commercial operations. There can be no assurance that the Company will have
sufficient funds to make such repayment.
If the Company satisfies certain conditions set forth in the AEF Agreements
and otherwise meets the requirements of AEF by a specified date prior to the
applicable launch (the 'Conversion Commitment Date'), Tranche A Loans
representing up to 60% of the launch costs may be converted ('Conversion') on
the launch date into term loans (the 'Tranche B Loans') which will amortize over
a period not to exceed seven years. However, not more than $80 million of the
Tranche A Loans may be converted in the aggregate under the AEF Agreements.
Prior to Conversion, based on documents and materials to be submitted by
the Company, including its business plan, AEF will place the Company into one of
three pre-established borrower categories for the purpose of determining the
conditions to Conversion that the Company must satisfy. It is anticipated that
the Company will be placed in the category for which the conditions to
Conversion are the most restrictive ('Category 3'). If the Company is placed in
Category 3, AEF, at its discretion, may impose conditions to Conversion and
require covenants in addition to those initially set forth in AEF Agreements.
There can be no assurance that the Company will be able to satisfy the
conditions to Conversion.
Interest on the Tranche B Loans will accrue at a rate of 3.5% per annum
above the Interest Basis and will be payable quarterly (or, in certain time
periods, monthly) in arrears. Any amounts due and payable by the Company which
are not paid on their due date will accrue interest at a default rate of 2%
above the interest rate otherwise applicable at such time.
The Company may, at any time, prepay the Tranche A Loans or the Tranche B
Loans by providing prior irrevocable written notice to AEF. The Company will be
required to prepay the loans in full, together with accrued interest and all
fees and other amounts due, if certain events occur, including the following:
(i) any of the applicable AEF Agreements, the Launch Services Agreement or the
related Multiparty Agreement among the Company, AEF and Arianespace is
terminated; (ii) following a launch failure, the Company does not request a
replacement launch within 180 days after the original launch date or a
replacement launch is not accomplished within two years following the original
launch date; (iii) an initial launch has not occurred by April 12, 2002; (iv) a
replacement launch results in a launch failure; or (v) the satellite fails to
enter commercial service within eight months following launch. The Company also
will be required to make a prepayment of the loans in proportion to any
prepayment (whether voluntary or mandatory) made by the Company under any other
financing agreement relating to the construction, launch and operation of the
satellites. Following Conversion, the Company will be required to apply a
percentage of its excess cash flow (cash flow not needed to service debt, pay
taxes or fund capital expenditures) to prepay the Tranche B Loans on certain
specified dates, with the percentage so applied decreasing as the outstanding
principal amount of the Tranche B loan decreases.
If Conversion occurs, the Company will not be permitted to pay any
dividends on any shares of its stock or purchase any capital stock or other
equity interest in, or make any loan to or investment in, any of its affiliates
unless the aggregate amount of all such payments for the applicable time period
is less than or equal to the amount of the Company's excess cash flow for such
period minus the amounts needed to make required prepayments of the Tranche B
loans and not used during such period to make loans, investments, capital
expenditures, scheduled payments on subordinated indebtedness or other purposes.
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If Conversion occurs, it is anticipated that the Tranche B Loans will be
amortized as set forth in the following schedule, with the final payment of
principal to be made no later than April 14, 2009 (the 'maturity date'):
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL AMOUNT
OF TRANCHE B LOANS
QUARTERLY PERIOD TO BE REPAID
FOLLOWING LAUNCH DATE PER QUARTER
- ------------------------------------------------------------------------- ------------------
<S> <C>
1 and 2.................................................................. No Repayment
3 and 4.................................................................. 1.0%
5 through 8.............................................................. 2.0%
9 through 12............................................................. 2.5%
13 through maturity date................................................. 5.0%
</TABLE>
However, based on the business plan and other documents to be submitted by
the Company during the review process required for Conversion, AEF may impose a
shorter amortization schedule for the Tranche B Loans.
If AEF determines that the Tranche A Loans are eligible for Conversion, the
Company also will be prohibited from changing its capital structure (including
the terms of its outstanding stock or other equity interests), permitting any
change in the composition of its ownership, or changing its organizational
documents, if such change could reasonably be expected to have a material
adverse effect on the Company, its business, assets or financial condition or
its ability to perform its obligations under any agreements relating to the
financing or the value of the Collateral (as defined below) or the license
granted under the Collateral Documents (as defined below). The Company will also
be prohibited from merging, consolidating or combining with any other entity.
As a condition to Conversion, the Company will be required to create, in
favor of a security agent (and on behalf of AEF, a bank group providing funding
to AEF to on-lend to the Company and any other lender to the project), liens on
specified assets of the Company, including the satellites, the Company's
interests in gateway, ground reception and similar facilities and the FCC
License (the 'Collateral'). In connection with such liens, the Company must
execute certain agreements (the 'Collateral Documents'), including an assignment
and security agreement granting the liens to the security agent, a mortgage on
any tracking, telemetry, control and monitoring equipment owned by the Company
and an intercreditor agreement. All obligations of the Company under the AEF
Agreements will be secured by such liens from and following the date of
execution of the Collateral Documents, subject to the condition that neither AEF
nor any member of the bank group providing funds to AEF may direct the security
agent to exercise rights with respect to the Collateral prior to Conversion.
From and following the date of execution of any Collateral Document, the Company
will be prohibited from creating or incurring any lien on the Collateral other
than liens in favor of AEF (or the other parties to the intercreditor agreement)
and certain specified permitted liens. From such date, the Company will be
prohibited from selling or transferring any Collateral having an aggregate fair
market value in excess of $1.0 million.
Following the Conversion Commitment Date, neither the Company nor its
subsidiaries may sell or transfer any assets (other than permitted dispositions
of the Collateral), except for (i) sales of inventory in the ordinary course of
business, (ii) the trade-in of machinery or equipment in connection with the
acquisition of similar machinery or equipment, (iii) the sale of obsolete or
worn-out property having a value not exceeding $1.5 million in the aggregate in
any fiscal year and (iv) sales or transfers of assets that (x) do not exceed in
the aggregate 2% of the Company's total assets in any fiscal year, (y) together
with all prior permitted sales or transfers do not exceed in the aggregate 5% of
the Company's total assets at the time of such action or (z) do not have a fair
market value in excess of $1.0 million per item.
Commencing on the Conversion Commitment Date, prior to incurring additional
indebtedness in an aggregate principal amount of $10.0 million or more, the
Company will be required to deliver to AEF a certificate stating that no default
will occur as a result of the incurrence of such indebtedness. From and after
Conversion, the Company also will be required to maintain certain financial
ratios relating to its ability to service debt. If the Company is placed in
Category 3 (as anticipated), it will be
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in breach of the AEF Agreements if its ratio of earnings before interest, tax,
depreciation and amortization ('EBITDA') to total interest accrued or payable
for any period of four fiscal quarters ending on the relevant date of
calculation is less than: (i) at any time after the first anniversary and on or
prior to the second anniversary of Conversion, 1.0 to 1, (ii) thereafter,
through and including the third anniversary of Conversion, 1.5 to 1, (iii)
thereafter, through and including the fourth anniversary of Conversion, 2.0 to
1, (iv) thereafter, through and including the fifth anniversary of Conversion,
2.5 to 1, and (v) any time thereafter, 3.0 to 1.
The Company will also be prohibited from permitting its ratio of EBITDA to
the sum of (a) total interest accrued or payable and (b) scheduled principal
payments for any period of four fiscal quarters ending on the relevant date of
calculation to be less than: (i) at any time after the first anniversary and on
or prior to the third anniversary of Conversion, 1.0 to 1, (ii) thereafter,
through and including the fourth anniversary of Conversion, 1.5 to 1, (iii)
thereafter, through and including the fifth anniversary of Conversion, 2.0 to 1,
and (iv) at any time thereafter, 2.5 to 1.
In addition, the Company may not permit its ratio of indebtedness to EBITDA
for the four fiscal quarters ending on the relevant calculation date to exceed:
(i) at any time after the first anniversary and on or prior to the second
anniversary of Conversion, 6.0 to 1, (ii) thereafter, through and including the
third anniversary of Conversion, 5.5 to 1, (iii) thereafter, through and
including the fourth anniversary of Conversion, 5.0 to 1, (iv) thereafter,
through and including the fifth anniversary of Conversion, 4.0 to 1, and (v) at
any time thereafter, 3.0 to 1.
From and following the Conversion Commitment Date, the Company may not make
any advances or loans other than (i) extensions of credit for a period not
exceeding ninety days in the nature of accounts receivable or notes receivable
arising from the sale or lease of goods or services in the ordinary course of
business, and (ii) if no default exists or would result therefrom, (x) loans or
extensions of credit in the ordinary course of business to affiliates, not
exceeding $2.5 million in an aggregate principal amount outstanding at any one
time and (y) loans or extension of credit to the Company's key management
employees, not exceeding $1.25 million in an aggregate principal amount
outstanding at any one time.
Neither the Company nor any of its subsidiaries may make any payments in
respect of any indebtedness subordinated to the prior payment of all amounts
payable by the Company under any of the AEF Agreements, except for regularly
scheduled payments of principal and interest required by the instruments
evidencing such subordinated indebtedness.
A default under either of the AEF Agreements will constitute a default
under the other AEF Agreement. In addition, the AEF Agreements will be
cross-defaulted to a default by the Company under any other financing agreement
relating to the project or any other agreement or instrument relating to
indebtedness in an aggregate principal amount exceeding five million dollars. If
the Company is subject to more restrictive cross-default provisions under any
other agreement providing for long-term, asset-based financing, those more
restrictive cross-default provisions will be deemed to be set forth in the AEF
Agreements.
Pursuant to a Multiparty Agreement to be executed among the Company, AEF
and Arianespace in connection with the AEF Agreements, if the Company is unable
to obtain sufficient financing to complete the construction and launch of the
satellites, and if the Company terminates the Arianespace Launch Contract, the
Company will be required to pay Arianespace a termination fee ranging from 5% to
40% of the launch services price, based on the proximity of the date of
termination to the scheduled launch date. The termination fee will be payable
prior to the time the Company commences commercial operations and there can be
no assurance that the Company will have sufficient funds to pay this fee.
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DESCRIPTION OF CAPITAL STOCK
The Company's Amended and Restated Certificate of Incorporation provides
for authorized capital of 250,000,000 shares, consisting of 200,000,000 shares
of Common Stock, par value $.001 per share, and 50,000,000 shares of Preferred
Stock, par value $.001 per share.
COMMON STOCK
As of September 30, 1997, the Company had 12,577,884 shares of Common Stock
outstanding held of record by 105 persons, and had reserved for issuance
3,763,000 shares of Common Stock with respect to outstanding options and
warrants, including 1,800,000 shares pursuant to warrants exercisable at $50.00
per share and expiring in 2005.
Holders of the Company's Common Stock are entitled to cast one vote for
each share held of record on all matters acted upon at any stockholders' meeting
and to dividends if, as and when declared by the Board of Directors out of funds
legally available therefor. There are no cumulative voting rights. In the event
of any liquidation, dissolution or winding up of the Company, each holder of the
Company's Common Stock will be entitled to participate, subject to the rights of
any outstanding Preferred Stock, ratably in all assets of the Company remaining
after payment of liabilities. Holders of the Company's Common Stock have no
preemptive or conversion rights. All outstanding shares of Common Stock are, and
the shares of Common Stock offered hereby will be when issued against the
consideration set forth in this prospectus, fully paid and non-assessable.
The Company's Common Stock currently is traded on the Nasdaq SmallCap
Market under the symbol 'CDRD.' The Company has applied for quotation of the
Common Stock on the Nasdaq National Market.
PREFERRED STOCK
The Board of Directors has the authority to issue shares of Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof including dividend rights, conversion rights, voting
rights, redemption rights, liquidation preferences and the number of shares
constituting any series, without any further vote or action by the stockholders.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock. In addition, because the
terms of such Preferred Stock may be fixed by the Board of Directors without
stockholder action, the Preferred Stock could be designated and issued quickly
in the event the Company determines to issue preferred stock to raise additional
equity capital. The Preferred Stock could also be designated and issued with
terms calculated to deter, delay or defeat a proposed take-over of the Company,
or with terms making the removal of management more difficult. Under certain
circumstances, this could have the effect of decreasing the market price of the
Common Stock. Otherwise, the Company currently has no plans to issue Preferred
Stock.
5% PREFERRED STOCK
On March 19, 1997, the Board of Directors authorized the issuance of up to
8,000,000 shares of the 5% Preferred Stock. As of September 30, 1997, there were
5,222,608 shares of the 5% Preferred Stock outstanding held of record by 37
entities. The Company has agreed to grant a warrant to purchase an additional
486,000 shares of 5% Preferred Stock at a price of $25.00 per share to Libra
Investments, Inc. ('Libra'), the original placement agent for the 5% Preferred
Stock. If the Exchange Offer is consummated, the Company will instead grant
Libra a warrant to purchase 121,500 shares of New Preferred Stock at a price of
$100.00 per share.
Dividends. Each share of the 5% Preferred Stock is entitled to receive
dividends at the rate of $1.25 per annum, payable semi-annually on April 15 and
October 15 of each year, in preference to any payment made on any other shares
of capital stock of the Company. Any dividend payable on the 5% Preferred Stock
may be paid, at the option of the Company, either (i) in cash or (ii) by adding
the amount of such dividend to the liquidation preference of the 5% Preferred
Stock. Each share of the 5% Preferred Stock is also entitled to a liquidation
preference of $25 per share, plus all accrued but unpaid dividends, in
preference to any other class or series of capital stock of the Company.
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Conversion. The 5% Preferred Stock is convertible into shares of Common
Stock at any time, provided that the Company is not obligated to honor any
request for conversion of the 5% Preferred Stock at any time if certain
governmental approvals of the issuance of the Common Stock upon such conversion
have not been obtained. If such approvals (other than with respect to a
conversion resulting in a holder or group of holders holding more than 50% of
the voting securities of the Company) are not obtained within 270 days after the
Initial Registration Deadline (as defined in the Preferred Stock Investment
Agreement), the Company is required, at the request of any holder of 5%
Preferred Stock, to repurchase the shares of 5% Preferred Stock held by such
holder at a purchase price per share equal to the sum of the liquidation
preference plus any other cash payments due to such holder ('Cash Payments'),
divided by .72125 (the 'Maximum Price'). The number of shares of Common Stock
issuable upon conversion of the shares of the 5% Preferred Stock will equal the
liquidation preference of the shares being converted plus any Cash Payments
divided by the then-effective conversion price applicable to the Common Stock
(the '5% Preferred Conversion Price'). The 5% Preferred Conversion Price, as of
any date up to and including November 15, 1997, is determined in accordance with
a formula based on market prices of the Common Stock or actual prices at which
the converting holder sold the Common Stock, in either case, multiplied by the
Applicable Multiplier set forth below. The Applicable Multiplier is as follows:
<TABLE>
<CAPTION>
CONVERSION AFTER THE APPLICABLE
FOLLOWING DATE MULTIPLIER
- ----------------------------------------------------------------------------------- ----------
<S> <C>
9/15/97............................................................................ 0.75125
10/15/97........................................................................... 0.75
11/15/97........................................................................... 0.72125
</TABLE>
At any date after November 15, 1997, the 5% Preferred Conversion Price is
determined in accordance with a formula based on the lowest of (i) market prices
of the Common Stock between October 15, 1997 and November 15, 1997, (ii) market
prices of the Common Stock during the three consecutive trading days immediately
preceding the date of conversion or (iii) actual prices at which the converting
holder sold the Common Stock, in any case, multiplied by .72125.
The 5% Preferred Stock is at all times subject to customary anti-dilution
adjustments for events such as stock splits, stock dividends, reorganizations
and certain mergers affecting the Common Stock. Three years or more after the
date of original issuance of the 5% Preferred Stock, the Company may require the
holders of the 5% Preferred Stock to convert such shares into Common Stock at
the then applicable 5% Preferred Conversion Price and all Cash Payments due on a
date specified in the notice of forced conversion. However, the Company will not
have the right to require such conversion if the Company has commenced
bankruptcy proceedings, has ceased operations or is in default for money
borrowed in excess of $50 million.
Required Redemption. The Company must reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the 5% Preferred Stock, at least such number of
shares of its Common Stock that is the greater of (i) ten million shares and
(ii) 1.5 times the number as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the 5% Preferred Stock. If the Company
does not have sufficient shares of Common Stock reserved to effect the
conversion of all outstanding shares of 5% Preferred Stock, then at any time at
the request of any holder of shares of the 5% Preferred Stock, the Company must
purchase from such holder the number of shares of 5% Preferred Stock equal to
such holder's pro-rata share of the number of shares of 5% Preferred Stock that
would not be able to be converted due to an insufficient number of shares of
Common Stock reserved for such purpose at the Maximum Price. In addition, if,
prior to the earlier of April 21, 1998 or the closing of a Qualifying Offering,
the FCC awards more than two licenses (including the license awarded to the
Company) permitting the licensee to provide satellite digital audio radio
services and more than two licensees (including the Company) commence or
announce an intention to commence satellite digital audio radio services, then
upon the request of the holders of more than one-third of the outstanding shares
of the 5% Preferred Stock, the Company must purchase one-half of the shares of
the 5% Preferred Stock held by each requesting shareholder at a purchase price
per share equal to the sum of the liquidation preference for a share of 5%
Preferred Stock plus any Cash Payments divided by the Applicable Multiplier. If
a Reorganization
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occurs or is proposed, each holder of the 5% Preferred Stock may require the
Company to redeem the 5% Preferred Stock at the Maximum Price. A
'Reorganization' is defined as any reorganization or any reclassification of the
Common Stock or other capital stock of the Company or any consolidation or
merger of the Company with or into any other corporation or corporations or a
sale of all or substantially all of the assets of the Company to any other
person. If the holder of 5% Preferred Stock chooses not to require the Company
to redeem such holder's shares, the shares will be convertible into the number
of shares of stock or other securities or property (including cash) to which a
holder of the number of shares of Common Stock deliverable upon conversion of
such share of 5% Preferred Stock not so redeemed would have been entitled upon
the Reorganization.
Redemption. The 5% Preferred Stock may be redeemed in whole but not in part
at a redemption price equal to the sum of the liquidation preference for the 5%
Preferred Stock plus any Cash Payments by the Company at any time beginning on
the date that is ten months after the date of original issuance of the 5%
Preferred Stock, plus one day for each day during which any registration
statement with respect to the Common Stock issuable upon conversion of the 5%
Preferred Stock is suspended or the related prospectus is not current, complete
or otherwise usable. The Company may not exercise its right of redemption unless
(i) the average closing price of the Common Stock as reported in The Wall Street
Journal for the twenty consecutive trading days prior to the notice of
redemption shall equal or exceed $18 per share (subject to adjustments) and (ii)
the shares of Common Stock issuable upon conversion of the 5% Preferred Stock
are registered for resale by an effective registration statement under the
Securities Act of 1933, as amended. The Company also may redeem the 5% Preferred
Stock in whole but not in part at the Maximum Price if the Company sells Common
Stock for cash in an amount not less than $100 million in a registered
underwritten public offering on or prior to October 15, 1997. The Company is
soliciting the approval of its stockholders, including the holders of the 5%
Preferred Stock, on the Record Date to an amendment to the Certificate of
Designations of the 5% Preferred Stock that would permit the Company to redeem
the 5% Preferred Stock in whole or in part upon the sale of equity or debt
securities in one or more offerings occurring after the date of the initial
issuance of the 5% Preferred Stock and on or prior to December 30, 1997 for
gross proceeds in an aggregate cash amount of not less than $100 million.
Cash Payments. The Preferred Stock Investment Agreement specifies certain
circumstances in which the Company must make a cash payment to each holder of
the 5% Preferred Stock (or underlying securities issued or issuable upon
conversion of the 5% Preferred Stock). The Company must make a cash payment in
an amount per share equal to 3% of the liquidation preference of the 5%
Preferred Stock per month to each holder if the Company fails (i) to honor any
request for conversion of the 5% Preferred Stock as permitted by the terms and
conditions of the 5% Preferred Stock or (ii) to maintain the listing of the
Common Stock on Nasdaq, the New York Stock Exchange or the American Stock
Exchange. A similar cash payment must be made if, after effecting a registration
statement with respect to the resale of Common Stock issuable upon conversion of
the 5% Preferred Stock, the use of the prospectus is suspended for more than 60
cumulative days in the aggregate in any twelve month period. In addition, if the
Company fails at any time to reserve a sufficient number of shares of Common
Stock for issuance upon conversion of the 5% Preferred Stock, it must make a
cash payment equal to 3% of the liquidation preference (proportionately reduced
by the amount of shares that are so authorized and reserved) per month to the
holders of the 5% Preferred Stock. The Preferred Stock Investment Agreement also
provides that prior to the completion of a Qualifying Offering, the Company must
not undertake to conduct any debt or equity financing that is not either pari
passu or junior to the 5% Preferred Stock in seniority, structure and maturity.
Voting Rights. Other than the consent rights described below with respect
to certain corporate actions, and except as otherwise provided by applicable
law, holders of the 5% Preferred Stock have no voting rights. Consent of the
holders of a majority of the 5% Preferred Stock is required before the Company
may take certain corporate actions or pay dividends on Common Stock. In
addition, certain other corporate actions taken in connection with a partial
repurchase of 5% Preferred Stock require the consent of all holders of the 5%
Preferred Stock.
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NEW CONVERTIBLE PREFERRED STOCK
Pursuant to a binding Summary Term Sheet/Commitment (the 'Commitment')
dated June 15, 1997 among Everest Capital International, Ltd., Everest Capital
Fund, L.P., The Ravich Revocable Trust of 1989 (together 'Everest') and the
Company, Everest committed to purchase from the Company, and the Company
committed to sell to Everest in a private placement, up to $58 million of a new
series of convertible preferred stock (the 'New Convertible Preferred Stock') in
conjunction with a financing by the Company to yield gross proceeds of $150
million or more in 'new money,' subject to certain conditions. Everest can
satisfy its obligation to purchase the New Convertible Preferred Stock by either
exchanging some or all of the 5% Preferred Stock it currently holds or by paying
cash. The terms of the New Convertible Preferred Stock differ substantially from
the terms of the New Preferred Stock. If Everest pursues its right to purchase
the New Convertible Preferred Stock pursuant to the Commitment and seeks to
enforce the Company's obligations thereunder, the Company may be required to
issue the New Convertible Preferred Stock. Everest has not made known to the
Company its intentions with respect to the Commitment and its current holding of
5% Preferred Stock.
PREFERRED STOCK PURCHASE RIGHTS
The Board of Directors intends to adopt a stockholders rights plan and, in
connection with the adoption of such plan, to declare a dividend distribution of
one 'Right' for each outstanding share of Common Stock (a 'Common Share') of the
Company to stockholders of record at the close of business on a record date to
be announced (the 'Rights Record Date'). Except as set forth below, each Right
will entitle the registered holder thereof to purchase from the Company one
one-hundredth of a share of Series B Preferred Stock, par value $0.001 per share
(the 'Series B Shares'), at a purchase price to be determined (the 'Purchase
Price'), subject to adjustment. The Purchase Price shall be paid in cash. The
description and terms of the Rights will be set forth in a Rights Agreement (the
'Rights Agreement') to be entered into by the Company and Continental Stock
Transfer & Trust Company, as Rights Agent.
Initially, no separate Right Certificates will be distributed. Until the
earlier to occur of (a) 10 business days following a public announcement that a
person or group of affiliated or associated persons (an 'Acquiring Person') has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Common Shares or (b) 15 business days following the
commencement of a tender offer or exchange offer if, upon consummation hereof,
such person or group would be the beneficial owner of 15% or more of such
outstanding Common Shares (the earlier of such dates being called the
'Separation Date'), the Rights will be evidenced, with respect to any Common
Shares outstanding as of the Rights Record Date, by the certificates
representing such Common Shares. The Rights Agreement provides that, until the
Separation Date, the Rights will be transferred with, and only with, Common
Share certificates. From as soon as practicable after the Rights Record Date and
until the Separation Date (or earlier redemption or expiration of the Rights),
new Common Share certificates issued after the Rights Record Date upon transfer
or new issuance of Common Shares will contain a notation incorporating the
Rights Agreement by reference. Until the Separation Date (or earlier redemption
or expiration of the Rights), the surrender for transfer of any certificates for
Common Shares outstanding as of the Rights Record Date will also constitute the
transfer of the Rights associated with the Common Shares represented by such
certificates. As soon as practicable following the Separation Date, separate
certificates evidencing the Rights ('Right Certificates') will be mailed to
holders of record of the Common Shares as of the close of business on the
Separation Date and, thereafter, such separate Right Certificates alone will
evidence the Rights. Holders of 15% or more of Common Stock as of the date of
the Rights Agreement will be excluded from the definition of 'Acquiring Person'
under the Rights Agreement unless each such holder increases the aggregate
percentage of its and its affiliates' beneficial ownership interest in the
Company by an additional 1%.
The Rights are not exercisable until the Separation Date and will expire on
the fifth anniversary of the Rights Agreement, unless earlier redeemed by the
Company as described below.
In the event that, at any time following the Separation Date, (a) the
Company is the surviving corporation in a merger with an Acquiring Person and
the Company's Common Shares are not changed or exchanged, (b) a person (other
than the Company and its affiliates) becomes the beneficial owner of
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15% or more of the then outstanding Common Shares (in any manner, except
pursuant to (i) the exercise of stock options granted pursuant to the Company's
existing and future stock option plans, (ii) the exercise of conversion rights
contained in specified Preferred Stock issues of the Company and (iii) a tender
offer for any and all outstanding Common Shares made in accordance with
applicable laws, which remains open for at least 40 Business Days and into which
holders of 80% or more of the Company's outstanding Common Shares tender their
shares), (c) an Acquiring Person engages in one or more 'self-dealing'
transactions as set forth in the Rights Agreement or (d) during such time as
there is an Acquiring Person, an event occurs that results in such Acquiring
Person's ownership interest being increased by more than one percent (e.g., a
reverse stock split), the Rights Agreement provides that proper provision shall
be made so that each holder of a Right will thereafter be entitled to receive,
upon exercise, Common Shares (or, in certain circumstances, cash, property or
other securities of the Company) having a value equal to two times the exercise
price of the Right.
In the event that, at any time following the first date of public
announcement by the Company or an Acquiring Person indicating that an Acquiring
Person has become such (the 'Shares Acquisition Date'), (a) the Company engages
in a merger or other business combination transaction in which the Company is
not the surviving corporation, (b) the Company engages in a merger or other
business combination transaction with another person in which the Company is the
surviving corporation, but in which its Common Shares are changed or exchanged
or (c) 50% or more of the Company's assets or earning power is sold or
transferred, the Rights Agreement provides that proper provision shall be made
so that each holder of a Right shall thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the Right, common
shares of the acquiring company having a value equal to two times the exercise
price of the Right.
The Board may, at its option, at any time after the right of the Board to
redeem the Rights has expired or terminated (with certain exceptions), exchange
all or part of the then outstanding and exercisable Rights (other than those
held by the Acquiring Person and Affiliates and Associates of the Acquiring
Person) for Common Shares at a ratio of one Common Share per Right, as adjusted;
provided, however, that such Right cannot be exercised once a Person, together
with such Person's Affiliates and Associates (each as defined in the Rights
Agreement), becomes the owner of 50% or more of the Outstanding Common Shares
(as defined in the Rights Agreement). If the Board authorizes such an exchange,
the Rights will immediately cease to be exercisable.
Notwithstanding any of the foregoing, following the occurrence of any of
the events set forth in the fourth and fifth paragraphs of this section, any
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person shall immediately
become null and void. The Rights Agreement contains provisions intended to
prevent the utilization of voting trusts or similar arrangements (except for the
voting arrangement between two of the Company's principal stockholders and the
Company) that could have the effect of rendering ineffective or circumventing
the beneficial ownership rules set forth in the Rights Agreement.
The Purchase Price payable, and the number of Series B Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (a) in the event of a dividend
of Series B Shares on, or a subdivision, combination or reclassification of, the
Series B Shares, (b) upon the grant to holders of the Series B Shares of certain
rights or warrants to subscribe for Series B Shares or securities con vertible
into Series B Shares at less than the current market price of the Series B
Shares or (c) upon the distribution to holders of the Series B Shares of debt
securities or assets (excluding regular quarterly cash dividends and dividends
payable in Series B Shares) or of subscription rights or warrants (other than
those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares that are not integral multiples of one
one-hundredth of a Series B Share will be issued and, in lieu thereof, an
adjustment in cash will be made based on the closing price of the Series B
Shares on the last trading date prior to the date of exercise.
At any time after the date of the Rights Agreement until ten Business Days
(as defined in the Rights Agreement) (a period that can be extended) following
the Shares Acquisition Date, the Board of Directors, with the concurrence of a
majority of the Independent Directors (those members of the
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Board who are not officers or employees of the Company or of any Subsidiary of
the Company and who are not Acquiring Persons or their Affiliates, Associates,
nominees or representatives, and who either (a) were members of the Board prior
to the adoption of the Rights Plan or (b) were subsequently elected to the Board
and were recommended for election or approved by a majority of the Independent
Directors then on the Board), may redeem the Rights in whole, but not in part,
at a price of $0.01 per Right, subject to adjustment (the 'Redemption Price').
Thereafter, the Board may only redeem the Rights in certain specified
circumstances including in connection with certain events not involving an
Acquiring Person or an Affiliate or Associate of an Acquiring Person. In
addition, the Company's right of redemption may be reinstated if (a) an
Acquiring Person reduces its beneficial ownership to 10% or less of the
outstanding Common Shares in a transaction or series of transactions not
involving the Company and (b) there is at such time no other Acquiring Person.
The Rights Agreement may also be amended, as described below, to extend the
period of redemption. Immediately upon the action of the Board ordering
redemption of the Rights, the Rights will no longer be exercisable, except upon
the occurrence of certain events that have the effect of deferring the effective
time of the redemption. In general, thereafter the only right of the holders of
Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Shares (or other consideration) of the Company or for
common shares of the Acquiring Person as set forth above.
Other than those provisions relating to the principal economic terms of the
Rights or imposing limitations on the right to amend the Agreement, any of the
provisions of the Rights Agreement may be amended by the Board with the
concurrence of a majority of the Independent Directors or by special approval of
the stockholders of the Company prior to the Separation Date. Thereafter, the
period during which the Rights may be redeemed may be extended (by action of the
Board, with the concurrence of a majority of the Independent Directors or by
special approval of the stockholders of the Company), and other provisions of
the Rights Agreement may be amended by action of the Board with the concurrence
of a majority of the Independent Directors or by special approval of the
shareholders of the Company; provided, however, that (a) such amendment will not
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person) and (b) no amendment shall be made at such time as the
Rights are no longer redeemable (except for the possibility of the right of
redemption being reinstated as described above).
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Section 203 of the Delaware General Corporation Law ('Section 203')
generally provides that a stockholder acquiring more than 15% of the outstanding
voting stock of a corporation subject to the statute (an 'Interested
Stockholder') but less than 85% of such stock may not engage in certain Business
Combinations (as defined in Section 203) with the corporation for a period of
three years after the time the stockholder became an Interested Stockholder
unless (i) prior to such time, the corporation's board of directors approved
either the Business Combination or the transaction in which the stockholder
became an Interested Stockholder or (ii) the Business Combination is approved by
the corporation's board of directors and authorized at a stockholders' meeting
by a vote of at least two-thirds of the corporation's outstanding voting stock
not owned by the Interested Stockholder. Under Section 203, these restrictions
will not apply to certain Business Combinations proposed by an Interested
Stockholder following the earlier of the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
was not an Interested Stockholder during the previous three years, who became an
Interested Stockholder with the approval of the corporation's board of directors
or who became an Interested Stockholder at a time when the restrictions
contained in Section 203 did not apply for reasons specified in Section 203, if
such extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to such person becoming an Interested
Stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors.
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Section 203 defines the term 'Business Combination' to encompass a wide
variety of transactions with or caused by an Interested Stockholder, including
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, transactions
with the corporation which increase the proportionate interest in the
corporation directly or indirectly owned by the Interested Stockholder or
transactions in which the Interested Stockholder receives certain other
benefits.
The provisions of Section 203, coupled with the Board's authority to issue
preferred stock without further stockholder action, could delay or frustrate the
removal of incumbent directors or a change in control of the Company. The
provisions also could discourage, impede or prevent a merger, tender offer or
proxy contest, even if such event would be favorable to the interests of
stockholders. The Company's stockholders, by adopting an amendment to the
Certificate, may elect not to be governed by Section 203 effective 12 months
after such adoption. Neither the Certificate nor the Bylaws exclude the Company
from the restrictions imposed by Section 203.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Stock Offering, the Company will have
16,077,884 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' overallotment option and no exercise of outstanding options. Of
these shares, 9,795,896 shares will be freely tradeable without restriction
under the Securities Act unless such shares are purchased in the Stock Offering
by Affiliates. Of the remaining 6,281,988 shares of Common Stock, 3,547,488
shares are Restricted Shares. Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act. Up to 1,642,000
of the Restricted Shares held by the directors and certain officers of the
Company will be eligible for sale, subject to the restrictions of Rule 144, upon
expiration of the Lock-up Agreements, 180 days after the effective date of the
Stock Offering. The remaining 1,905,488 Restricted Shares will not become
eligible for resale until August 1998, and then only pursuant to the
restrictions under Rule 144. In addition, Darlene Friedland has entered into a
lock-up agreement relating to her 2,734,500 shares lasting for a period ending,
on a cumulative basis, as to 25% of the shares of Common Stock she owns, on the
expiration of the 15th, 18th, 21st and 24th month following August 26, 1997. As
such shares become free of such lock-up, they will be eligible for sale without
restriction.
In general, under Rule 144 as currently in effect, beginning 90 days after
the conclusion of the Stock Offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including persons who may be deemed 'affiliates' of the Company, will be
entitled to sell in any three month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are also subject to certain other requirements relating to manner of sale,
notice and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the three months immediately
preceding the sale is entitled to sell restricted shares pursuant to Rule 144(k)
without regard to the limitations described above, provided that two years have
expired since the later of the date on which such restricted shares were first
acquired from the Company or from an affiliate of the Company. Certain of the
Company's current stockholders have demand and incidental registration rights.
See 'Principal Stockholders.'
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The Company has granted options to purchase 1,733,000 shares of Common
Stock to certain officers and key employees of the Company pursuant to the Stock
Plans. Of the shares underlying these outstanding options, 1,705,000 are subject
to the agreements described above restricting the sale of such shares for a
period of 180 days after the date of this Prospectus. Following the Stock
Offering, the Company intends to file a registration statement under the
Securities Act to register shares of Common Stock issuable upon the exercise of
stock options granted under the Company's stock option plans. Except as limited
by the agreements described above and by Rule 144 volume limitations applicable
to affiliates, shares issued upon the exercise of stock options after the
effective date of such registration statement generally will be available for
sale in the open market.
The Company is unable to predict the effect that sales made under Rule 144,
pursuant to future registration statements, or otherwise, may have on any then
prevailing market price for shares of the Common Stock. Nevertheless, sales of a
substantial amount of Common Stock in the public market, or the perception that
such sales could occur, could adversely affect market prices.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain United States federal income tax
consequences applicable under current law to holders of 5% Preferred Stock who
exchange such stock for New Preferred Stock pursuant to the Exchange Offer is
for general information only and is not intended as a substitute for careful tax
planning. The discussion is based upon the Internal Revenue Code of 1986, as
amended (the 'Code'), regulations promulgated by the U.S. Department of the
Treasury (the 'Treasury Regulations'), and Internal Revenue Service (the
'Service') rulings and judicial decisions now in effect, all of which are
subject to change at any time by legislative, judicial or administrative action.
Any such changes could be retroactively applied in a manner that could adversely
affect a holder of the New Preferred Stock received pursuant to the Exchange
Offer. The discussion does not cover all aspects of Federal taxation that may be
relevant to, or the actual tax effect that any of the matters described herein
will have on, particular persons, and it does not deal with state, local or
foreign income or other tax laws. Certain holders (including financial
institutions, tax-exempt organizations, broker-dealers, insurance companies, and
foreign individuals and entities) may be subject to special rules not discussed
below. The discussion assumes that recipients of New Preferred Stock will hold
the New Preferred Stock as a capital asset within the meaning of Section 1221 of
the Code. Persons considering exchanging 5% Preferred Stock for New Preferred
Stock should consult their own tax advisors with respect to their particular
situations as well as any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.
EXCHANGE OF 5% PREFERRED STOCK FOR NEW PREFERRED STOCK
THE 1997 TAX ACT
The tax consequences of the Exchange Offer may be significantly affected by
the Taxpayer Relief Act of 1997 ('1997 Tax Act'), which was enacted on August 5,
1997 and has not yet been subject to any administrative or judicial
interpretation. Under the 1997 Tax Act, gain or loss generally will be
recognized upon the receipt of Nonqualified Preferred Stock (as defined below)
for property other than Nonqualified Preferred Stock in a transaction in which
no other stock is issued. Upon an exchange of Nonqualified Preferred Stock for
Nonqualified Preferred Stock, no loss may be recognized, but gain will be
recognized to the extent that certain other property is received in the
exchange. The New Preferred Stock is Nonqualified Preferred Stock under the 1997
Tax Act. Accordingly, the Federal income tax treatment of the exchange depends
on whether or not the 5% Preferred Stock is classified as Nonqualified Preferred
Stock, which, as discussed below, is not clear. (See 'Treatment of 5% Preferred
Stock Under the 1997 Tax Act'). If the 5% Preferred Stock is not Nonqualified
Preferred Stock, then an exchange of 5% Preferred Stock for New Preferred Stock
will require the recognition of gain or loss equal to the difference between the
fair market value of the New Preferred Stock and cash received, and the tax
basis in the 5% Preferred Stock surrendered. Any such gain or loss likely would
be treated as short-term capital gain or loss, and the tax basis of the New
Preferred Stock received would be equal to its fair market value. If the 5%
Preferred Stock is Nonqualified Preferred Stock, no gain or loss will
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be recognized upon the Exchange Offer (except for any gain or loss recognized
with respect to cash received in lieu of fractional share interests (see
'Treatment of Cash Received in Lieu of Fractional Share Interests' below)). In
such case, the tax basis of the New Preferred Stock will be equal to the tax
basis of the 5% Preferred Stock for which it is exchanged (though calculated by
treating those receiving New Preferred Stock as also receiving fractional share
interests of New Preferred Stock rather than cash, as described in 'Treatment of
Cash Received in Lieu of Fractional Share Interests' below).
TREATMENT OF 5% PREFERRED STOCK UNDER THE 1997 TAX ACT
Under the 1997 Tax Act, Nonqualified Preferred Stock is defined as stock
which is limited and preferred as to dividends and does not participate in
corporate growth to any significant extent if, in addition, any of the following
requirements are met: (i) the holder of such stock has the right to require the
issuer or a related person to redeem or purchase the stock, (ii) the issuer or a
related person is required to redeem or purchase such stock, (iii) the issuer or
a related person has the right to redeem or purchase the stock and, as of the
issue date, it is more likely than not that such right will be exercised, or
(iv) the dividend rate on such stock varies in whole or in part (directly or
indirectly) with reference to interest rates, commodity prices, or other similar
indices. The Conference Report accompanying the 1997 Tax Act provides that in no
event will a conversion privilege into stock of the issuer automatically be
considered to constitute participation in corporate growth to any significant
extent.
Because the 5% Preferred Stock is convertible at all times into Common
Stock of a value in excess of the Liquidation Preference of the 5% Preferred
Stock plus any other Cash Payments due to the holder of such 5% Preferred Stock
(with the amount of such excess increasing over time), it is possible that the
5% Preferred Stock may be viewed as participating in corporate growth to a
significant extent. If so, then the 5% Preferred Stock would not be treated as
Nonqualified Preferred Stock under the 1997 Tax Act. If on the other hand, the
conversion features of the 5% Preferred Stock are not taken into account for
this purpose and therefore the 5% Preferred Stock is not treated as
participating in corporate growth to a significant extent, the 5% Preferred
Stock will be treated as Nonqualified Preferred Stock if either (i) as of the
issue date, it was more likely than not that the Company would redeem the 5%
Preferred Stock, or (ii) the holders have a right to require the Company to
repurchase the 5% Preferred Stock and such right is not subject to a contingency
which made the likelihood of such a repurchase remote as of the issue date. It
is not clear whether the 5% Preferred Stock will meet the 'more likely than not'
test in clause (i), nor is it clear whether the contingencies to which the
holder's right to require redemption of the 5% Preferred Stock is subject will
be considered to make remote the likelihood of such a redemption. Accordingly,
it is not clear whether or not the 5% Preferred Stock will be classified as
Nonqualified Preferred Stock.
TREATMENT OF CASH RECEIVED IN LIEU OF FRACTIONAL SHARE INTERESTS
The receipt of cash in lieu of fractional share interests of New Preferred
Stock should generally be treated as a separate event for Federal income tax
purposes, in which the holder making the exchange is treated as first receiving
in the exchange the fractional share interest of New Preferred Stock to which
the holder is entitled and redeeming the fractional shares of New Preferred
Stock for cash. While the matter is not free from doubt, the Company believes
that under principles of Section 302 such a redemption will be treated as a
distribution in payment in exchange for the stock. (See 'Sale or
Redemption -- Redemption of New Preferred Stock.')
POSSIBLE TREATMENT OF NEW PREFERRED STOCK AS SECTION 306 STOCK
If the Exchange Offer is not a taxable event, the New Preferred Stock
received pursuant to the Exchange Offer could, under certain circumstances, be
treated as 'Section 306 Stock,' thereby subjecting holders to ordinary income or
dividend treatment on certain dispositions of the stock, if the Company has
earnings or profits. The Company does not have accumulated earnings and profits
and does not expect to have earnings and profits for the year 1997. If the
Company does not have earnings and profits for the year 1997, then the New
Preferred Stock will not be treated as Section 306 Stock.
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POSSIBLE CONSTRUCTIVE SECTION 305 STOCK DISTRIBUTION
It is possible that, to the extent of any dividend arrearages of the 5%
Preferred Stock, there may be a constructive Section 305 stock distribution with
respect to an exchange of such stock for New Preferred Stock. However, because
any unpaid dividends are added to the liquidation preference of the 5% Preferred
Stock causing a change in the conversion ratio of such stock, the Company
believes there should be considered no dividend arrearages with respect to the
5% Preferred Stock.
DIVIDENDS ON NEW PREFERRED STOCK
Distributions with respect to the New Preferred Stock paid by the Company
in either cash or Common Stock will be treated as dividends and taxable as
ordinary income to the extent that the distributions are made out of either the
Company's current or accumulated earnings and profits. (In the case of a
distribution of Common Stock, the amount distributed will be the fair market
value of such Common Stock.) To the extent that such a distribution is not made
out of the Company's current or accumulated earnings and profits, the
distribution will first constitute a non-taxable return of capital, reducing the
holder's adjusted tax basis in the shares of New Preferred Stock held, and then,
to the extent the distribution exceeds such tax basis, will result in a gain
from the sale or exchange of such stock. The tax basis of any Common Stock so
distributed will be equal to the fair market value of such Common Stock at the
time of the distribution.
The New Preferred Stock will accrue dividends from its date of issuance,
but dividends will not become payable until five years after the stock's
issuance. It is possible that under Section 305 of the Code and the Treasury
Regulations thereunder that during the period that dividends are not payable, a
holder of New Preferred Stock will be treated as receiving constructive
distributions of additional stock. In such event, the holder would take such
distributions into account under principles similar to those applicable to
original issue discount on debt instruments.
DIVIDENDS RECEIVED DEDUCTION
In calculating their taxable income, corporate stockholders will generally
be eligible to claim a dividends-received deduction (currently 70% of the amount
of the dividend for most corporate stockholders) with respect to distributions
that are treated as dividends on the New Preferred Stock (i.e., distributions
out of earnings and profits, which the Company does not believe that it
currently has and does not expect to have until after it commences commercial
operations). However, complex rules apply which may cause disallowance or
limitation of the dividends-received deduction under circumstances described in
the Code. For instance, Section 246A of the Code reduces the dividends-received
deduction allowed to a corporate holder that has incurred indebtedness 'directly
attributable' to its investment in portfolio stock. In addition, Section 246(c)
of the Code, as recently amended by the 1997 Tax Act, requires that in order to
be eligible for the dividends-received deduction, a corporation must generally
hold the shares of stock for at least 46 days during the 90-day period beginning
on the date which is 45 days before the date on which such share becomes
ex-dividend with respect to such dividend. If a dividend on preferred stock is
attributable to a period or periods aggregating in excess of 366 days, then the
stock must be held for at least 91 days during the 180-day period beginning on
the date which is 90 days before the date on which such share becomes
ex-dividend with respect to such dividend. For this purpose, the corporation's
holding period is reduced by periods during which its position in the stock is
hedged in the manner described in Section 246(c)(4) of the Code. In addition, in
computing the alternative minimum tax, corporate stockholders may be required to
make certain adjustments in calculating their alternative minimum taxable
income. Corporate stockholders should consult their own tax advisors as to the
possible application of these provisions.
EXTRAORDINARY DIVIDEND
The tax basis of stock that has been held by a corporate stockholder for
not more than two years is reduced (but not below zero) by the non-taxed portion
of any 'extraordinary dividend' received with respect to such stock. Moreover,
if the non-taxed portion of such dividends exceeds such basis, such excess will
be treated as gain from the sale or exchange of such stock for the taxable year
in which the
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extraordinary dividend is received. In determining whether a holder satisfies
the holding period requirement, the length of the holding period is determined
as of the date that the issuer declares, announces or agrees to the payment or
the amount of a dividend, whichever is the earliest. Generally, an extraordinary
dividend is a dividend that (i) equals or exceeds 5% of the holder's basis in
stock preferred as to dividends, or 10% of the holder's basis in any other stock
(treating all dividends having ex-dividend dates within an 85-day period as a
single dividend) or (ii) exceeds 20% of the holder's basis in the stock
(treating all dividends having ex-dividend dates within a 365-day period as a
single dividend). If the holder is able to establish, to the satisfaction of the
Service, the fair market value of the stock as of the day before the ex-dividend
date, the holder may elect to substitute such fair market value for the holder's
basis in applying these tests.
Dividends will accrue quarterly with respect to the New Preferred Stock at
an annual rate of 10.5%, but will not become payable until November 15, 2002. If
the Company has substantial earnings and profits at the time of the November 15,
2002 distribution and such amounts have not previously been treated as
constructive distributions, it is likely that the payment made on that date will
be treated as an extraordinary dividend.
ADJUSTMENT OF CONVERSION PRICE
Section 305 of the Code and applicable Treasury Regulations also provide
that under certain circumstances, adjustments in the conversion price of
convertible stock and other similar transactions (including the failure to
adjust the conversion rate) may be treated as constructive distributions of
stock taxable as a dividend if (i) as a result, the proportionate interest of
the holder of such convertible preferred stock in the assets or earnings and
profits of the issuer is increased and (ii) the adjustment does not fall within
the parameters set forth under Section 305. The operation of certain aspects of
the conversion price adjustment provisions of the New Preferred Stock does not
fall within these parameters, and accordingly, if these provisions become
operative the holders of New Preferred Stock would be deemed to have received a
constructive distribution that may be taxable as a dividend, notwithstanding the
fact that such holders do not actually receive cash or property.
REDEMPTION PREMIUM
Under Section 305 of the Code and the Treasury Regulations thereunder, if
the redemption price of shares of mandatorily redeemable preferred stock exceeds
the issue price (which is generally the price paid in cash or property for the
shares at original issuance) by more than a de minimis amount, the excess may be
taxable as a constructive distribution of additional stock to the holder taken
into account under principles similar to those applicable to original issue
discount on debt instruments. Such a circumstance could arise if, for example,
the fair market value of the New Preferred Stock is less than its liquidation
preference by more than a de minimis amount as of the Closing Date of the
Exchange Offer. If such a constructive distribution were to occur, a holder
could be required to recognize ordinary income to the extent that the
distributions are made out of either the Company's current or accumulated
earnings and profits. To the extent that such a distribution is not made out of
the Company's current or accumulated earnings and profits, the distribution
would first constitute a non-taxable return of capital, reducing the holder's
adjusted tax basis in the shares of New Preferred Stock held, and then, to the
extent the distribution exceeds such tax basis, will result in a gain from the
sale or exchange of such stock.
CONVERSION
The New Preferred Stock is convertible by the holder into Common Stock.
Conversion of the New Preferred Stock into Common Stock should not result in the
recognition of gain or loss, and in such event the tax basis of the Common Stock
received would be equal to the tax basis of the New Preferred Stock surrendered
(though the receipt of cash in lieu of fractional shares would impact the
exchange as described in 'Exchange of 5% Preferred Stock for New Preferred
Stock -- Treatment of Cash Received in Lieu of Fractional Share Interests'
above). Also, the holding period of the Common Stock received upon conversion
would include the holding period of the New Preferred Stock converted. (If the
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exchange of 5% Preferred Stock for New Preferred Stock is treated as a tax-free
exchange (aside from a tax on any cash received), then the holding period of
such New Preferred Stock will also include the time during which the 5%
Preferred Stock was held).
In addition, upon the occurrence of certain events, the New Preferred Stock
would be automatically converted into Series D Preferred Stock. No gain or loss
should be recognized on such a conversion, and the tax basis of the Series D
Preferred Stock received should be equal to the tax basis of the New Preferred
Stock surrendered (though the receipt of cash in lieu of fractional shares would
impact the exchange as described in 'Exchange of 5% Preferred Stock for New
Preferred Stock -- Treatment of Cash Received in Lieu of Fractional Share
Interests' above).
SALE OR REDEMPTION
SALE OR EXCHANGE OF NEW PREFERRED STOCK OR THE COMMON STOCK INTO WHICH IT IS
CONVERTED
In the event that the New Preferred Stock is not treated as Section 306
Stock (see 'Exchange of 5% Preferred Stock for New Preferred Stock -- Possible
Treatment of New Preferred Stock as Section 306 Stock'), upon the sale or
exchange of the New Preferred Stock or the Common Stock into which it is
converted, the holder will recognize gain or loss equal to the difference
between the amount realized and his or her tax basis in the New Preferred Stock
or the Common Stock into which it is converted. The resulting gain or loss will
be a capital gain or loss and will be a long-term capital gain or loss if the
New Preferred Stock or the Common Stock into which it is converted was held for
more than one year. (If the exchange of 5% Preferred Stock for New Preferred
Stock is treated as a tax-free exchange (aside from a tax on any cash received),
then the holding period of the New Preferred Stock will also include the time
during which the 5% Preferred Stock was held.) For individuals, gain from such a
transaction will be taxed at rates that vary depending upon whether the stock
exchanged was held for one year or less, more than one year but not more than 18
months, or more than 18 months.
REDEMPTION OF NEW PREFERRED STOCK
If the Company redeems shares of New Preferred Stock solely for cash, and
such stock is not Section 306 Stock with respect to the holder, such redemption
will be taxable as a sale or exchange if the redemption (i) results in a
'complete termination' of the holder's stock interest in the Company under
Section 302(b)(3) of the Code, (ii) is 'substantially disproportionate' with
respect to the holder under Section 302(b) of the Code, (iii) is 'not
essentially equivalent to a dividend' with respect to the holder under Section
302(b)(1) of the Code, or (iv) is from a non-corporate holder in partial
liquidation of the Company under Section 302(b)(4) of the Code. In determining
whether any of these tests has been met, shares considered to be owned by the
holder by reason of the constructive ownership rules set forth in Section 318 of
the Code (pursuant to which a holder will be deemed to own shares owned by
certain related individuals and entities or shares subject to an option), as
well as the shares actually owned, would generally be taken into account. If a
redemption of shares of New Preferred Stock solely for cash satisfies any of the
above Section 302 tests with respect to a holder, such holder will recognize
gain or loss based on the difference between the amount of cash received and the
holder's tax basis in the redeemed shares in the same manner as if the holder
had sold the shares. If such a redemption does not satisfy any of the Section
302 tests, the gross proceeds will be treated as a distribution taxable as a
dividend to the extent of the Company's current and accumulated earnings and
profits and any excess will be treated first as a return of capital and then as
gain upon a sale or exchange of the New Preferred Stock. A holder whose proceeds
of a redemption are taxed as a dividend would transfer the tax basis in the New
Preferred Stock redeemed (reduced for any amounts treated as a non-taxed portion
of extraordinary dividends or a return of capital) to any stock interest
retained in the Company.
BACK-UP WITHHOLDING
Under Section 3406 of the Code and applicable Treasury Regulations, a
holder of New Preferred Stock or Common Stock acquired through exercise of the
conversion privilege may be subject to back-up withholding tax at the rate of
31% with respect to dividends paid or on the proceeds of a sale, exchange or
redemption of the New Preferred Stock or Common Stock. The Company will be
required
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to deduct and withhold the tax if (i) the holder fails to furnish a taxpayer
identification number ('TIN') to the Company, (ii) the IRS notifies the Company
that the TIN furnished by the holder is incorrect, (iii) there has been a
notified holder under-reporting with respect to interest, dividends or original
issue discount described in Section 3406(c) of the Code, or (iv) there has been
a failure of the holder to certify under the penalty of perjury that the holder
is not subject to withholding under Section 3406(a)(1)(C) of the Code. The
Company will be required to withhold a tax equal to 31% from any dividend or
redemption payment made with respect to the New Preferred Stock or Common Stock
if any one of the events discussed above occurs. Holders should consult their
tax advisors regarding their qualification for exemption from back-up
withholding and the procedure for obtaining any applicable exemption.
The foregoing summary is included herein for general information only.
Accordingly, prospective participants in the Exchange Offer should consult with
their own tax advisors as to the specific tax consequences to them, including
the application and effect of state, local and foreign income and other tax
laws.
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LEGAL OPINIONS
The validity of the shares of New Preferred Stock to be issued in the
Exchange Offer will be passed upon for the Company by Paul, Weiss, Rifkind,
Wharton & Garrison, New York, New York. Certain regulatory matters arising under
the Communications Act are being passed upon by Wiley, Rein & Fielding,
Washington, D.C. Certain legal matters will be passed upon for the Dealer
Manager by Shearman & Sterling, New York, New York.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for each of the three years in the period ended December 31,
1996, and for the period from May 17, 1990 (date of inception) to December 31,
1996 incorporated herein by reference, have been included herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of said firm as experts in accounting and auditing.
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Facsimile copies of the Letter of Transmittal will be accepted. Letters of
Transmittal, certificates representing shares of 5% Preferred Stock and any
other required documents should be sent by each stockholder or his or her
broker, dealer, commercial bank, trust company or other nominee to the Exchange
Agent at one of the addresses as set forth below:
The Exchange Agent is:
IBJ SCHRODER BANK & TRUST COMPANY
1 State Street
New York, New York 10004
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By Mail: By Hand or Overnight Courier:
P.O. Box 84 1 State Street
Bowling Green Station New York, New York 10004
New York, New York 10274-0084 Attn.: Reorganization Dept.
Attn.: Reorganization Dept. Securities Processing Window SC-1
</TABLE>
By Facsimile Transmission
(For Eligible Institutions Only):
(212) 858-2611
Confirm Receipt of Notice of Guaranteed Delivery by Telephone:
(212) 858-2103
The Information Agent for the Exchange Offer is:
[Logo]
156 Fifth Avenue, 9th Floor
New York, New York 10010
(212) 929-5500
Any questions or requests for assistance or additional copies of this
Prospectus or the Letter of Transmittal may be directed to the Information Agent
at their telephone number and location set forth on this page. You may also
contact your broker, dealer, commercial bank or trust company or other nominee
for assistance concerning the Exchange Offer.
The Dealer Manager for the Exchange Offer is:
MERRILL LYNCH & CO.
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281
<PAGE>
<PAGE>
FORM OF LETTER OF TRANSMITTAL
TO EXCHANGE SHARES
OF THE 5% DELAYED CONVERTIBLE
PREFERRED STOCK ('5% PREFERRED STOCK')
OF
CD RADIO INC.
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
, 1997 UNLESS EXTENDED (THE 'EXPIRATION DATE'). TENDERS
OF 5% PREFERRED STOCK MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION
DATE.
To tender, this Letter of Transmittal should be delivered only to:
IBJ SCHRODER BANK & TRUST COMPANY, EXCHANGE AGENT
Facsimile Transmission:
(212) 858-2611
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By Mail: Overnight Delivery: By Hand:
P.O. Box 84 1 State Street 1 State Street
Bowling Green Station New York, New York 10004 New York, New York 10004
New York, New York 10274-0084 Attn.: Reorganization Dept. Attn.: Reorganization Dept.
Attn.: Reorganization Dept. Securities Processing Window SC-1 Securities Processing Window SC-1
</TABLE>
To confirm receipt of this Letter of Transmittal, please call:
(212) 858-2103
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (Call Collect)
or
CALL TOLL-FREE (800) 322-2885
Any questions concerning the Exchange Offer or requests for additional
copies of this Letter of Transmittal may be directed to the Information Agent.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A
NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated October ,
1997 (the 'Prospectus') of CD Radio Inc. (the 'Company') and this Letter of
Transmittal, which together describe the Company's offer to exchange (the
'Exchange Offer') up to 1,932,073 shares of its new 10 1/2% Series C Convertible
Preferred Stock (the 'New Preferred Stock') for up to all of the outstanding
shares (the 'Shares') of its 5% Delayed Convertible Preferred Stock (the '5%
Preferred Stock') at a rate of one share of New Preferred Stock for each $100 in
Exchange Rate Liquidation Preference represented by Shares not previously
converted. The 'Exchange Rate Liquidation Preference' shall be the amount
determined by dividing the liquidation preference of the Shares being exchanged
(including accrued and unpaid dividends on the Shares) by 0.696145. As of
September 30, 1997, there were 5,222,608 Shares outstanding.
The undersigned has checked the appropriate boxes below and has signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE
INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE INFORMATION AGENT OR THE
EXCHANGE AGENT AT THE ADDRESSES AND TELEPHONE NUMBERS SET FORTH ABOVE.
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List below the shares of the 5% Preferred Stock to which this Letter of
Transmittal relates. If the space provided below is inadequate, the certificate
numbers and/or the number of shares of the 5% Preferred Stock tendered should be
listed on a separate signed schedule affixed hereto.
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DESCRIPTION OF SHARES OF 5% PREFERRED STOCK TENDERED
NAMES(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) SHARES OF 5% PREFERRED STOCK TENDERED
(PLEASE FILL IN, IF BLANK) (ATTACH ADDITIONAL SIGNED SCHEDULE IF NECESSARY)
(1) (2) (3) (4)
TOTAL NUMBER NUMBER OF
OF SHARES SHARES
REPRESENTED TENDERED`D'
CERTIFICATE BY (IF LESS THAN
NUMBER(S)* CERTIFICATE(S)*`D' ALL)
TOTAL
*Need not be completed by book-entry holders.
`D'Unless otherwise indicated, the holder will be deemed to have tendered the full number of shares of 5%
Preferred Stock.
</TABLE>
This Letter of Transmittal is to be used either if certificates of shares
of the 5% Preferred Stock are to be forwarded herewith or if delivery of shares
of the 5% Preferred Stock is to be made by book-entry transfer to an account
maintained by the Exchange Agent at The Depository Trust Company, pursuant to
the procedures set forth in 'The Exchange Offer -- Tender Procedure' in the
Prospectus. Delivery of documents to the book-entry transfer facility does not
constitute delivery to the Exchange Agent.
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<PAGE>
[ ] CHECK HERE IF TENDERED SHARES OF 5% PREFERRED STOCK ARE ENCLOSED
HEREWITH.
[ ] CHECK HERE IF TENDERED SHARES OF 5% PREFERRED STOCK ARE BEING DELIVERED
BY BOOK-ENTRY TRANSFER MADE TO THE EXCHANGE AGENT'S ACCOUNT AT THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution .................................................
Book-Entry Transfer Facility: The Depository Trust Company
Account No. ..................... Transaction Code
No. .....................
Date Tendered .................................................................
[ ] CHECK HERE IF TENDERED SHARES OF 5% PREFERRED STOCK ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE
EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Holder(s) ..........................................................
Date of Execution of Notice of Guaranteed Delivery ............................
Name of Institution that Guaranteed Delivery ..................................
IF DELIVERY IS BY BOOK-ENTRY TRANSFER, SPECIFY THE ACCOUNT NUMBER OF THE
BOOK-ENTRY TRANSFER FACILITY AND TRANSACTION CODE NUMBER:
Book-Entry Transfer Facility: The Depository Trust Company
Account No. ..................... Transaction Code
No. .....................
Date Tendered .................................................................
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name ..........................................................................
Address .......................................................................
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PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to the Company the number of shares of 5%
Preferred Stock indicated above upon the terms and subject to the conditions set
forth in the Prospectus (receipt of which is hereby acknowledged) and in this
Letter of Transmittal, both of which together constitute the Company's offer
(the 'Exchange Offer') to exchange New Preferred Stock for shares of 5%
Preferred Stock properly tendered.
Subject to, and effective upon, the acceptance for exchange of the shares
of the 5% Preferred Stock tendered herewith, the undersigned hereby exchanges,
assigns and transfers to, or upon the order of, the Company all right, title and
interest in and to such shares of the 5% Preferred Stock. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that said
Exchange Agent acts as the agent of the Company, in connection with the Exchange
Offer) to cause the shares of 5% Preferred Stock to be assigned, transferred and
exchanged. The undersigned represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the shares of the 5%
Preferred Stock and to acquire shares of the New Preferred Stock issuable upon
the exchange of such tendered shares of the 5% Preferred Stock, and that, when
the same are accepted for exchange, the Company will acquire good and
unencumbered title to the tendered shares of the 5% Preferred Stock, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. The undersigned also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Exchange Agent or the
Company to be necessary or desirable to complete the exchange, assignment and
transfer of tendered shares of the 5% Preferred Stock or transfer ownership of
such shares of the 5% Preferred Stock on the account books maintained by the
book-entry transfer facility.
The undersigned understands that tenders of shares of 5% Preferred Stock
pursuant to the procedures described in the Prospectus under the heading 'The
Exchange Offer -- Tender Procedure' and in the instructions hereto constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions described in the Prospectus.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption 'The Exchange Offer -- Conditions of the Exchange
Offer.' The undersigned recognizes that as a result of these conditions (which
may be waived, in whole or in part, at any time and from time to time, by the
Company), as more particularly set forth in the Prospectus, the Company may not
be required to exchange any of the shares of 5% Preferred Stock tendered hereby
and, in such event, the shares of 5% Preferred Stock not exchanged will be
returned to the undersigned at the address shown below the signature of the
undersigned.
The name(s) and address(es) of the registered holder(s) should be printed
above under 'Description of Shares of 5% Preferred Stock Tendered,' if not
already printed thereunder, exactly as they appear on the shares of the 5%
Preferred Stock tendered hereby. The certificate number(s) and the number of
shares of the 5% Preferred Stock to which this Letter of Transmittal relates,
together with the number of shares of the 5% Preferred Stock that the
undersigned wishes to tender, should be indicated in the appropriate boxes above
under 'Description of Shares of 5% Preferred Stock Tendered.'
All authority conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
personal representatives, successors and assigns of the undersigned. A tender of
shares of 5% Preferred Stock made pursuant to the Exchange Offer may not be
withdrawn after the Expiration Date. A purported notice of withdrawal will be
effective only if delivered to the Exchange Agent in accordance with the
specific procedure set forth in the Prospectus under the heading 'The Exchange
Offer -- Withdrawal and Revocation Rights.'
Certificates for all shares of New Preferred Stock delivered in exchange
for tendered shares of 5% Preferred Stock and any shares of 5% Preferred Stock
delivered herewith but not exchanged, and registered in the name of the
undersigned, shall be delivered to the undersigned at the address shown below
the signature of the undersigned.
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<PAGE>
TENDERING HOLDER(S) SIGN HERE
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
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............................................................. ..............................................................
SIGNATURE OF HOLDER SIGNATURE OF HOLDER (IF MORE THAN ONE)
Dated: .............................................. , 199 ..
(Must be signed by registered holder(s) exactly as name(s) appear(s) on certificate(s) for 5% Preferred Stock. If signature is
by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, please set forth the full title of such person.) See Instruction 3.
Name(s): Address:
............................................................. ..............................................................
............................................................. ..............................................................
(PLEASE PRINT) ..............................................................
Capacity (full title): (INCLUDE ZIP CODE)
............................................................. Area Code and
Telephone Number: ............................................
Taxpayer Identification No. ..................................
</TABLE>
<PAGE>
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
Certificates for all physically delivered shares of 5% Preferred Stock or
confirmation of any book-entry transfer to the Exchange Agent's or its agent's
account at a book-entry transfer facility of shares of 5% Preferred Stock
tendered by book-entry transfer, as well as a properly completed and duly
executed copy of this Letter of Transmittal or facsimile thereof, and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent at any of its addresses set forth herein at any time prior to the
Expiration Date (as defined in the Prospectus).
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE SHARES OF 5%
PREFERRED STOCK AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDER, AND EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF SUCH
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, BE USED. IN ALL CASES SUFFICIENT TIME SHOULD BE
ALLOWED TO PERMIT TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR CERTIFICATES FOR
SHARES OF 5% PREFERRED STOCK SHOULD BE SENT TO THE COMPANY.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the shares of 5% Preferred Stock for exchange.
2. PARTIAL TENDERS; WITHDRAWALS.
If fewer than all of the shares of 5% Preferred Stock evidenced by a
submitted certificate are tendered, the tendering holder should fill in the
number of shares tendered in the column entitled 'Number of Shares Tendered.' A
newly issued certificate for the shares of 5% Preferred Stock submitted but not
tendered will be sent to such holder as soon as practicable after the Expiration
Date. All shares of 5% Preferred Stock delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise clearly indicated.
Tenders of 5% Preferred Stock pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date. To be effective, a written,
telegraphic, telex or facsimile transmission notice of withdrawal must be
received by the Exchange Agent prior to the Expiration Date at any of its
addresses set forth herein, and with respect to a facsimile transmission, must
be confirmed by telephone and an original delivered by guaranteed overnight
delivery. Any such notice of withdrawal must specify the person named in this
Letter of Transmittal as having tendered the shares of 5% Preferred Stock to be
withdrawn, the certificate numbers of the shares of 5% Preferred Stock to be
withdrawn, a statement that such holder is withdrawing his election to have such
shares of 5% Preferred Stock exchanged, and the name of the registered holder of
such shares of 5% Preferred Stock, and must be signed by the holder in the same
manner as the original signature on this Letter of Transmittal (including any
required signature guarantees) or be accompanied by evidence satisfactory to the
Company that the person withdrawing the tender has succeeded to the beneficial
ownership of the shares of 5% Preferred Stock being withdrawn. The Exchange
Agent will return the properly withdrawn shares of 5% Preferred Stock promptly
following receipt of notice of withdrawal. If shares of 5% Preferred Stock have
been tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn shares of 5% Preferred Stock
or otherwise comply with the book-entry transfer procedure. All questions as to
the validity of notices of withdrawals, including time of receipt, will be
determined by the Company, and such determination will be final and binding on
all parties.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL WRITTEN INSTRUCTION AND ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder(s) of the
shares of 5% Preferred Stock tendered hereby, the signature must correspond with
the name(s) as written on the face of the certificates without alteration,
enlargement or any change whatsoever.
If any of the shares of 5% Preferred Stock tendered hereby are owned of
record by two or more joint owners, all such owners must sign this Letter of
Transmittal.
If a number of shares of 5% Preferred Stock registered in different names
are tendered, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
shares of 5% Preferred Stock.
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When this Letter of Transmittal is signed by the registered holders or
holders (which term, for the purposes described herein, shall include the
book-entry transfer facility whose name appears on a security listing as the
owner of the shares of 5% Preferred Stock) of shares of 5% Preferred Stock
listed and tendered hereby, no endorsements of certificates or separate written
instruments of transfer or exchange are required.
If this Letter of Transmittal or any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
4. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the
transfer and exchange of shares of 5% Preferred Stock to it or its order
pursuant to the Exchange Offer. If a transfer tax is imposed for any reason
other than the transfer and exchange of shares of 5% Preferred Stock to the
Company or its order pursuant to the Exchange Offer, the amount of any such
transfer taxes (whether imposed on the registered holder or any other person)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exception therefrom is not submitted herewith the amount of such
transfer taxes will be billed directly to such tendering holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the certificates representing shares of 5%
Preferred Stock listed in this Letter of Transmittal.
5. WAIVER OF CONDITIONS.
The Company reserves the right to waive in its reasonable judgment, in
whole or in part, at any time and from time to time, any of the conditions to
the Exchange Offer set forth in the Prospectus.
6. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES.
Any holder whose certificates representing shares of 5% Preferred Stock
have been mutilated, lost, stolen or destroyed should contact the Exchange Agent
at the address set forth above for further instructions.
7. IRREGULARITIES.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of shares of 5% Preferred
Stock will be determined by the Company, whose determination will be final and
binding. The Company reserves the absolute right to reject any shares of 5%
Preferred Stock not properly tendered or the acceptance for exchange of which
may, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the absolute right to waive any defect or irregularity in the tender of
any shares of 5% Preferred Stock. Unless waived, any defects or irregularities
in connection with tenders of shares of 5% Preferred Stock for exchange must be
cured within such reasonable period of time as the Company will determine. None
of the Company, the Information Agent, the Exchange Agent or any other person
will be under any duty to give notification of any defects or irregularities in
tenders or incur any liability for failure to give any such notification.
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
assistance or additional copies of the Prospectus and this Letter of
Transmittal, may be directed to the Information Agent or the Exchange Agent at
the addresses and telephone numbers set forth above.
IMPORTANT: This Letter of Transmittal or a facsimile thereof (together with
certificates representing shares of 5% Preferred Stock or confirmation of
book-entry transfer and all other required documents) or a Notice of Guaranteed
Delivery must be received by the Exchange Agent on or prior to the Expiration
Date.
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TO BE COMPLETED BY ALL TENDERING HOLDERS
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PAYOR'S NAME: CD RADIO INC.
Name (see Specific Instructions following):
..................................................................................................
Business name, if different from above (see Specific Instructions following):
..................................................................................................
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX TIN: ..............................................
FORM W-9 AT RIGHT AND CERTIFY BY SIGNING AND DATING Social Security Number or
DEPARTMENT OF TREASURY BELOW. Employer Identification Number
INTERNAL REVENUE SERVICE
PAYOR'S REQUEST FOR
TAXPAYER IDENTIFICATION
NUMBER ('TIN') AND
CERTIFICATION
PART 2 -- TIN APPLIED FOR [ ]
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting
for a number to be issued to me).
(2) I am not subject to backup withholding either because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service (the 'IRS') that I am
subject to backup withholding as a result of a failure to report all interest or dividends, or
(c) the IRS has notified me that I am no longer subject to backup withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE ........................................ DATE ........................................
You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup
withholding because of underreporting of interest or dividends on your tax return and you have not been notified by the IRS
that you are no longer subject to backup withholding.
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of the
exchange, 31 percent of all reportable payments made to me thereafter will be
withheld until I provide a number.
<TABLE>
<S> <C>
.......................................................................... ..........................................
SIGNATURE DATE
</TABLE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9
SECTION REFERENCES ARE TO THE INTERNAL REVENUE CODE.
Purpose of Form. A person who is required to file an information return
with the IRS must obtain your correct taxpayer identification number ('TIN') to
report income paid to you, real estate transactions, mortgage interest you paid,
the acquisition or abandonment of secured property, cancellation of debt, or
contributions you made to an IRA. For individuals, the TIN is generally a social
security number ('SSN'). Use Form W-9 to furnish your correct TIN to the
requester (the person asking you to furnish your TIN) and, when applicable, (1)
to certify
<PAGE>
<PAGE>
that the TIN you are furnishing is correct (or that you are waiting for a number
to be issued), (2) to certify that you are not subject to backup withholding,
and (3) to claim exemption from backup withholding if you are an exempt payee.
Furnishing your correct TIN and making the appropriate certifications will
prevent certain payments from being subject to backup withholding.
Note: If a requester gives you a form other than a W-9 that is
substantially similar to a Form W-9 to request your TIN, you must use the
requester's form.
How to Obtain a TIN. If you do not have a TIN, apply for one immediately.
To apply, get Form SS-5, Application for a Social Security Card (for
individuals), from your local office of the Social Security Administration, or
Form SS-4, Application for Employer Identification Number (for businesses and
all other entities), from your local IRS office or by calling the IRS at
1-800-TAX-FORM (1-800-829-3676).
To complete Form W-9 if you do not have a TIN, write 'Applied For' in the
space for the TIN in Part 1 (or check the box in Part 3 of Substitute Form W-9),
sign and date the form, and give it to the requester. Generally, you must obtain
a TIN and furnish it to the requester by the time of payment, but in any case,
within 60 calendar days. If the requester does not receive your TIN by the time
of payment, backup withholding, if applicable, will begin and continue until you
furnish your TIN to the requester.
Note: Writing 'Applied For' (or check the box in Part 3 of the Substitute
Form W-9) on the form means that you have already applied for a TIN OR that you
intend to apply for one in the near future.
As soon as you receive your TIN, complete another Form W-9, include your
TIN, sign and date the form, and give it to the requester.
What is Backup Withholding? Persons making certain payments to you are
required to withhold and pay to the IRS 31% of such payments under certain
conditions. This is called 'backup withholding.' Payments that could be subject
to backup withholding include interest, dividends, broker and barter exchange
transactions, rents, royalties, nonemployee compensation, and certain payments
from fishing boat operators, but do not include real estate transactions.
If you give the requester your correct TIN, make the appropriate
certifications, and report all your taxable interest and dividends on your tax
return, your payments will not be subject to backup withholding. Payments you
receive will be subject to backup withholding if:
1. You do not furnish your TIN to the requester, or
2. The IRS notifies the requester that you furnished an incorrect TIN,
or
3. You are notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and dividends on
your tax return (for reportable interest and dividends only), or
4. You do not certify to the requester that you are not subject to
backup withholding under 3 above (for reportable interest and dividend
accounts opened after 1983 only), or
5. You do not certify your TIN. This applies only to reportable
interest, dividend, broker, or barter exchange accounts opened after 1983,
or broker accounts considered inactive in 1983.
Except as explained in 5 above, other reportable payments are subject to
backup withholding only if 1 or 2 above applies. Certain payees and payments are
exempt from backup withholding and information reporting. See Payees and
Payments Exempt From Backup Withholding, below, and Example Payees and Payments
under Specific Instructions, below, if you are an exempt payee.
Payees and Payments Exempt From Backup Withholding. The following is a list
of payees exempt from backup withholding and for which no information reporting
is required. For interest and dividends, all listed payees are exempt except
item (9). For broker transactions, payees listed in (1) through (13) and a
person registered under the Investment Advisers Act of 1940 who regularly acts
as a broker are exempt. Payments subject to reporting under sections 6041 and
6041A are generally exempt from backup withholding only if made to payees
described in items (1) through (7), except a corporation that provides medical
and health care services or bills and collects payments for such services is not
exempt from backup withholding or information reporting. Only payees described
in item (2) through (6) are exempt from backup withholding for barter exchange
transactions and patronage dividends.
(1) A corporation. (2) An organization exempt from tax under section
501(a), or an IRA, or a custodial account under section 403(b)(7). (3) The
United States or any of its agencies or instrumentalities. (4) A state, the
District of Columbia, a possession of the United States, or any of their
political subdivisions or instrumentalities. (5) A foreign government or any of
its political subdivisions, agencies, or instrumentalities. (6) An international
<PAGE>
<PAGE>
organization or any of its agencies or instrumentalities. (7) A foreign central
bank of issue. (8) A dealer in securities or commodities required to register in
the United States, the District of Columbia, or a possession of the United
States. (9) A futures commission merchant registered with the Commodity Futures
Trading Commission. (10) A real estate investment trust. (11) An entity
registered at all times during the tax year under the Investment Company Act of
1940. (12) A common trust fund operated by a bank under section 584(a). (13) A
financial institution. (14) A middleman known in the investment community as a
nominee or who is listed in the most recent publication of the American Society
of Corporate Secretaries, Inc., Nominee List. (15) A trust exempt from tax under
section 664 or described in section 4947.
Payments of dividend and patronage dividends generally not subject to
backup withholding include the following:
Payments to nonresident aliens subject to withholding under section 1441.
Payments to partnerships not engaged in a trade or business in the United
States and that have at least one nonresident alien partner.
Payments of patronage dividends not paid in money.
Payments made by certain foreign organizations.
Section 404(k) payments made by an ESOP.
Payments of interest generally not subject to backup withholding include
the following:
Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payer's trade or business and you have not
provided your correct TIN to the payer.
Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
Payments described in section 6049(b)(5) to nonresident aliens.
Payments on tax-free covenant bonds under section 1451.
Payments made by certain foreign organizations.
Mortgage interest paid to you.
Payments that are not subject to information reporting are also not subject
to backup withholding. For details, see sections 6041, 6041A, 6042, 6044, 6045,
6049, 6050A, and 6050N, and the applicable regulations.
PENALTIES
Failure To Furnish TIN. If you fail to furnish your correct TIN to a
requester, you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect.
Civil Penalty for False Information With Respect to Withholding. In
addition to any criminal penalty described below, if you make a false statement
with no reasonable basis that results in decreased or no backup withholding, you
will be subject to a $500 penalty.
Criminal Penalty for Falsifying Information. If you willfully make a false
certification, then, in addition to any other penalty provided by law, upon
conviction thereof, you will be fined or imprisoned or both.
Misuse of TINs. If the requester discloses or uses TINs in violation of
Federal law, the requester may be subject to civil and criminal penalties.
SPECIFIC INSTRUCTIONS
Name. If you are an individual, you must generally provide the name shown
on your social security card. However, if you have changed your last name, for
instance, due to marriage, without informing the Social Security Administration
of the name change, please enter your first name, the last name shown on your
social security card, and your new last name.
If you are a sole proprietor, you must furnish your individual name and
either your SSN or EIN. You may also enter your business name or 'doing business
as' name on the business name line. Enter your name(s) as shown on your social
security card and/or as it was used to apply for your EIN on Form SS-4.
<PAGE>
<PAGE>
SIGNING THE CERTIFICATION.
1. Interest, Dividend, and Barter Exchange Accounts Opened Before 1984 and
Broker Accounts Considered Active During 1983. You are required to furnish your
correct TIN, but you are not required to sign the certification.
2. Interest, Dividend, Broker, and Barter Exchange Accounts Opened After
1983 and Broker Accounts Considered Inactive During 1983. You must sign the
certification or backup withholding will apply. If you are subject to backup
withholding and you are merely providing your correct TIN to the requester, you
must cross out item 2 in the certification before signing the form.
3. Real Estate Transactions. You must sign the certification. You may cross
out item 2 of the certification.
4. Other Payments. You are required to furnish your correct TIN, but you
are not required to sign the certification unless you have been notified of an
incorrect TIN. Other payments include payments made in the course of the
requester's trade or business for rents, royalties, goods (other than bills for
merchandise), medical and health care services (including payments to
corporations), payments to a nonemployee for services (including attorney and
accounting fees), and payments to certain fishing boat crew members.
5. Mortgage Interest Paid by You, Acquisition or Abandonment of Secured
Property, Cancellation of Debt, or IRA Contributions. You are required to
furnish your correct TIN, but you are not required to sign the certification.
6. Exempt Payees and Payments. If you are exempt from backup withholding,
you should complete this form to avoid possible erroneous backup withholding.
Enter your correct TIN in Part I, write 'EXEMPT' in the block in Part II, and
sign and date the form. If you are a nonresident alien or foreign entity not
subject to backup withholding, give the requester a complete Form W-8,
Certificate of Foreign Status.
7. TIN 'Applied For.' Follow the instructions under How To Obtain a TIN, on
page 1, and sign and date this form.
Signature. For a joint account, only the person whose TIN is shown in Part
1 should sign.
Privacy Act Notice. Section 6109 requires you to furnish your correct TIN
to persons who must file information returns with the IRS to report interest,
dividends, and certain other income paid to you, mortgage interest you paid, the
acquisition or abandonment of secured property, cancellation of debt, or
contributions you made to an IRA. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. The IRS may also
provide this information to the Department of Justice for civil and criminal
litigation and to cities, states, and the District of Columbia to carry out
their tax laws. You must provide your TIN whether or not you are required to
file a tax return. Payers must generally withhold 31% of taxable interest,
dividend, and certain other payments to a payee who does not furnish a TIN to a
payer. Certain penalties may also apply.
WHAT NAME AND NUMBER TO GIVE THE REQUESTER
<TABLE>
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE NAME AND SSN OF:
- -------------------------------------------------------------- --------------------------------------------------------------
<S> <C>
1. Individual The individual
2. Two or more individuals (joint account) The actual owner of the account or, if combined funds, the
first individual on the account(1)
3. Custodian account of a minor (Uniform Gift to Minors Act) The minor(2)
4. a. The usual revocable savings trust (grantor is
also trustee) The grantor-trustee(3)
b. So-called trust account that is not a
legal or valid trust under state law The actual owner(3)
5. Sole proprietorship The owner(4)
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE NAME AND EIN OF:
- -------------------------------------------------------------- --------------------------------------------------------------
<S> <C>
6. Sole proprietorship The owner(4)
7. A valid trust, estate, or pension trust Legal entity(5)
8. Corporate The corporation
9. Association, club, religious, charitable, educational, or
other tax-exempt organization The organization
10. Partnership The partnership
11. A broker or registered nominee The broker or nominee
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C>
12. Account with the Department of Agriculture in the name of
a public entity (such as a state or local government,
school district, or prison) that receives agriculture
program payments The public entity
</TABLE>
Note: If no name is circled when more than one name is listed, the number will
be considered to be that of the first name listed.
- ------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's SSN.
(3) List first and circle the name of the person whose number you furnish.
(4) Show your individual name, but you may also enter your business or 'doing
business as' name. You may use either your SSN or EIN (if you have one).
(5) List first and circle the name of the legal trust, estate, or pension trust.
(Do not furnish the TIN of the personal representative or trustee unless the
legal entity itself is not designated in the account title).
vii
<PAGE>
<PAGE>
FORM OF GUARANTEED DELIVERY FOR TENDER OF 5% DELAYED
CONVERTIBLE PREFERRED STOCK OF CD RADIO INC. IN EXCHANGE FOR
10.5% SERIES C CONVERTIBLE PREFERRED STOCK
Registered holders of shares of 5% Delayed Convertible Preferred Stock (the
'5% Preferred Stock') of CD Radio Inc., a Delaware corporation (the 'Company'),
who wish to tender any such shares in exchange for shares of 10.5% Series C
Convertible Preferred Stock of the Company, on the terms and subject to the
conditions set forth in the Prospectus of the Company dated October , 1997
(the 'Prospectus'), and the related Letter of Transmittal, and whose shares of
5% Preferred Stock are not immediately available or who cannot deliver their
shares of 5% Preferred Stock and the Letter of Transmittal (and any other
documents required by the Letter of Transmittal) to IBJ Schroder Bank & Trust
Company (the 'Exchange Agent') prior to the Expiration Date (as defined in the
Prospectus), may use this Notice of Guaranteed Delivery or one substantially
equivalent hereto. This Notice of Guaranteed Delivery may be delivered by hand
or sent by facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight delivery) or mailed to the Exchange
Agent. See 'The Exchange Offer -- Tender Procedure' in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER:
IBJ Schroder Bank & Trust Company
FACSIMILE NUMBER: (212) 858-2611
(For Eligible Institutions Only)
BY HAND OR OVERNIGHT COURIER:
(Registered or Certified Mail Recommended)
1 State Street
New York, New York 10004
Attn.: Reorganization Dept.
Securities Processing Window SC-1
BY MAIL:
P.O. Box 84
Bowling Green Station
New York, New York 10274-0084
Attn.: Reorganization Dept.
TO CONFIRM RECEIPT OF NOTICE OF GUARANTEED DELIVERY BY TELEPHONE:
(212) 858-2103
Delivery of this Notice of Guaranteed Delivery to an address other than as
set forth above or transmission of instructions via a facsimile transmission to
a number other than as set forth above will not constitute a valid delivery.
1
<PAGE>
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders the number of shares of 5% Delayed
Convertible Preferred Stock ('5% Preferred Stock') indicated below, upon the
terms and subject to the conditions contained in the Prospectus, dated October
, 1997, of the Company, receipt of which is hereby acknowledged.
<TABLE>
<S> <C> <C> <C> <C>
DESCRIPTION OF SHARES OF 5% PREFERRED STOCK TENDERED
NAMES(S) AND ADDRESS(ES) OF SHARES OF 5% PREFERRED STOCK TENDERED
REGISTERED HOLDER(S) (ATTACH ADDITIONAL SIGNED SCHEDULE IF NECESSARY)
(PLEASE FILL IN, IF BLANK)
(1) (2) (3) (4)
CERTIFICATE TOTAL NUMBER NUMBER OF
NUMBER(S)* OF SHARES SHARES
REPRESENTED TENDERED`D'
BY
CERTIFICATES*`D'
Total
* Need not be completed by book-entry holders.
`D' Unless otherwise indicated, the holder will be deemed to have tendered the full number of shares of 5%
Preferred Stock.
</TABLE>
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
The undersigned, a firm that is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office, branch,
agency, or correspondent in the United States, hereby guarantees to deliver to
the Exchange Agent, at one of its addresses set forth above, the certificates
representing the shares of the 5% Delayed Convertible Preferred Stock, together
with a properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees, and any other documents
required by the Letter of Transmittal within three New York Stock Exchange, Inc.
trading days after the date of execution of this Notice of Guaranteed Delivery.
......................................
NAME OF FIRM
......................................
(AUTHORIZED SIGNATURE)
......................................
(NAME)
......................................
(TITLE)
......................................
(ADDRESS)
......................................
(AREA CODE AND TELEPHONE NUMBER)
Dated ......................... , 1997
NOTE: DO NOT SEND CERTIFICATES OF 5% DELAYED CONVERTIBLE PREFERRED STOCK WITH
THIS NOTICE OF GUARANTEED DELIVERY. CERTIFICATES OF 5% DELAYED CONVERTIBLE
PREFERRED STOCK SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
2
<PAGE>
<PAGE>
FORM OF LETTER TO BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES AND OTHER
NOMINEES
CD RADIO INC.
OFFER TO EXCHANGE
5% DELAYED CONVERTIBLE PREFERRED STOCK FOR
10 1/2% SERIES C CONVERTIBLE PREFERRED STOCK
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED (THE 'EXPIRATION DATE').
October , 1997
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
In our capacity as Dealer Manager, we are enclosing the material listed
below relating to the offer (the 'Exchange Offer') by CD Radio Inc. (the
'Company') to exchange up to 1,932,073 shares of its new 10 1/2% Series C
Convertible Preferred Stock (the 'New Preferred Stock') for up to all of the
outstanding shares (the 'Shares') of its 5% Delayed Convertible Preferred Stock
(the '5% Preferred Stock') at a rate of one share of New Preferred Stock for
each $100 in Exchange Rate Liquidation Preference represented by Shares not
previously converted. The 'Exchange Rate Liquidation Preference' shall be the
amount determined by dividing the liquidation preference of the Shares being
exchanged (including accrued and unpaid dividends on the Shares) by 0.696145.
Such exchange will be upon the terms and subject to the conditions of the
Exchange Offer (as described in the Prospectus) and subject to the right of the
Company to amend or terminate the Exchange Offer. As of September 30, 1997,
there were 5,222,608 Shares outstanding.
The Company expressly reserves the right to extend, amend or modify the
terms of the Exchange Offer, and not to accept for exchange any shares of 5%
Preferred Stock, at any time and from time to time prior to the Expiration Date
for any reason.
We are asking you to contact your clients for whom you hold shares of 5%
Preferred Stock registered in your name (or in the name of your nominee) or who
hold shares of 5% Preferred Stock registered in their own names. Please bring
the Exchange Offer to their attention as promptly as possible.
The Company will pay all stock transfer taxes applicable to the exchange of
shares of 5% Preferred Stock pursuant to the Exchange Offer, subject to
Instruction 4 of the Letter of Transmittal referred to below.
For your information and for forwarding to your clients, we are enclosing
the following documents:
1. The Prospectus dated October , 1997 (the 'Prospectus');
2. The Letter of Transmittal to be used by holders of shares of 5%
Preferred Stock in accepting the Exchange Offer (duly executed photocopies
of the Letter of Transmittal may be used to exchange shares of 5% Preferred
Stock);
3. A letter which may be sent to your clients for whose accounts you
hold shares of 5% Preferred Stock registered in your name or in the name of
your nominee, with space for obtaining such clients' instructions with
regard to the Exchange Offer;
4. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9, providing
information relating to backup federal income tax withholding; and
5. A return envelope addressed to CD Radio Inc.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE
THAT THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
, 1997, UNLESS THE EXCHANGE OFFER IS EXTENDED.
<PAGE>
<PAGE>
Any questions or requests for assistance or additional copies of the
enclosed materials may be directed to CD Radio Inc., the Information Agent, the
Exchange Agent or the Dealer Manager, at the addresses and telephone numbers set
forth on the inside back cover of the enclosed Prospectus.
Very truly yours,
CD Radio Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL BE DEEMED TO
APPOINT YOU THE AGENT OF THE COMPANY, THE DEALER MANAGER, THE INFORMATION AGENT
OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT
OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE EXCHANGE
OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED
THEREIN.
<PAGE>
<PAGE>
FORM OF LETTER TO CLIENTS
CD RADIO INC.
OFFER TO EXCHANGE
5% DELAYED CONVERTIBLE PREFERRED STOCK FOR
10 1/2% SERIES C CONVERTIBLE PREFERRED STOCK
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED.
October , 1997
To Our Clients:
Enclosed for your consideration are the Prospectus, dated October , 1997
(the 'Prospectus'), of
CD Radio Inc. (the 'Company') and the related Letter of Transmittal (the 'Letter
of Transmittal'), which together describe the Company's offer to exchange (the
'Exchange Offer') up to 1,932,073 shares of its new 10 1/2% Series C Convertible
Preferred Stock (the 'New Preferred Stock') for up to all of the outstanding
shares (the 'Shares') of its 5% Delayed Convertible Preferred Stock (the '5%
Preferred Stock') at a rate of one share of New Preferred Stock for each $100 in
Exchange Rate Liquidation Preference represented by Shares not previously
converted. The 'Exchange Rate Liquidation Preference' shall be the amount
determined by dividing the liquidation preference of the Shares being exchanged
(including accrued and unpaid dividends on the Shares) by 0.696145. Such
exchange will be upon the terms and subject to the conditions of the Exchange
Offer (as described in the Prospectus) and subject to the right of the Company
to amend or terminate the Exchange Offer. As of September 30, 1997, there were
5,222,608 Shares outstanding.
WE ARE THE HOLDER OF RECORD OF SHARES OF 5% PREFERRED STOCK HELD FOR YOUR
ACCOUNT. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD
AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU
FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES OF 5%
PREFERRED STOCK HELD BY US FOR YOUR ACCOUNT.
We request instructions as to whether you wish us to tender any or all of
the shares of 5% Preferred Stock held by us for your account, upon the terms and
subject to the conditions set forth in the Prospectus and the Letter of
Transmittal. We urge you to read the enclosed Prospectus carefully before
conveying your instructions to us.
Your attention is invited to the following:
1. The Exchange Offer is for up to all of the Company's outstanding
shares of 5% Preferred Stock. The Exchange Offer is subject to certain
conditions. See 'The Exchange Offer -- Conditions of the Exchange Offer' in
the Prospectus.
2. The Exchange Offer will expire at 12:00 Midnight, New York City time,
on , 1997, unless the Exchange Offer is extended. Your
instructions to us should be forwarded to us in ample time to permit us to
submit a tender on your behalf. If you would like to withdraw your shares
of 5% Preferred Stock that we have tendered, you can withdraw them at any
time prior to the Expiration Date (as defined in the Prospectus).
3. Exchanges will be made on the basis of one share of New Preferred
Stock for each $100 in Exchange Rate Liquidation Preference represented by
shares of 5% Preferred Stock tendered and accepted for exchange. The
'Exchange Rate Liquidation Preference' shall be the amount determined by
dividing the liquidation preference of the shares of 5% Preferred Stock
being exchanged (including accrued and unpaid dividends on the Shares) by
0.696145.
<PAGE>
<PAGE>
4. Any transfer taxes applicable to the exchange of shares of 5%
Preferred Stock with the Company pursuant to the Exchange Offer will be
paid by the Company, except as otherwise provided in Instruction 4 of the
Letter of Transmittal.
If you wish to have us tender any or all of your shares of 5% Preferred
Stock held by us for your account upon the terms and subject to the conditions
set forth in the Exchange Offer, please so instruct us by completing, executing,
detaching and returning to us the Tender Instruction Form on the detachable part
hereof. An envelope to return your instructions to us is enclosed. If you
authorize tender of your shares of 5% Preferred Stock, all such shares of 5%
Preferred Stock will be tendered unless otherwise specified on the Tender
Instruction Form. Your instructions should be forwarded to us in ample time to
permit us to submit a tender on your behalf by the expiration of the Exchange
Offer.
TENDER INSTRUCTION FORM
INSTRUCTIONS WITH RESPECT TO
CD RADIO INC.
OFFER TO EXCHANGE
5% DELAYED CONVERTIBLE PREFERRED STOCK FOR
10 1/2% SERIES C CONVERTIBLE PREFERRED STOCK
The undersigned acknowledge(s) receipt of your letter and the
enclosed Prospectus dated October , 1997 of CD Radio Inc. (the
'Company') and the related Letter of Transmittal, which together describe
the Company's offer to exchange (the 'Exchange Offer') up to 1,932,073
shares of its new 10 1/2% Series C Convertible Preferred Stock (the 'New
Preferred Stock') for up to all of the outstanding shares (the 'Shares')
of its 5% Delayed Convertible Preferred Stock (the '5% Preferred Stock')
at a rate of one share of New Preferred Stock for each $100 in Exchange
Rate Liquidation Preference represented by Shares not previously
converted. The 'Exchange Rate Liquidation Preference' shall be the amount
determined by dividing the liquidation preference of the Shares being
exchanged (including accrued and unpaid dividends on the Shares) by
0.696145. Such exchange will be upon the terms and subject to the
conditions of the Exchange Offer (as described in the Prospectus) and
subject to the right of the Company to amend or terminate the Exchange
Offer. As of September 30, 1997, there were 5,222,608 Shares outstanding.
This will instruct you to tender to the Company the number of shares
of 5% Preferred Stock indicated below (or, if no number is indicated
below, all shares of 5% Preferred Stock) which are held by you for the
account of the undersigned, upon the terms and subject to the conditions
of the Exchange Offer.
<TABLE>
<S> <C>
SIGN HERE: ........................................ ...................................................
Name: ............................................ Name (if more than one): ..........................
Address: .......................................... Address: ..........................................
.................................................. ...................................................
Social Security No. (or Taxpayer Social Security No. (or Taxpayer
Identification No.): .............................. Identification No.): ..............................
<PAGE>
</TABLE>
<PAGE>
Exhibit (a)(6)
CD Radio Files Offerings
Washington, D.C. - September 2, 1997 - CD Radio Inc. (Nasdaq: CDRD) today filed
registration statements with the Securities and Exchange Commission for the
issuance of 3,500,000 shares of Common Stock and for the issuance of $150
million gross proceeds of Senior Discount Notes due 2007.
In addition, the Company filed a registration statement for the issuance of
Convertible Preferred Stock in exchange for the outstanding shares of its 5%
Delayed Convertible Preferred Stock.
Managing underwriters for the sale of the Common Stock are Merrill Lynch, Lehman
Brothers and Unterberg Harris. Managing underwriters for the sale of the Senior
Discount Notes are Merrill Lynch and Lehman Brothers. Merrill Lynch is the
dealer manager for the Exchange Offer.
Registration statements relating to these securities have been filed with the
Securities and Exchange Commission but have yet to become effective. These
securities may not be sold nor may offers to buy or exchange be accepted prior
to the time the applicable registration statement becomes effective. This press
release shall not constitute an offer to sell or exchange or the solicitation of
an offer to sell or exchange, nor shall there be any sale or exchange, of these
securities in any state in which such offer, solicitation, sale or exchange
would be unlawful prior to registration or qualification under the securities
laws of any such state.
CD Radio is the winning bidder for one of two FCC national satellite radio
broadcast licenses. The Company is building a satellite-to-car 50 channel radio
system for the broadcast of music and other programming to motorists throughout
the United States.
For Further Information:
David Margolese
202-296-6192
<PAGE>
<PAGE>
Exhibit (c)
VOTING TRUST AGREEMENT
AGREEMENT, made this 26th day of August, 1997, among CD RADIO INC.,
a Delaware corporation (the "Company"), DARLENE FRIEDLAND ("DF"), a stockholder
of the Company and DAVID MARGOLESE (hereinafter called the "Trustee").
RECITALS
WHEREAS, the Company intends to make through Merrill Lynch & Co. (i)
an offer registered under the Securities Act of 1933, as amended, to exchange
shares of a new class of its preferred stock for all outstanding shares of its
5% Delayed Convertible Preferred Stock, par value $.001 per share (the "Exchange
Offer"), (ii) an underwritten public offering of its common stock, par value
$.001 per share ("Common Stock") (the "Stock Offering"), and (iii) an
underwritten public offering of senior debt securities of the Company (the "Debt
Offering", and together with the Exchange Offer and the Stock Offering, the
"Offers); and
WHEREAS, DF owns 2,834,500 shares of Common Stock (the "Current
Shares") and ROBERT M. FRIEDLAND ("RMF") is the husband of DF; and
<PAGE>
<PAGE>
WHEREAS, in order to assist the Company in marketing and completing
the Offerings and for other consideration, DF has agreed to enter into this
Agreement and to deposit the Friedland Securities (as defined below) into the
trust created hereby; and
WHEREAS, DF agrees to deposit, or cause the deposit into the trust
created hereby of the Current Shares and any other shares of capital stock of
the Company ("Other Shares") that may hereafter be acquired or beneficially
owned by any of RMF, DF, members of RMF's or DF's immediate family or any entity
in which any of RMF, DF or members of RMF's or DF's immediate family have,
directly or indirectly, a controlling interest or, on a best efforts basis, more
than 25% of such entity's equity or debt (the "Friedland Affiliates", acting as
a group or severally as the context requires), including, without limitation,
any shares of capital stock of the Company that may be issued upon exercise of
any rights, warrants or options to purchase, or other securities convertible
into, Common Stock (collectively with the Current Shares and the Other Shares,
the "Friedland Securities"); and
WHEREAS, in order to induce the Trustee to act hereunder, the
Company has agreed to indemnify the Trustee for his services hereunder; and
WHEREAS, in the interests of all the stockholders of the Company,
the parties hereto are desirous of creating a trust;
2
<PAGE>
<PAGE>
NOW, THEREFORE, the parties hereby agree as follows:
1. The Friedland Affiliates shall forthwith, and from time to time
in the future if any of the Friedland Affiliates acquires additional Friedland
Securities, endorse in blank and assign and deliver to the Trustee all
certificates for the Friedland Securities and shall do all things necessary for
the transfer of the Friedland Securities to the Trustee on the books of the
Company. The Trustee shall issue and deliver in exchange therefor voting trust
certificates for the Friedland Securities so transferred to the Trustee in
substantially the form attached hereto as APPENDIX I.
2. (a) The Trustee shall hold the Friedland Securities so
transferred to him in trust hereunder for the benefit of the Friedland
Affiliates, under the terms and conditions set forth herein.
(b) Notwithstanding any provision hereof, each of the
Friedland Affiliates shall have the right to sell, assign, transfer or pledge
any or all of the Friedland Securities to unaffiliated third parties and the
Trustee shall use his reasonable efforts to cause any Friedland Securities so
sold, assigned, transferred or hypothecated to be transferred promptly to the
purchaser, assignee, transferee or pledgee thereof against delivery of the
voting trust certificates representing the Friedland Securities; PROVIDED in the
case of a pledge that the pledgee shall not have any right to vote the Friedland
Securities. Friedland Securities sold, assigned, transferred or hypothecated to
an affiliate of any of the Friedland Affiliates shall
3
<PAGE>
<PAGE>
remain in trust hereunder subject to the terms of this Agreement. Friedland
Securities sold or transferred to third parties not affiliated with the
Friedland Affiliates shall be released from the trust upon such sale or
transfer. A third party shall be deemed "affiliated" for purposes of this
Section 2(b) if such third party (i) is controlled by, controls or is under
common control with RMF, DF or a member of the immediate family of RMF or DF,
(ii) is retained by RMF, DF or a member of the immediate family of RMF or DF as
consultant generally operating at the direction of such person, (iii) is
employed, directly or indirectly, by RMF, DF, a member of the immediate family
of RMF or DF or a person controlled by, controlling or under common control with
RMF or DF, or (iv) has made a substantial business investment of any nature in
any entity with RMF, DF or a member of the immediate family of RMF or DF. The
term "substantial business investment" refers to investments by a third party
comprising more than 5% of the equity or debt of a company, partnership or joint
venture (other than the Company) in which RMF, DF or an affiliate of RMF or DF
has an investment of at least 5%.
3. The Trustee shall surrender to the proper officers of the Company
for cancellation all certificates of stock which shall be assigned and delivered
to him as hereinbefore provided, and in their stead shall procure new
certificates to be issued to him as Trustee under this Agreement.
4. (a) The Trustee shall have only the powers set forth in this
Agreement.
4
<PAGE>
<PAGE>
(b) With respect to all Friedland Securities held in trust by
the Trustee hereunder, the Friedland Affiliates shall severally retain the
entire economic and beneficial ownership rights therein, including without
limitation the right to receive dividends and distributions on the Friedland
Securities and the right to direct the Trustee in any order whatsoever to sell,
assign, transfer, encumber or grant any option therein to or in favor of any
person other than RMF, DF or another Friedland Affiliate or agree to do any such
thing, except that the Trustee shall have the exclusive and absolute right in
respect of such Friedland Securities to vote (in person, by proxy, by written
consent or otherwise) the Friedland Securities at all times during the term of
this Agreement, including without limitation the right to vote at any election
of directors and in favor of or in opposition to any resolution, any
dissolution, liquidation, merger or consolidation of the Company, any sale of
all or substantially all the Company's assets, any issuance or authorization of
securities, or any action of any character whatsoever which may be presented at
any meeting or require the consent of stockholders of the Company. David
Margolese as Trustee shall vote the Friedland Securities in his discretion. In
the case of his incapacity, the successor Trustee or Trustees shall at all times
vote in respect of any action as follows: (i) if the matter concerned is the
election of directors, then the Trustees shall vote the entire number of shares
held by the trust created hereunder for each director (or nominee for director)
by multiplying the total number of votes held by the trust by a fraction, the
numerator of which is the number of votes cast in respect of shares of the
Company other than Friedland Securities (the "Nonaffiliated Votes") for such
person and the denominator of which is the sum of the total number of votes
5
<PAGE>
<PAGE>
represented by all shares casting any votes in the election of directors; (ii)
where the matter under Delaware law or the Certificate of Incorporation or the
Bylaws of the Company requires at least an absolute majority of a all
outstanding shares of common stock of the Company in order to be effected, then
the Trustees shall vote all of the Friedland Securities in this manner as the
majority of all Nonaffiliated Votes are cast for or against the matter; and
(iii) on all other matters, including without limitation any amendment of this
Agreement for which a stockholders vote is required under Section 9 hereof, the
Trustees shall at all times vote all of the Friedland Securities for or against
the matter in the same manner in favor of or in opposition to such matter as
Nonaffiliated Votes are cast for or against the matter. If any calculation of
votes under the preceding sentence would require a fractional vote, the Trustees
shall vote the next lower number of whole shares. Notwithstanding the foregoing,
the Trustee or the Trustees shall vote the Friedland Securities against any
proposal to elect RMF, DF, any other Friedland Affiliate or any other person
affiliated with RMF or DF (as defined in Section 2(b) above) as an officer or
director of the Company. The Trustee shall use all reasonable commercial efforts
to ensure, with respect to the Friedland Securities held in trust hereunder,
that all of the Friedland Securities are counted as being present for the
purposes of any quorum required for stockholder action of the Company and to
vote as set forth above.
(c) The Trustee may vote with respect to all the Friedland
Securities held hereunder in person or by such person or persons as it may from
time
6
<PAGE>
<PAGE>
to time select as their proxy; PROVIDED that the Trustee shall at all times do
so in conformity with the provisions of Section 4(b) hereof.
(d) The Trustee shall have no authority to sell or otherwise
dispose of or to pledge, encumber or hypothecate, any of the stock deposited
pursuant to the provisions of this Agreement, unless directed to do so by the
Friedland Affiliates as provided in Section 2(b) above.
5. To the fullest extent permitted by law, the Trustee shall not be
liable for any vote cast, or consent given by him, or for any other action
hereunder taken or omitted by him hereunder, in good faith, or in the absence of
gross negligence or willful misconduct. To the fullest extent permitted by law,
the Trustee shall not be liable in acting on any notice, request, consent,
certificate, instruction, or other paper or document or signature reasonably
believed to be genuine and to have been signed by the proper party. The Trustee
may consult with legal counsel (reasonably competent for the purpose) and, to
the fullest extent permitted by law, any act or omission undertaken by the
Trustee in good faith in accordance with the opinion of such legal counsel shall
not result in any liability of the Trustee.
6. The Trustee shall collect and receive all dividends that may
accrue upon the shares of stock subject to this trust, and shall distribute the
same to the Friedland Affiliates in accordance with their respective ownership
interests, except
7
<PAGE>
<PAGE>
that dividends payable in capital stock of the Company shall be held in trust as
additional Friedland Securities hereunder.
7. In the event of any Trustee dying or resigning or refusing or
becoming unable to act (any of which is deemed incapacity), a successor Trustee,
which shall be a bank incorporated under the laws of Canada or any of the
Provinces thereof having a capital and surplus of at least $500,000,000 CDN,
shall be appointed by the Board of Directors of the Company, and any Trustee so
appointed shall thereupon be vested with all the duties, powers, and authority
of a Trustee hereunder as if originally named herein. No successor Trustee shall
be liable for actions or omissions of any other Trustee.
8. This Agreement and the trust created herein shall become
effective on the closing of the first of the Offers and shall terminate upon the
fifth anniversary of the closing date. This Agreement is subject to any required
regulatory approvals. Until termination of this Agreement and the trust created
herein as provided above, such trust will be irrevocable. Upon the termination
of this Agreement, the Trustee shall assign and transfer to the Friedland
Affiliates in accordance with their respective ownership interests all the
Friedland Securities remaining in trust hereunder.
9. The Company and its stockholders are hereby expressly made third
party beneficiaries of this Agreement and, accordingly, to the fullest extent
8
<PAGE>
<PAGE>
permitted by law, this Agreement may not be amended without the prior written
consent of the Company, acting by unanimous vote of its Board of Directors, and
approval of the Company's stockholders acting by the affirmative vote of
two-thirds of the total voting power of the capital stock of the Company
generally entitled to vote on matters submitted to a stockholder vote; PROVIDED,
HOWEVER, that the parties hereto may enter into any amendment of this Agreement,
without regard to this Section 9, and the parties agree to enter into any such
amendment, if such amendment is in the opinion of legal counsel to the Company
and DF necessary or appropriate to maintain technical compliance of the terms of
this agreement with the laws of the State of Delaware.
10. The Trustee is expressly authorized to incur and pay such
reasonable expenses and charges, to employ and pay such agents, attorneys and
counsel, and to incur and pay such other charges and expenses as the Trustee may
deem reasonably necessary and proper for administering this Agreement. All such
charges and expenses shall be paid by the Company. The Company hereby agrees to
indemnify any Trustee serving hereunder against any loss or liability, including
attorneys' fees, incurred in serving as voting trustee hereunder, to the fullest
extent permitted by law.
11. (a) Except as provided in Section 8 above, all of the covenants
and agreements contained in this Agreement shall be binding upon, and
9
<PAGE>
<PAGE>
inure to the benefit of, the respective parties and their successors, assigns,
heirs, executors, administrators and other legal representatives, as the case
may be.
(b) This Agreement, and the rights of the parties hereto,
shall be governed by and construed in accordance with the laws of the State of
Delaware.
(c) This Agreement may be executed in one or more
counterparts, each of which will be deemed an original but all of which together
shall constitute one and the same instrument.
(d) If any provision of this Agreement shall be declared void
or unenforceable by any court or administrative board of competent jurisdiction,
such provision shall be deemed to have been severed from the remainder of the
Agreement and this Agreement shall continue in all respects to be valid and
enforceable. Each of the parties hereto shall take any and all actions necessary
for the enforceability of this Agreement under Delaware Law, including without
limitation any necessary filings or actions required by Section 218 of the
General Corporation Law of Delaware.
(e) Whenever the context of this Agreement shall so require,
the use of the singular number shall include the plural and the use of the
gender shall include all genders.
10
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the Company and DF have hereunto set their
hands and seals, and the Trustee, in token of his acceptance of the trust hereby
created, has hereunto set his hand and seal.
CD RADIO INC.
/s/ David Margolese
- ----------------------------------------
By: David Margolese
Chairman and Chief Executive Officer
/s/ David Margolese
- ----------------------------------------
David Margolese
/s/ Darlene Friedland
- ----------------------------------------
Darlene Friedland
- --------------------------------------------------------------------------------
CONSENT AND AGREEMENT
I hereby consent to the creation of the voting trust provided for in the
foregoing agreement, and I hereby agree to take all action necessary so as to
effectuate the provisions thereof affecting the Friedland Affiliates and the
Friedland Securities.
/s/ Robert M. Friedland
------------------------------------
Robert M. Friedland
11
<PAGE>
<PAGE>
APPENDIX I
VOTING TRUST CERTIFICATE
Registered Holder:___________________ Certificate No.___
THE SALE, ASSIGNMENT, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER
ENCUMBRANCE OF THIS VOTING TRUST CERTIFICATE OR THE COMMON STOCK REFERRED TO
HEREIN IS SUBJECT TO THE RESTRICTIONS, TERMS AND CONDITIONS SET FORTH IN THE
VOTING TRUST AGREEMENT DESCRIBED IN THIS CERTIFICATE AND PURSUANT TO WHICH THIS
CERTIFICATE IS ISSUED. THIS CERTIFICATE AND SUCH COMMON STOCK ARE SUBJECT TO AND
MAY BE TRANSFERRED OR ENCUMBERED ONLY IN ACCORDANCE WITH SUCH AGREEMENT, A
DUPLICATE OF WHICH IS ON FILE WITH THE SECRETARY OF THE CORPORATION.
Voting Trust Certificate
for
______ (__) shares of Common Stock
$0.001 par value per share
of
CD Radio, Inc.
a Delaware corporation
THIS IS TO CERTIFY THAT, upon the termination of a certain Voting
Trust established by a Voting Trust Agreement, dated August 26, 1997 (the
"Agreement"), by and among DARLENE FRIEDLAND (the "Shareholder"), CD RADIO, INC.
a Delaware corporation (the "Company") and DAVID MARGOLESE, as Voting Trustee
(the "Voting Trustee") pursuant to which this certificate has been issued, the
Shareholder, as registered holder of this certificate, will be entitled to
receive certificates, for the shares hereinabove specified (the "SHARES") and,
for the duration of such Agreement, to receive distributions equal to the cash
or property or non-voting stock distributions, if any, received by the Voting
Trustee upon a like number of the Shares standing in its name. Prior to the
termination of the Agreement, the Voting Trustee, with respect to the Shares,
shall possess and be entitled to exercise, in the manner and to the extent
provided in the Agreement, all the rights of every kind of the holder of this
certificate, including the right to vote and to take part in, or to consent to
any corporate or shareholders' action, it being expressly stipulated that no
right to vote, or take part in, or to consent to any corporate or shareholders'
action, shall pass to the registered holder hereof by, or under, this
certificate.
<PAGE>
<PAGE>
2
This certificate is not transferable except as permitted by the
Agreement, and is not valid unless signed by the Voting Trustee. The holder
hereof, by accepting this certificate, manifests its consent that the
undersigned Voting Trustee may treat the registered holder hereof as the true
owner of this certificate for all purposes.
IN WITNESS WHEREOF, the undersigned, the Voting Trustee has caused
this certificate to be signed as of the ____ day of __________ 1997.
DAVID MARGOLESE, as Voting Trustee
------------------------------------
<PAGE>
<PAGE>
[ITEM 8 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A FOR THE YEAR ENDED
12/31/96]
Exhibit (g)(1)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-3
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1996, and for the period May 17, 1990 (date of inception)
to December 31, 1996................................................................ F-4
Consolidated Statements of Stockholders' Equity for the period May 17, 1990 (date of
inception)
to December 31, 1996................................................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 and for the period May 17, 1990 (date of inception)
to December 31, 1996................................................................ F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
CD Radio Inc.
We have audited the accompanying consolidated balance sheets of CD Radio
Inc. and Subsidiary (A Development Stage Enterprise) as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996 and for the period May 17, 1990 (date of inception) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CD Radio Inc.
and Subsidiary as of December 31, 1995 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 and for the period May 17, 1990 (date of inception) to
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Washington, D.C.
March 26, 1997
F-2
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 1,799,814 $ 4,583,562
Prepaid expense and other................................... 8,781 9,368
------------ ------------
Total current assets................................... 1,808,595 4,592,930
------------ ------------
Property and equipment, at cost:
Technical equipment......................................... 254,200 254,200
Office equipment and other.................................. 89,220 89,220
Demonstration equipment..................................... 38,664 38,664
------------ ------------
382,084 382,084
Less accumulated depreciation............................... (160,498) (213,344)
------------ ------------
221,586 168,740
Deposits......................................................... 303,793 303,793
------------ ------------
Total assets........................................... $ 2,333,974 $ 5,065,463
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................... $ 46,521 $ 131,118
Other....................................................... 20,716 20,174
------------ ------------
Total current liabilities.............................. 67,237 151,292
Loan from officer................................................ 240,000 --
Deferred rent and other.......................................... 35,967 15,795
------------ ------------
Total liabilities...................................... 343,204 167,087
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized; 4,000,000 shares designated as 5% Delayed
Convertible Preferred Stock; none issued or outstanding... -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized; 9,305,960 and 10,300,391 shares issued and
outstanding as of December 31, 1995 and 1996,
respectively.............................................. 9,306 10,300
Additional paid-in capital.................................. 18,006,729 23,423,936
Deficit accumulated during the development stage............ (15,705,265) (18,535,860)
Deferred compensation on stock options granted.............. (320,000) --
------------ ------------
Total stockholders' equity............................. 1,990,770 4,898,376
------------ ------------
Total liabilities and stockholders' equity............. $ 2,333,974 $ 5,065,463
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE FOR
THE PERIOD
MAY 16, 1986
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
----------------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Revenue................................ $ -- $ -- $ -- $ --
Expenses:
Legal, consulting and regulatory
fees............................ 1,245,472 1,045,562 1,582,091 7,248,964
Other general and
administrative.................. 2,455,393 1,062,343 1,230,748 7,532,763
Research and development.......... 374,668 122,210 117,299 1,916,355
Write-off of investment in
Sky-Highway Radio Corp. ........ -- -- -- 2,000,000
----------- ----------- ----------- -------------
Total expenses............... 4,075,533 2,230,115 2,930,138 18,698,082
----------- ----------- ----------- -------------
Other income (expense)
Interest income................... 50,921 142,549 112,811 328,672
Interest expense.................. (40,155) (19,783) (13,268) (166,450)
----------- ----------- ----------- -------------
10,766 122,766 99,543 162,222
----------- ----------- ----------- -------------
Net loss............................... $(4,064,767) $(2,107,349) $(2,830,595) $ (18,535,860)
=========== =========== =========== =============
Net loss per common share.............. $ (0.48) $ (0.23) $ (0.29)
=========== =========== ===========
Weighted average common shares
outstanding.......................... 8,397,668 9,224,431 9,642,048
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STATE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Initial Sale of no par value common stock,
$5.00 per share, May 17, 1990.............. 11,080 $ 55,400 -- $ -- -- $ --
Initial issuance of common stock in
satisfaction of due to related party, $5.00
per share.................................. 28,920 144,600 -- -- -- --
Conversion of no par value common stock to
Class A and Class B no par value common
stock...................................... (40,000) (200,000) 2,000,000 169,492 360,000 30,580
Sale of Class B common stock, $0.4165 per
share...................................... -- -- -- -- 442,000 184,101
Issuance of Class B common stock in
satisfaction of due to related party,
$0.4165 per share.......................... -- -- -- -- 24,000 10,000
Net loss..................................... -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1990................... -- -- 2,000,000 169,492 826,000 224,609
Sale of Class B common stock, $0.50 per
share...................................... -- -- -- -- 610,000 305,000
Issuance of Class B common stock in
satisfaction of due to related party, $0.50
per share.................................. -- -- -- -- 300,000 150,000
Net Loss..................................... -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1991................... -- -- 2,000,000 169,492 1,736,000 679,609
Sale of Class B common stock, $0.50 per
share...................................... -- -- -- -- 200,000 100,000
Issuance of Class B common stock in
satisfaction of due to related party, $0.50
per share.................................. -- -- -- -- 209,580 104,790
Conversion of note payable to related party
to Class B common stock, $0.4165........... -- -- -- -- 303,440 126,380
Conversion of Class A and Class B common
stock to no par value common stock......... 4,449,020 1,180,271 (2,000,000) (169,492) (2,449,020) (1,010,779)
Sale of no par value common stock, $1.25 per
share...................................... 1,600,000 2,000,000 -- -- -- --
Conversion of no par value common stock to
$.001 par value common stock............... -- (3,174,222) -- -- -- --
Sale of $.001 par value common stock, $5.00
per share.................................. 315,000 315 -- -- -- --
Net loss..................................... -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1992................... 6,364,020 $ 6,364 -- $ -- -- $ --
<CAPTION>
DEFICIT
ACCUMULATED DEFERRED
ADDITIONAL DURING THE COMPENSATION
PAID-IN DEVELOPMENT ON STOCK
CAPITAL STAGE OPTIONS GRANTED TOTAL
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Initial Sale of no par value common stock,
$5.00 per share, May 17, 1990.............. $ -- $ -- $ -- $ 55,400
Initial issuance of common stock in
satisfaction of due to related party, $5.00
per share.................................. -- -- -- 144,600
Conversion of no par value common stock to
Class A and Class B no par value common
stock...................................... -- -- -- --
Sale of Class B common stock, $0.4165 per
share...................................... -- -- -- 184,101
Issuance of Class B common stock in
satisfaction of due to related party,
$0.4165 per share.......................... -- -- -- 10,000
Net loss..................................... -- (838,911) -- (838,911)
------------ ------------ --------------- ---------------
Balance, December 31, 1990................... -- (838,911) -- (444,810)
Sale of Class B common stock, $0.50 per
share...................................... -- -- -- 305,000
Issuance of Class B common stock in
satisfaction of due to related party, $0.50
per share.................................. -- -- -- 150,000
Net Loss..................................... -- (574,963) -- (574,963)
------------ ------------ --------------- ---------------
Balance, December 31, 1991................... -- (1,413,874) -- (564,773)
Sale of Class B common stock, $0.50 per
share...................................... -- -- -- 100,000
Issuance of Class B common stock in
satisfaction of due to related party, $0.50
per share.................................. -- -- -- 104,790
Conversion of note payable to related party
to Class B common stock, $0.4165........... -- -- -- 126,380
Conversion of Class A and Class B common
stock to no par value common stock......... -- -- -- --
Sale of no par value common stock, $1.25 per
share...................................... -- -- -- 2,000,000
Conversion of no par value common stock to
$.001 par value common stock............... 3,174,222 -- -- --
Sale of $.001 par value common stock, $5.00
per share.................................. 1,574,685 -- -- 1,575,000
Net loss..................................... -- (1,550,802) -- (1,550,802)
------------ ------------ --------------- ---------------
Balance, December 31, 1992................... $ 4,748,907 $ (2,964,676) $ -- $ 1,790,595
</TABLE>
(table continues on following page)
The accompanying notes are an integral part of the consolidated statements.
F-5
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STATE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sale of $.001 par value common stock, $5.00
per share, net of commissions.............. 1,029,000 $ 1,029 -- $ -- -- $ --
Compensation expense in connection with
issuance of stock options.................. -- -- -- -- -- --
Common stock issued in connection with
conversion of note payable at $5.00 per
share...................................... 60,000 60 -- -- -- --
Common stock issued in satisfaction of
commissions payable, $5.00 per share....... 4,000 4 -- -- -- --
Net loss..................................... -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1993................... 7,457,020 7,457 -- -- -- --
Sales of $.001 par value common stock, $5.00
per share, net of commissions.............. 250,000 250 -- -- -- --
Initial public offering of Units, consisting
of two shares of $.001 par value common
stock and one warrant, $10.00 per Unit, net
expenses................................... 1,491,940 1,492 -- -- -- --
Deferred compensation on stock options
granted.................................... -- -- -- -- -- --
Forfeiture of stock options by Company
officer.................................... -- -- -- -- -- --
Compensation expense in connection with
issuance of stock options.................. -- -- -- -- -- --
Amortization of deferred compensation........ -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1994................... 9,198,960 9,199 -- -- -- --
Common stock issued for services rendered,
between $3.028 and $3,916 per share........ 107,000 107 -- -- -- --
Amortization of deferred compensation........ -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1995................... 9,305,960 9,306 -- -- -- --
Exercise of stock warrants at $6.00 per
share...................................... 791,931 792 -- -- -- --
Exercise of stock options by Company
officers, between $1.00 and $5.00 per
share...................................... 135,000 135 -- -- -- --
Common stock issued for services rendered,
between $5.76 and $12.26 per share......... 67,500 67 -- -- -- --
Common stock options granted for services
rendered, to purchase 60,000 shares at
$4.50 a share.............................. -- -- -- -- -- --
Amortization of deferred compensation........ -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1996................... 10,300,391 $ 10,300 -- $ -- -- $ --
========== =========== ========== ========= ========== ===========
<CAPTION>
DEFICIT
ACCUMULATED DEFERRED
ADDITIONAL DURING THE COMPENSATION
PAID-IN DEVELOPMENT ON STOCK
CAPITAL STAGE OPTIONS GRANTED TOTAL
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Sale of $.001 par value common stock, $5.00
per share, net of commissions.............. $ 4,882,163 $ -- $ -- $ 4,883,192
Compensation expense in connection with
issuance of stock options.................. 80,000 -- -- 80,000
Common stock issued in connection with
conversion of note payable at $5.00 per
share...................................... 299,940 -- -- 300,000
Common stock issued in satisfaction of
commissions payable, $5.00 per share....... 19,996 -- -- 20,000
Net loss..................................... -- (6,568,473) -- (6,568,473)
------------ ------------ ----------- -------------
Balance, December 31, 1993................... 10,031,006 (9,533,149) -- 505,314
Sales of $.001 par value common stock, $5.00
per share, net of commissions.............. 1,159,125 -- -- 1,159,375
Initial public offering of Units, consisting
of two shares of $.001 par value common
stock and one warrant, $10.00 per Unit, net
expenses................................... 4,833,922 -- -- 4,835,414
Deferred compensation on stock options
granted.................................... 1,730,000 -- (1,730,000) --
Forfeiture of stock options by Company
officer.................................... (207,000) -- 207,000 --
Compensation expense in connection with
issuance of stock options.................. 112,500 -- -- 112,500
Amortization of deferred compensation........ -- -- 883,000 883,000
Net loss..................................... -- (4,064,767) -- (4,064,767)
------------ ------------ ----------- -------------
Balance, December 31, 1994................... 17,659,553 (13,597,916) (640,000) 3,430,836
Common stock issued for services rendered,
between $3.028 and $3,916 per share........ 347,176 -- -- 347,283
Amortization of deferred compensation........ -- -- 320,000 320,000
Net loss..................................... -- (2,107,349) -- (2,107,349)
------------ ------------ ----------- -------------
Balance, December 31, 1995................... 18,006,729 (15,705,265) (320,000) 1,990,770
Exercise of stock warrants at $6.00 per
share...................................... 4,588,296 -- -- 4,589,088
Exercise of stock options by Company
officers, between $1.00 and $5.00 per
share...................................... 154,865 -- -- 155,000
Common stock issued for services rendered,
between $5.76 and $12.26 per share......... 554,226 -- -- 554,293
Common stock options granted for services
rendered, to purchase 60,000 shares at
$4.50 a share.............................. 119,820 -- -- 119,820
Amortization of deferred compensation........ -- -- 320,000 320,000
Net loss..................................... -- (2,830,595) -- (2,830,595)
------------ ------------ ----------- -------------
Balance, December 31, 1996................... $ 23,423,936 $(18,535,860) $ -- $ 4,898,376
============ ============ =========== =============
</TABLE>
The accompanying notes are an integral part of the consolidated statements.
F-6
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE FOR
THE PERIOD
MAY 16, 1986
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
----------------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Cash flows from development stage activities:
Deficit accumulated during the development
stage.......................................... $(4,064,767) $(2,107,349) $(2,830,595) $ (18,535,860)
Adjustments to reconcile deficit accumulated
during the development stage to net cash used
in development stage activities:
Depreciation expense........................... 48,847 57,593 52,846 224,043
Write off of investment in Sky-Highway Radio
Corp. ....................................... -- -- -- 2,000,000
Compensation expense in connection with
issuance of stock options.................... 995,500 320,000 320,000 1,715,500
Common stock issued for services rendered...... -- 347,283 554,293 901,576
Common stock options granted for services
rendered..................................... -- -- 119,820 119,820
Increase (decrease) in cash and cash equivalents
resulting from changes in assets and
liabilities:
Prepaid expense and other...................... 56,806 (7,465) (587) (9,368)
Due to related party........................... -- -- -- 350,531
Deposits....................................... 41,456 -- -- (303,793)
Accounts payable and accrued expenses.......... (13,773) (189,755) 84,597 206,357
Accrued executive compensation................. (378,000) -- -- --
Other liabilities.............................. (266,203) (6,930) (20,714) 35,969
----------- ----------- ----------- -------------
Net cash used in development stage
activities................................. (3,580,134) (1,586,623) (1,720,340) (13,295,225)
----------- ----------- ----------- -------------
Cash flows from investing activities:
Capital expenditures............................. (22,228) (13,824) -- (392,783)
Acquisition of Sky-Highway Radio Corp............ -- -- -- (2,000,000)
----------- ----------- ----------- -------------
Net cash used in investing activities........ (22,228) (13,824) -- (2,392,783)
----------- ----------- ----------- -------------
Cash flows from financing activities:
Proceeds from issuance of Units and common stock,
net............................................ 5,434,789 -- -- 14,557,482
Proceeds from exercise of stock options by
company officers............................... -- -- 155,000 155,000
Proceeds from exercise of stock warrants......... -- -- 4,589,088 4,589,088
Proceeds from issuance of promissory note........ 200,000 -- -- 200,000
Proceeds from issuance of promissory notes to
related parties................................ 560,000 -- -- 2,965,000
Repayment of promissory note..................... (200,000) -- -- (200,000)
Repayment of promissory notes to related
parties........................................ (200,000) -- (240,000) (2,435,000)
Loan from officer................................ 240,000 -- -- 440,000
Deferred offering costs.......................... 190,776 -- -- --
----------- ----------- ----------- -------------
Net cash provided by financing activities.... 6,225,565 -- 4,504,088 20,271,570
----------- ----------- ----------- -------------
Net increase (decrease) in cash and cash
equivalents...................................... 2,623,203 (1,600,447) 2,783,748 4,583,562
Cash and cash equivalents at the beginning of
period........................................... 777,058 3,400,261 1,799,814 --
----------- ----------- ----------- -------------
Cash and cash equivalents at the end of period..... $ 3,400,261 $ 1,799,814 $ 4,583,562 $ 4,583,562
=========== =========== =========== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest......... $ 2,559 $ -- $ 42,666 $ 82,729
=========== =========== =========== =============
Supplemental disclosure of non-cash financing
activities:
Common stock issued in satisfaction of notes
payable to related parties, including accrued
interest....................................... $ 572,072 $ -- $ -- $ 998,452
=========== =========== =========== =============
Common stock issued in satisfaction of due to
related parties including accrued interest..... $ -- $ -- $ -- $ 409,390
=========== =========== =========== =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-7
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND FINANCING
Business
CD Radio Inc. (the "Company") was originally incorporated in the State of
Delaware on May 17, 1990, under the name Satellite CD Radio, Inc. On December 7,
1992, the Company changed its name to CD Radio Inc. The Company shortly
thereafter formed a wholly-owned subsidiary, Satellite CD Radio, Inc. (SCDR)
which is capitalized with nominal assets. On April 29, 1993, the Company
acquired all of the outstanding shares of stock of Sky-Highway Radio Corp., a
Colorado corporation ("SHRC"), and on December 23, 1994, SHRC was liquidated and
dissolved. SCDR and SHRC were formed primarily to apply for certain Federal
Communications Commission ("FCC") licenses. CD Radio Inc., SCDR, and SHRC are
hereinafter collectively referred to as the "Company."
The Company is a pioneer in the development of a service for broadcasting
compact-disc-quality music programming via satellites to subscribers' motor
vehicle radios, as well as to portable and home receivers. The Company intends
to focus exclusively on providing a consumer service, and anticipates that the
equipment required to receive its broadcasting will be manufactured by consumer
electronics manufacturers and automakers.
In October 1992, in response to a request from the Company, the FCC voted
unanimously to propose the establishment of satellite digital audio radio
service ("satellite radio"). At that time, the FCC established a December 15,
1992 cutoff date for FCC License applications. The Company has filed an
application to utilize a portion of the frequency spectrum that was allocated
for satellite radio by the FCC in January 1995. Subsequent to its acquisition of
SHRC, the Company caused SHRC to withdraw its pending application. The Company
is currently one of four remaining applicants which have the right to
participate in the auction for spectrum scheduled for April 1, 1997.
Auction of Spectrum
On March 3, 1997, the FCC adopted satellite radio licensing rules (the
"Licensing Rules") and implemented a spectrum plan that will accommodate only
two national satellite radio licenses, both of which are scheduled to be
auctioned to the Company and the other three applicants on April 1, 1997. There
can be no assurance that the Company will be successful in obtaining one of the
two licenses or that the cost of obtaining it would not be material to the
Company's operations.
Pursuant to the Licensing Rules, the auction is scheduled to be held among
the four existing applicants on April 1, 1997. Prior to the commencement of the
auction each applicant must deposit $3 million with the FCC. The minimum opening
bid for each FCC License is $8 million. The bidding will continue until only two
bidders remain. Within 10 business days following the announcement of winning
bidders, each auction winner must deposit with the FCC twenty percent of its
winning bid. The $3 million initial deposit is applied toward the twenty percent
down payment. The winning bidders will also be required to supplement their
applications on file with the FCC within 30 days after the close of bidding.
After the FCC has confirmed receipt of each winning bidder's twenty percent
payment and acceptance of each winning bidder's application, the FCC will accept
petitions to deny the winning bidders' applications. If the FCC dismisses the
petitions, the winning bidders will have 10 business days to submit the balance
of their winning bids.
Pursuant to the Licensing Rules, certain progress milestones would be
required. Licensees would be required to begin satellite construction within one
year; and to launch and begin operating their first satellite within four years
and begin operating their entire system within six years. Failure to meet those
milestones could result in revocation of the FCC License.
F-8
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. BUSINESS AND FINANCING -- (CONTINUED)
The Company is in the process of obtaining monetary commitments to allow it
to be, in the opinion of management, competitive in the auction process. These
commitments include subscriptions to purchase 5% Delayed Convertible Preferred
Stock contingent upon the Company's success in the auction.
Financing requirements
In order to commence CD Radio service, the Company will require, among
other things, an FCC License to construct, launch and operate its satellites
(the "FCC License") and substantial funds, approximately $500 million or more,
to finance construction of its satellite system, to plan and implement its
service, to provide working capital and to sustain its operations until it
generates positive cash flows from operations. The Company will participate in
the auction for spectrum scheduled for April 1, 1997. As noted above, the
minimum opening bid for each license will be $8 million. The Company has not
commenced construction of its satellites and will require substantial additional
financing before it is able to do so. Failure to obtain an FCC License and/or
inability to attract the required long-term financing will prevent the Company
from realizing its objective of providing satellite-delivered radio programming
to vehicular radios. Management's plan to fund operations and capital expansion
includes the additional sale of debt and equity securities through public and
private sources. In absence of the FCC License, the Company believes that its
working capital at December 31, 1996 is sufficient to fund planned operations
through the first quarter of 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
The consolidated financial statements include the accounts of CD Radio Inc.
and its wholly-owned subsidiaries, SCDR and SHRC (through the date of SHRC's
dissolution, December 23, 1994). Intercompany transactions are eliminated in
consolidation. The Company's activities to date principally have been planning
and organization, the process of obtaining an FCC License, initiating research
and development programs, conducting market research and securing adequate
equity capital for the development of its proposed service. Accordingly, the
Company's financial statements are presented as those of a development stage
enterprise, as prescribed by Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development Stage Enterprises".
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 at the
date of the financial statements and the reported amounts of expenses during the
reported period. The estimates involve judgments with respect to, among other
things, various future factors which are difficult to predict and are beyond the
control of the Company. Therefore, actual amounts could differ from these
estimates.
Depreciation
Depreciation of office equipment is computed on the straight-line method
over three to five years based upon estimated useful lives. Depreciation of
technical equipment, primarily satellite communications equipment, is computed
on the straight-line method based on an estimated useful life of ten years.
Depreciation of demonstration equipment, primarily an automobile used in a
prototype system, is computed on the straight-line method based on an estimated
useful life of four years.
F-9
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Cash equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of credit risk
The Company has invested its excess cash in a money market fund with a
major bank. These investments are collateralized by the underlying assets of the
fund. The fund invests in government securities or short-term interest or
dividend-bearing investment-grade securities. The Company has not experienced
any losses on its investments.
Income taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the sum of tax payable for the period and the change
during the period in deferred tax assets and liabilities.
Net loss per share
Net loss per common share is based on the weighted average number of common
shares and dilutive common share equivalents outstanding during the periods.
Options and warrants granted by the Company have not been included in the
calculation of net loss per share because such items were anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128) to
improve the EPS information provided in financial statements. FAS 128 simplifies
the existing computational guidelines of Accounting Principles Board Opinion No.
15, "Earnings Per Share," revises the disclosure requirements, and increases the
comparability of earnings per share (EPS) data on an international basis. To
simplify the EPS computations, the presentation of primary EPS is eliminated and
replaced with basic EPS, with the principal difference being that common stock
equivalents are not considered in computing basic EPS. In addition, FAS 128
requires dual presentation of basic and diluted EPS regardless of whether they
are same. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997. As long as the Company continues to experience
net losses, there will be no impact to its net loss per share computation since
its common stock equivalents are anti-dilutive and are already not considered in
computing loss per share, as noted above.
3. CAPITAL STOCK
Preferred stock
The Board of Directors has the authority to issue shares of preferred stock
and fix the terms thereof, without any further vote or action by the
stockholders of the Company. In October 1996, in connection with the execution
of the Preferred Stock Investment Agreement, the Board of Directors authorized
the designation of 5% Delayed Convertible Preferred Stock (the "5% Preferred").
The rights and performance of the 5% Preferred include: (a) cumulative dividends
at the rate of $1.25 per share per annum, payable semi-annually, when and as
declared by the Board of Directors; (b) liquidation preference equal to issuance
price
F-10
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITAL STOCK -- (CONTINUED)
plus any accrued but unpaid dividends; (c) certain redemption and lock-up rights
granted to the Company; and (d) certain conversion and registration rights
granted to the holders of 5% Preferred.
Warrants
In connection with the Company's initial public offering and the partial
exercise of the underwriters' over-allotment option, the Company issued warrants
to purchase 745,970 shares of the Company's Common Stock. Additionally, the
Company issued to the underwriters as consideration warrants to purchase 123,560
shares of the Company's Common Stock. Each warrant originally entitled the
holder to purchase one share of Common Stock at a purchase price of $5.00 per
share until March 20, 1995 and at a purchase price of $6.00 per share during the
six-month period thereafter. In September 1995, the Company extended the
expiration date of the warrants to March 20, 1996, at a purchase price of $6.00
per share. Then, in March 1996, the Company extended the expiration date of
these warrants to September 20, 1996 at a purchase price of $6.00 per share. In
September 1996 the Company received proceeds of $4,589,088 relating to the
exercise of 864,848 warrants. The remaining 4,682 warrants expired unexercised.
Of the warrants exercised, 764,848 shares of common stock were issued in
exchange for cash and 27,083 shares of common stock were issued in a cashless
exercise of 100,000 warrants held by the underwriters.
Stock options and bonuses
Under an amended and restated employment agreement effective June 2, 1992,
the Company, on July 30, 1993, granted an officer options to purchase 20,000
shares of the Company's Common Stock at $1.00 per share, exercisable for 7 years
from date of grant. This officer also transferred to the Company, for nominal
consideration, his rights in connection with certain patent applications.
Additionally, on December 23, 1994, in accordance with this agreement, the
Company granted this officer options to purchase 112,500 shares of its Common
Stock under the terms of the 1994 Stock Option Plan at an exercise price of
$1.00 per share, as a result of the completion of a certain specified milestone.
The Company has recorded salary expense and additional paid-in-capital in the
amount of $112,500, reflecting the difference between the fair market value per
share of Common Stock at the measurement date and the exercise price. These
options were immediately vested and exercisable. In 1996 this officer was
granted options to purchase an additional 60,000 shares of Common Stock under
the terms of the 1994 Stock Option Plan at an exercise price of $8.5625. The
options granted in 1996 vest based on certain milestones which were not met as
of December 31, 1996. If this officer is terminated for any reason other than
cause, as defined in the agreement, the Company is obligated to pay to this
officer an amount equal to 50% of his annual salary and, at this officer's
option, to repurchase all of his shares of Common Stock at a price of $1.25 per
share. In 1996, this officer exercised options to purchase 80,000 shares of the
Company's Common Stock.
During 1996, options to purchase 400,000 shares of common stock at $8.5625
per share were granted to the Company's Chairman and Chief Executive Officer.
These options vest based on a certain milestone which was not met as of December
31, 1996.
In October 1992, the Company entered into a financial consulting services
agreement with a financial advisory firm. Pursuant to this agreement, the
Company has granted the investment advisory firm an option to purchase 260,000
shares of the Company's Common Stock at $6.25 per share as follows -- 60,000
shares upon execution of the agreement and four 50,000 share increments upon the
successful completion of equity and/or debt financing of certain specified
amounts during the term of the agreement and for a period of two years following
termination of the agreement by the Company. Each option expires three years
from the date such option becomes exercisable. As of December 31, 1996 under
this agreement, 60,000 options for shares had expired unexercised and none of
the remaining options were exercisable. Additionally, the agreement provides,
F-11
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITAL STOCK -- (CONTINUED)
among other things, for the payment in cash to this firm of fees equal to (i)
two percent (2%) of the gross proceeds from each equity financing after December
15, 1992 and (ii) one percent (1%) of the gross proceeds from each debt
financing, during the term of the agreement and for a period of two years
following termination of the agreement by the Company.
In 1995, the Company adopted the 1995 Stock Compensation Plan
("Compensation Plan") from which up to 175,000 shares of the Company's Common
Stock could be issued in lieu of cash compensation to employees and or
consultants. During 1995 and 1996, respectively, 95,000 and 67,500 shares of the
Company's Common Stock were issued pursuant to this Compensation Plan.
Stock option plans
In February 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan") and its 1994 Directors' Nonqualified Stock Option Plan (the "Directors'
Plan"). Options granted under the 1994 Plan generally vest over a four-year
period and generally are exercisable for a period of ten years from the date of
grant. In 1996, the Board of Directors voted to increase the number of shares of
Common Stock available for issuance pursuant to the 1994 Plan and the Directors'
Plan by 350,000 shares. As of December 31, 1996 there are an aggregate of
1,600,000 shares of Common Stock authorized for issuance.
A summary of option activity under the 1994 Plan, the Directors' Plan, and
of all other option activity follows:
<TABLE>
<CAPTION>
1994 PLAN DIRECTORS' PLAN OTHER
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTION PRICE PER OPTION PRICE PER OPTION PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1994........... -- -- 410,000 $4.33
--------- --------- ---------
Granted................................ 707,500 $3.81 15,000 $ 5.00 --
Exercised.............................. -- --
Cancelled.............................. (90,000) $5.00 -- --
--------- --------- ---------
Outstanding at December 31, 1994......... 617,500 $3.63 15,000 $ 5.00 410,000 $4.33
--------- --------- ---------
Granted................................ -- 110,000 $ 3.11 --
Exercised.............................. -- -- --
Cancelled.............................. -- -- (60,000) $6.25
--------- --------- ---------
Outstanding at December 31, 1995......... 617,500 $3.63 125,000 $ 3.34 350,000 $4.00
--------- --------- ---------
Granted................................ 545,000 $8.10 40,000 $ 6.875 --
Exercised.............................. (80,000) $1.00 -- (55,000) $1.36
Cancelled.............................. -- -- --
--------- --------- ---------
Outstanding at December 31, 1996......... 1,082,500 $6.08 165,000 $ 4.20 295,000 $4.56
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1994 PLAN DIRECTORS' PLAN OTHER
-------------- --------------- ------------
<S> <C> <C> <C>
As of December 31, 1996:
Range of exercise prices........................ $1.00-$8.5625 $2.125-$6.875 $1.00-$6.25
Weighted average remaining contractual life for
options outstanding (years).................. 8.45 8.67 5.71
</TABLE>
The weighted average fair value of options granted during 1995 and 1996 was
$1.383 and $4.366, respectively.
F-12
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITAL STOCK -- (CONTINUED)
An aggregate of 272,500 shares of Common Stock remain available for grant
pursuant to either the 1994 Plan or the Directors' Plan. The Company has
reserved a total of 1,815,000 shares of Common Stock issuable upon the exercise
of outstanding options and options available for issuance pursuant to the
Company's stock option plans. As of December 31, 1996, 857,500 options were
vested and exercisable.
As a result of certain option grants in 1994 at exercise prices below fair
market value, the Company recorded deferred compensation, which is reflected as
a component of stockholders' equity on the balance sheets. Deferred compensation
is being amortized over the vesting period of the related options. Deferred
compensation related to options that were forfeited has been charged to
additional paid-in capital. As of December 31, 1996 all deferred compensation
relating to the 1994 issuance of stock options had been amortized.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (FAS 123) as they pertain to financial
statement recognition of compensation expense attributable to option grants. If
the Company had elected to recognize compensation cost for the option grants
consistent with FAS 123, the Company's net loss and net loss per share on a
pro-forma basis would have been.
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net loss -- as reported............................ $(2,107,349) $(2,830,595)
Net loss -- pro-forma.............................. $(2,259,434) $(4,428,995)
Net loss per share -- as reported.................. $ (0.23) $ (0.29)
Net loss per share -- pro-forma.................... $ (0.24) $ (0.46)
</TABLE>
The pro-forma expense related to the stock options is recognized over the
vesting period, generally four years. The fair value of each option grant was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for each year:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Risk-free interest rate...................................... 5.81% 6.00%
Expected life of options -- years............................ 2.77 2.79
Expected stock price volatility.............................. 75% 75%
Expected dividend yield...................................... N/A N/A
</TABLE>
F-13
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTIES
Since inception, the Company has relied upon related parties for certain
consulting, legal and management services. Total expenses incurred in
transactions with related parties are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED MAY 17, 1990
DECEMBER 31, (DATE OF INCEPTION)
-------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
-------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Consulting fees............... $ 47,772 $ 34,575 $187,820 $ 713,210
Legal fees.................... 171,523 74,761 70,582 727,550
Management fees............... -- -- -- 361,800
Interest expense.............. 25,361 19,783 13,268 113,474
Office space.................. -- -- -- 40,500
Patent and FCC fees........... -- -- -- 56,600
Other......................... -- -- -- 26,750
-------- -------- -------- -----------
$244,656 $129,119 $271,670 $ 2,039,884
======== ======== ======== ===========
</TABLE>
Of the $187,820 in consulting fee expenses for the year ended December 31,
1996, $119,820 relate to issuance of common stock options to a related party for
consulting services performed for the Company.
During the period May 17, 1990 (date of inception) to December 31, 1996,
the Company issued Common Stock in lieu of cash in settlement of certain
liabilities and expenses as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED MAY 17, 1990
DECEMBER 31, (DATE OF INCEPTION)
-------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
-------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Consulting fees............... $ -- $ 36,330 $ 32,550 $ 168,880
Legal fees.................... -- 310,953 521,743 1,028,227
Management fees............... -- -- -- 60,000
Interest expense.............. -- -- -- 14,259
Patent and FCC fees........... -- -- -- 39,600
-------- -------- -------- -----------
$ -- $347,283 $554,293 $ 1,310,966
======== ======== ======== ===========
</TABLE>
Liabilities settled through the issuance of Common Stock in lieu of cash
are reflected in the statements of stockholders' equity.
In April 1994, an officer loaned the Company $240,000 payable on April 1,
1995 and accruing simple interest at the rate of 8% per annum. This loan and
accrued interest was repaid in 1996. If this officer is terminated for any
reason other than cause, as defined in his amended employment and noncompetition
agreement dated June 8, 1994, the Company is obligated to pay this officer
$300,000 plus any and all amounts then owed to him by the Company. This officer
waived his compensation for the fourth quarter of 1994.
During the second quarter of 1994, a principal stockholder of the Company
loaned the Company $560,000 payable on demand and accruing simple interest at
the rate of 8% per annum. The principal balance
F-14
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTIES -- (CONTINUED)
of this note and accrued interest thereon, totaling $572,000, was exchanged for
57,200 Units in connection with the Company's public offering.
5. INCOME TAXES
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax assets and deferred tax liability and are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Capitalized start-up costs......................... $ 4,312,000 $ 5,377,000
Net operating loss carryforwards................... 1,517,500 1,511,300
Deferred compensation.............................. 509,800 542,300
Accrual to cash adjustments........................ 38,400 60,500
----------- -----------
6,377,700 7,491,100
Valuation allowance................................ (6,377,700) (7,491,100)
----------- -----------
Net deferred tax asset............................. $ -- $ --
=========== ===========
</TABLE>
Realization of the net deferred tax asset at the balance sheet date is
dependent upon future earnings which are uncertain. Accordingly, a full
valuation allowance was recorded against the asset.
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $3,713,800 for federal and state income tax purposes available to
offset future taxable income. The net operating loss carryforwards expire at
various dates beginning 2005. There may be limitations on the annual utilization
of these net operating losses as a result of certain changes in ownership that
have occurred since the Company's inception. In addition, a significant portion
of costs incurred have been capitalized for tax purposes as a result of the
Company's status as a start-up enterprise. Once the Company begins it active
trade or business, these capitalized costs will be amortized over 60 months. The
total capitalized start-up costs of $5,546,000 include $169,000 which when
realized would not affect financial statement income but will be recorded
directly to shareholders' equity.
6. COMMITMENTS AND CONTINGENCIES
Lease commitment
In October 1992, the Company entered into a lease with an unaffiliated
property management company for the office space that the Company previously
subleased from a company controlled by a former director and executive officer
of the Company. The lease term extends through October 1998. The lease provided
for the abatement of rental payments for the first three months of each of the
first two years of the lease term. Also, in addition to the base rental
payments, the Company will pay a monthly allocation of the building's operating
expenses. Minimum annual rental commitments under this lease are as follows for
the year ended December 31:
<TABLE>
<S> <C>
1997.............................................................. $219,000
1998.............................................................. 176,000
--------
$395,000
========
</TABLE>
F-15
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Total rent expense for the years ended December 31, 1994, 1995 and 1996 and
the period May 17, 1990 (date of inception) to December 31, 1996 was $325,798,
$274,653, $301,765 and $1,205,008, respectively.
Satellite construction
The Company has entered into an agreement (the "Construction Contract")
with Space Systems/Loral pursuant to which Space Systems/Loral has agreed to
construct two satellites and, at the Company's option, a third satellite in
accordance with stipulated specifications. The Company has extended the
Construction Contract on a monthly basis through April 30, 1997 while it
negotiates with Space Systems/Loral to amend the contract's technical
specifications, pricing and delivery terms. The Company may negotiate with Space
Systems/Loral to extend the Construction Contract further or it may permit the
contract to expire. The Company believes it will be able to negotiate a
favorable contract with Space Systems/Loral for the construction of the
satellites, although there can be no assurance that the Company will be able to
do so. An initial payment of $100,000 was made by the Company at the time the
contract was signed, which is included in Deposits on the balance sheets as of
December 31, 1995 and 1996.
Launch services
The Company has reserved two launch slots with Arianespace during the
period extending from November 1, 1999 through April 30, 2000. If the Company's
satellites are not available for launch during this period, the Company will
arrange to launch the satellites on the first launch dates available after the
satellites are completed. In order to maintain its launch slots, the Company
will need to enter into a definitive agreement with Arianespace by May 31, 1997,
providing for the launch of its satellites. The final terms and conditions of
any launch agreement are subject to negotiations between the Company and
Arianespace. Satellite launches are subject to significant risks, including
satellite destruction or damage during launch or failure to achieve proper
orbital placement. In connection with this agreement, the Company paid a non-
refundable launch date reservation fee of $100,000. This amount, which is
included in Deposits on the balance sheets as of December 31, 1995 and 1996 will
be credited against the cost of the launch services.
F-16
<PAGE>
<PAGE>
[PAGES 1 THROUGH 6 OF PART I OF THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR
THE PERIOD ENDED 6/30/97]
Exhibit (g)(2)
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the period
Three months end Six months ended May 17,1990
---------------------------- ---------------------------- (date of inception)
June 30, June 30, June 30, June 30, to June 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ - $ - $ - $ - $ -
------------ ------------ ------------ ------------- ------------
Expenses:
Legal, consulting and
regulatory fees 1,009,110 347,495 1,245,751 575,169 8,494,715
Other general and administrative 566,250 330,151 846,915 611,832 8,379,678
Research and development 15,434 24,576 35,058 52,477 1,951,413
Write-off of investment in
Sky-Highway Radio Corp. - - - - 2,000,000
------------ ------------ ------------ ------------- ------------
Total expenses 1,590,794 702,222 2,127,724 1,239,478 20,825,806
------------ ------------ ------------ ------------- ------------
Other income (expense)
Interest income 1,237,003 20,099 1,297,684 45,389 1,626,356
Interest expense (34) (4,903) (4,945) (9,820) (171,395)
------------ ------------ ------------ ------------- ------------
1,236,969 15,196 1,292,739 35,569 1,454,961
------------ ------------ ------------ ------------- ------------
Net loss $ (353,825) $ (687,026) $ (834,985) $ (1,203,909) $(19,370,845)
============ ============ ============ ============= ============
Net loss per common share $ (4.23) $ (0.07) $ (4.28) $ (0.13)
============ ============ ============ =============
Weighted average common shares
outstanding 10,313,114 9,322,471 10,307,255 9,385,781
============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
1
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30,184,349 $ 4,583,562
Interest receivable and other 447,141 9,368
------------- ------------
Total current assets 30,631,490 4,592,930
------------- ------------
Property and equipment in service, at cost:
Technical equipment 254,200 254,200
Office equipment and other 93,720 89,220
Demonstration equipment 38,664 38,664
------------- ------------
386,584 382,084
Less accumulated depreciation (233,118) (213,344)
------------- ------------
153,466 168,740
------------- ------------
Satellite construction in process 6,500,000 -
Other assets
Launch deposit 3,420,000 -
FCC license deposit 16,669,200 -
Designated cash 66,676,800 -
Other deposits 303,793 303,793
------------- ------------
Total other assets 87,069,793 303,793
------------- ------------
Total assets $ 124,354,749 $ 5,065,463
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 187,172 $ 131,118
Other 20,082 20,174
------------- ------------
Total current liabilities 207,254 151,292
Deferred rent and other 5,743 15,795
------------- ------------
Total liabilities 212,997 167,087
============= ============
Commitments and contingencies
5% Delayed Convertible Preferred Stock, $0.001 par value;
8,000,000 shares authorized, 5,400,000 shares issued and
outstanding at June 30, 1997 (liquidation preference
of $136,400,000), at net carrying value 111,855,311
Stockholders' equity:
Preferred stock, $0.001 par value, 50,000,000 shares
authorized; 8,000,000 shares designated as 5% Delayed
Convertible Preferred Stock
Common stock, $0.001 par value; 200,000,000 shares
authorized; 10,313,391 and 10,300,391 shares issued and
outstanding at June 30, 1997 and December 31, 1996,
respectively 10,313 10,300
Additional paid-in capital 75,424,923 23,423,936
Subscription receivable (465,450) -
Deficit accumulated during the development stage (62,683,345) (18,535,860)
------------- ------------
Total stockholders' equity 12,286,441 4,898,376
------------- ------------
Total liabilities and stockholders' equity $ 124,354,749 $ 5,065,463
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
2
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the period
Six months ended May 17,1990
------------------------------ (date of inception)
June 30, June 30, to June 30,
1997 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (834,985) $ (1,203,909) $(19,370,845)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 19,774 26,885 243,817
Write off of investment in Sky-Highway Radio Corp. - - 2,000,000
Compensation expense in connection with
issuance of stock options - 160,000 1,715,500
Common stock issued for services rendered - 222,731 901,576
Common stock options granted for services 119,820
rendered - -
Increase (decrease) in cash and cash equivalents
resulting from changes in assets and liabilities:
Interest receivable and other (437,773) 4,713 (447,141)
Due to related party - - 350,531
Deposits - - 303,793)
Accounts payable and accrued expenses 56,054 57,405 262,411
Other liabilities (10,144) (12,995) 25,825
------------ ------------ ------------
Net cash used in development stage activities (1,207,074) (745,170) (14,502,299)
------------ ------------ ------------
Cash flows from investing activities:
Payments for satellite construction (6,500,000) - (6,500,000)
Advance payment for launch services (3,420,000) - (3,420,000)
License fee payments to the FCC (16,669,200) - (16,669,200)
Designated cash (66,676,800) - (66,676,800)
Capital expenditures (4,500) - (397,283)
Acquisition of Sky-Highway Radio Corp. - - (2,000,000)
------------ ------------ ------------
Net cash used in investing activities (93,270,500) - (95,663,283)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of units and common stock - - 14,557,482
Proceeds from issuance of preferred stock 120,052,361 - 120,052,361
Proceeds from exercise of stock warrants - 211,800 4,589,088
Proceeds from issuance of promissory notes - - 200,000
Proceeds from issuance of promissory notes to
related parties - - 2,965,000
Proceeds from exercise of stock options by
Company employees 26,000 105,000 181,000
Repayment of promissory note - - (200,000)
Repayment of promissory notes to related parties - - (2,435,000)
Loan from officer - - 440,000
Deferred offering costs - - -
------------ ------------ ------------
Net cash provided by financing activities 120,078,361 316,800 140,349,931
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 25,600,787 (428,370) 30,184,349
Cash and cash equivalents at the beginning of period 4,583,562 1,799,814 -
------------ ------------ ------------
Cash and cash equivalents at the end of period $ 30,184,349 $ 1,371,444 $ 30,184,349
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
GENERAL
The accompanying consolidated financial statements do not include all
of the information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal, recurring adjustments) considered necessary to fairly reflect the
Company's consolidated financial position and consolidated results of
operations have been included.
SATELLITE CONSTRUCTION
In March 1997, the Company extended its satellite construction
contract with Space Systems/Loral ("Loral") and amended the contract to allow
Loral to commence work associated with the program schedule. In April 1997 the
Company made its first payment of $6.5 million under this agreement.
BROADCAST LICENSE
In April 1997, the Federal Communications Commission held an auction
for two national satellite radio broadcast licenses. The Company was the
winning bidder in such auction for one of these licenses (the "FCC License")
with a bid price of $83.3 million. Of the total bid price, $16.7 million has
been deposited with the FCC, with the remainder due within 10 business days
following the public notice by the FCC that it is prepared to award the
license. The Company has classified $66.7 million as designated cash in the
June 30, 1997 balance sheet reflecting the balance due the FCC if and when the
license is awarded.
PRIVATE PLACEMENT
In April 1997, the Company completed a private placement of its 5%
Delayed Convertible Preferred Stock (the "5'% Preferred Stock"). The Company
sold a total of 5.4 million shares of the 5% Preferred Stock for an aggregate
sale price of $135 million. In connection with the private placement, the
Company paid $10.1 million in fees to its placement agent, Libra Investments,
Inc. ("Libra"), and $2.7 million to Batchelder & Partners, Inc., a financial
advisory firm. In addition, the Company agreed to grant a warrant to Libra to
purchase 486,000 shares of the 5% Preferred Stock with an exercise price of
$25.00 per share. As a result of the private placement, options to purchase
200,000 shares of Common Stock held by Batchelder & Partners, Inc. vest and
become exercisable for three years with an exercise price of $6.25. Reference
is made to the Company's report on Form 8-K filed May 5, 1997 for a description
of the terms of the 5% Preferred Stock.
4
<PAGE>
<PAGE>
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
SUBSEQUENT EVENTS
On July 22, 1997, the Company entered into two loan agreements
(collectively the "AEF Agreements") with Arianespace Finance S.A. ("AEF"), a
subsidiary of Arianespace S.A. ("Arianespace"), to finance approximately $105
million of the estimated $176 million price of the launch services to be
provided by Arianespace. Under these agreements, the Company is able to borrow
funds to meet the progress payments due to Arianespace for the construction of
each launch vehicle and other launch costs (the "Loans"). The Company has the
opportunity upon satisfying a variety of conditions specified in the AEF
Agreements to extend the Loans. Otherwise, if not refinanced, the Company will
be required to repay the Loans in full, together with accrued interest and all
fees and other amounts due, approximately three months before the applicable
launch date. The AEF Agreements impose restrictions on the Company's ability to
permit liens on certain assets of the Company, other than liens in favor of
AEF. If the loans are extended, the Company will be subject to provisions
restricting its ability to incur additional indebtedness or make investments.
On August 5, 1997, Loral agreed to an amendment to the Company's
satellite construction contract under which Loral agreed defer for three years
$20 million in payments to be made by the Company in connection with the
contract. In addition, on the same date, Loral's parent company, Loral Space &
Communications Ltd., purchased from the Company 1.9 million shares of common
stock for $25 million.
NET LOSS PER COMMON SHARE
Net loss per common share has been computed based on the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares representing the common shares that would be issued on
conversion of convertible securities and exercise of outstanding stock options
and warrants reduced by the number of shares which could be purchased from the
related exercise proceeds are not included since their effect would be
anti-dilutive.
The net loss attributable to common stockholders has been adjusted for
deemed dividends. The deemed dividend relates to the discount feature
associated with the Company's 5% Delayed Convertible Preferred Stock, computed
in accordance with the SEC's position on accounting for preferred stock which
is convertible at a discount to the market. The discount, which totaled
approximately $52 million, will be recognized as a return to the 5% Delayed
Convertible Preferred Stock shareholders over the period April 1997 through
July 1997, which is the minimum period in which the shareholders can realize
that return.
5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
3 months 6 months
ended ended
June 30, June 30,
1997 1997
-------- --------
<S> <C> <C>
Net loss $ (353,825) $ (834,985)
Deemed dividends
on preferred stock (43,312,500) (43,312,500)
--------------- --------------
Net loss attributable
to common stockholders ($43,666,325) ($44,147,485)
=============== ==============
Per common share:
Net loss $ (.03) $ (.08)
Deemed dividends on
on preferred stock (4.20) (4.20)
----- -----
Net loss attributable to
common stockholders $ (4.23) $ (4.28)
===== =====
</TABLE>
For reporting periods ending after December 15, 1997, the Company will
be required to report earnings (loss) per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). As
long as the Company continues to experience net losses, there will be no
material impact on the Company's net loss per share from adoption of SFAS 128.
6
