Registration No. 333-_________
As filed with the Securities and Exchange Commission on August 29, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CD RADIO INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-1700207
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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SIXTH FLOOR, 1001 - 22ND STREET, N.W.
WASHINGTON, D.C. 20037
202-296-6192
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
DAVID
MARGOLESE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
CD RADIO INC.
SIXTH FLOOR, 1001 - 22ND STREET, N.W.
WASHINGTON, D.C. 20037
202-296-6192
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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Copies to:
LEONARD V. QUIGLEY DAVID J. BEVERIDGE
MITCHELL S. FISHMAN SHEARMAN & STERLING
PAUL, WEISS, RIFKIND, WHARTON & GARRISON 599 LEXINGTON AVENUE
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10022
NEW YORK, NEW YORK 10019-6064 212-848-4000
212-373-3000
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APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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If the securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED (1) OFFERING PRICE PER SHARE (2) AGGREGATE OFFERING PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock..................... 4,025,000 $ 19.00 $ 76,475,000 $ 23,175
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(1) Includes shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933 and based on the
average of the bid and asked price of the Common Stock of the Company
reported on the NASDAQ SmallCap Market on August 27, 1997.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 29, 1997
PROSPECTUS
3,500,000 SHARES
[CD Radio Logo]
COMMON STOCK
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All of the shares of common stock, par value $.001 per share (the
"Common Stock"), offered hereby (the "Stock Offering") are being offered by CD
Radio Inc. (the "Company").
The Stock Offering is one component of a financing transaction which
includes an offer to exchange (the "Exchange Offer") shares of the Company's
new Convertible Preferred Stock (the "New Preferred Stock") for shares of the
Company's outstanding 5% Delayed Convertible Preferred Stock (the "5% Preferred
Stock") and an underwritten public offering of the Company's Senior Discount
Notes due 2007 (the "Notes Offering"); and together with the Stock Offering, the
"Offerings"). Separate registration statements have been filed for each of the
Exchange Offer and the Notes Offering, and such offers will be made by separate
prospectuses. The consummation of the Stock Offering is not conditioned upon the
consummation of the Notes Offering but is conditioned upon consummation of the
Exchange Offer.
The Common Stock of the Company is traded on the Nasdaq SmallCap Market
under the symbol "CDRD." On August 27, 1997, the closing bid price of the
Common Stock as reported on the Nasdaq SmallCap Market was $19 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
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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.
<TABLE>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share..................................... $ $ $
Total(3)...................................... $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $________.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an additional 525,000 shares
of Common Stock solely to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to the Company will be $ , $
and $ , respectively. See "Underwriting."
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The shares of Common Stock are being offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock will be made in New
York, New York on or about , 1997.
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MERRILL LYNCH & CO.
LEHMAN BROTHERS
UNTERBERG HARRIS
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The date of this Prospectus is , 1997.
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[Photographs]
CERTAIN PERSONS PARTICIPATING IN THE STOCK OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
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ILLUSTRATIVE CHANNEL LISTINGS
The following channel list (which employs terminology common to the
music industry) has been prepared by the Company to illustrate the manner in
which the Company's music programming might be marketed. The Company intends to
vary channel formats from time-to-time to reflect the results of its market
research and subscriber tastes.
1. SYMPHONIC
Presenting the full range of the classical repertoire, with complete works
from great composers -- Beethoven, Mozart, Handel, Copland -- performed by
world-class artists and orchestras, including the New York Philharmonic
Orchestra, Itzhak Perlman, Wynton Marsalis and Yo-Yo Ma.
2. CHAMBER MUSIC
The lighter side of classical music, featuring chamber music from small
ensembles, as well as solo performances. Composers like Vivaldi, Telemann
and Liszt performed by Ruth Laredo, the Juilliard String Quartet, Julian
Bream and Jean-Pierre Rampal.
3. OPERA
Full-length operatic masterpieces from Verdi, Wagner and Puccini, along with
arias and songs, showcasing the world's great vocal artists, including
Luciano Pavarotti, Dawn Upshaw, the Hilliard Ensemble, Placido Domingo and
Cecilia Bartoli.
4. TODAY'S COUNTRY
The honest 90s sound of today's stars, including Tim McGraw, Leann Rimes,
Vince Gill, Alan Jackson, Garth Brooks, Pam Tillis and Bryan White.
5. TRADITIONAL COUNTRY
Classic country hits from legends like Merle Haggard, Conway Twitty, Waylon
Jennings, Loretta Lynn and George Jones.
6. CONTEMPORARY JAZZ
The smooth instrumental sounds of David Sanborn, Kenny G, Larry Carlton,
Dave Koz and Bob James, mixed with the vocal stylings of Manhattan Transfer,
Al Jarreau and Michael Franks.
7. CLASSIC JAZZ
Mainstream jazz at its finest. Features the artistry of legends like Miles
Davis, Oscar Peterson, Thelonious Monk, Sarah Vaughan and Dave Brubeck and
performers following in the tradition like Dianne
Schuur and Branford Marsalis.
8. BLUES
The Blues from A to Z -- from legends like Muddy Waters and Howlin' Wolf to
John Lee Hooker, Etta James, B.B. King, Robert Cray, Buddy Guy and exciting
new artists like Keb' Mo', Duke
Robillard and Jonny Lang.
9. BIG BAND/SWING
From the great bands of the 30s and 40s to bands today. Featuring the sounds
of Artie Shaw, Tommy Dorsey, Glenn Miller, Benny Goodman, Harry James, Duke
Ellington and Count Basie.
10. TOP OF THE CHARTS
Today's hottest US hits. No Doubt, Mariah Carey, Spice Girls.
11. CLASSIC ROCK
Classic tracks and deep album cuts from the legends of rock, including the
Who, the Beatles, the Rolling Stones, Led Zeppelin, The Doors, Eric Clapton,
Neil Young, Jimi Hendrix and Jethro Tull.
16. LATIN RHYTHMS
Move to the music of Ruben Blades, Albita, Juan Luis Guerra, and the
legendary Tito Puente.
17. REGGAE
Reggae from legends like Bob Marley & the Wailers, Peter Tosh and Third
World to new sounds from Steel Pulse, UB40, Shaggy, Ziggy Marley, Maxi
Priest, Aswad and Lady Saw.
18. RAP
Pure rap from the masters of the genre, including Puff Daddy, Fugees, DJ
Kool, Freak Nasty, Warren G and M.C. Lyte.
19. DANCE
Techno, club and pop remixes from around the world make this one of the
hottest spots on the dial.
20. URBAN CONTEMPORARY
The soulful sounds of Toni Braxton, Luther Vandross, Keith Sweat and Mary
J. Blige.
21. SOFT ROCK
Mainstream pop hits from artists like Celine Dion, Phil Collins, Gloria
Estefan and George Michael.
22. SINGERS AND SONGS
The greats sing the standards, with legends like Frank Sinatra, Nat King
Cole, Tony Bennett and Barbra Streisand.
23. BEAUTIFUL INSTRUMENTALS
Melodic relaxing orchestrations from Richard Clayderman, Paul Mauriat,
Zamfir, James Last, Roger Williams and James Galway.
24. ALBUM ROCK
Mainstream rock from veteran bands and new artists, including Aerosmith,
Collective Soul, Dave Matthews Band and John Mellencamp.
25. ALTERNATIVE ROCK
Modern rock from such diverse bands as Beck, Live, Stone Temple Pilots and
Smashing Pumpkins.
26. NEW AGE
Sounds that soothe and transport. Relax with Jim Brickman, Kitaro and
Yanni.
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12. 50S OLDIES
Sock hops and going steady. Tune in and experience it all over again with
Chuck Berry, Little Richard and Elvis Presley.
13. 60S OLDIES
Put the top down and cruise to the sounds of the sixties. The solid gold
sounds of Motown, the British Invasion and Surfer Rock.
14. FOLK ROCK
Singer-songwriters and bands with thoughtful lyrics and melodies, including
Joni Mitchell, Lyle Lovett, James Taylor, Shawn Colvin, Chris Isaak, Tori
Amos and Indigo Girls.
15. LATIN BALLADS
Emotive romantic sounds from Julio Iglesias, Rocio Durcal, Roberto Carlos,
Ana Gabriel, Gloria Estefan and Jon Secada.
27. BROADWAY'S BEST
The Great White Way shines with all your favorites from the past and
today's hot new shows. Rodgers and Hammerstein, Marvin Hamlisch and Andrew
Lloyd Webber.
28. GOSPEL
Soulful gospel sounds of joy. Mahalia Jackson, Al Green and the Winans.
29. CHILDREN'S ENTERTAINMENT
Entertaining songs and storytelling for younger listeners. Fred Penner,
Raffi and Tom Chapin.
30. WORLD BEAT
Spanning continents, select sounds from all over the world; Gipsy Kings,
Cheb Khaled, The Chieftains, Zap Mama, Ladysmith Black Mambazo and Youssou
N'Dour.
The artists named herein do not endorse the Company or the securities
being offered hereby.
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ADDITIONAL 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, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at its regional offices located at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511; and 13th Floor, 7 World Trade Center, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 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., 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-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") with respect of the securities covered by this Prospectus.
This Prospectus, which forms part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company and such
securities, reference is hereby made to such Registration Statement, including
the exhibits filed therewith. The Registration Statement and the exhibits
thereto can be obtained by mail from or inspected and copied at the public
reference facilities maintained by the Commission as provided in the prior
paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission, are incorporated herein by reference:
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.
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 description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A filed pursuant to
Section 12(b) of the Exchange Act, and declared effective on
September 13, 1994 (including any amendment or report filed for
the purpose of updating such description).
7
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All documents subsequently filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the
Stock Offering shall be deemed to be incorporated by reference in and to be a
part of this Prospectus from the date of filing of such documents. 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 this
Prospectus to the extent that a statement contained herein or in the
Registration Statement containing this Prospectus or in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the request of such person, a copy of any or all
of the documents incorporated herein by reference (other than exhibits, unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to: Secretary, CD Radio Inc., Sixth
Floor, 1001 22nd Street, N.W., Washington D.C. 20037.
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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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS.
PROSPECTIVE INVESTORS 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, THE INFORMATION IN THIS PROSPECTUS DOES
NOT GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND
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"). The Company was a winning bidder at
a Federal Communications Commission ("FCC") auction in April 1997 and expects to
receive shortly one of two licenses to be awarded by 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 expected FCC license, the
Company will have 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:
o Symphonic o Classic Rock o Soft Rock
o Chamber Music o 50s Oldies o Singers and Songs
o Opera o 60s Oldies o Beautiful Instrumentals
o Today's Country o Folk Rock o Album Rock
o Traditional Country o Latin Ballads o Alternative Rock
o Contemporary Jazz o Latin Rhythms o New Age
o Classic Jazz o Reggae o Broadway's Best
o Blues o Rap o Gospel
o Big Band/Swing o Dance o Children's Entertainment
o Top of the Charts o Urban Contemporary o World Beat
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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.
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, in
urban areas 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
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<PAGE>
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.
THE CD RADIO SERVICE
CD Radio will offer motorists: (i) a wide range of finely focused music
formats; (ii) 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.
11
<PAGE>
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(degree)W and 110(degree)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. The terms
"seamless" and "omnipresent" used throughout this Prospectus in relation to the
broadcast of CD Radio describe the signal coverage provided by the Company's
satellites and terrestrial repeating stations, which the Company believes will
virtually blanket the continental United States subject only to "dead zones"
where line-of-sight to both of the satellites is obstructed and none of the
Company's terrestrial repeating transmitters is in range.
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 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 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.
12
<PAGE>
The Company does not intend to manufacture or distribute radio cards,
S-band radios or miniature satellite dish antennas. The Company has entered into
a non-binding memorandum of understanding with a major consumer electronics
manufacturer, 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 New York City. 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:
1993 o Contracted with Loral for construction of its satellites
o Contracted with Arianespace for launch of two of its satellites
o Developed and patented its miniature satellite dish antenna
1994 o Completed an initial public offering of its Common Stock
1995 o Secured patents for the signal diversity and memory reception
portions of its broadcast system
1996 o Designed the radio card receiver
1997 o Submitted the winning bid for one of two FCC national satellite
radio broadcast licenses
o Completed a $135 million private placement 5% Preferred Stock
o Commenced construction of two satellites
o Completed $105 million of vendor financing with Arianespace
Finance S.A.
o Recruited its key programming, marketing and financial
management team
o Completed a strategic sale of $25 million of Common Stock to
Loral Space
See "Business -- Progress to Date and Significant Development Milestones."
13
<PAGE>
CONCURRENT OFFERINGS
The Stock Offering is part of a financing transaction, which includes
the Notes Offering and the Exchange Offer, that is intended to raise capital to
partially finance the construction and launch of the Company's satellites and
for general corporate purposes. Pursuant to the terms of the Exchange Offer, the
Company will offer to exchange shares of its New Preferred Stock for all
outstanding shares of its 5% Preferred Stock. The Exchange Offer is intended to
be consummated concurrently with the Offerings. The Company expects that the
Offerings will result in net proceeds to the Company of $__ million, $__ million
from the Stock Offering and $__ million from the Notes Offering. The Company
will receive no proceeds from the Exchange Offer. See "Use of Proceeds." The
consummation of the Stock Offering is not conditioned upon consummation of the
Notes Offering but is conditioned upon the consummation of the Exchange Offer,
and there can be no assurance that the Notes Offering will be completed.
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 $266.2 million to date. After
giving effect to the Offerings, the Company will have raised $491.2 million of
funds, leaving anticipated additional cash needs of approximately $168.9 million
to fund its operations through 1999. The Company anticipated additional cash
requirements of approximately $100 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 purchasers in the Stock Offering.
--------------------------
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 applicant of record and winning bidder for 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.
14
<PAGE>
THE STOCK OFFERING
Common Stock offered by the
Company.......................... 3,500,000 shares.(1)
Common Stock outstanding
after the Stock Offering......... shares (1)(2)(3)
Use of Proceeds....................... The net proceeds of the Stock
Offering, together with the net
proceeds of the Notes Offering, will
be used to partially finance the
construction and launch of the
Company's satellites and for working
capital and other general corporate
purposes.
Nasdaq SmallCap Market
Symbol(4)............................. CDRD
Dividend Policy....................... The Company has never declared or
paid any cash dividends on its
capital stock and does not
anticipate paying cash dividends in
the foreseeable future. See "Price
Range of Common Stock" and "Dividend
Policy."
- -----------------
(1) Assumes the Underwriters' over-allotment option to purchase 525,000 shares
is not exercised. See "Underwriting."
(2) Based on the number of shares outstanding at July 31, 1997. Excludes
1,960,000 shares of Common Stock issuable upon the exercise of certain
outstanding and unexercised options at July 31, 1997 (of which 1,090,500
shares are subject to currently exercisable options). Also excludes shares
of Common Stock issuable upon exercise of the Company's 5% Preferred Stock.
See "Description of Capital Stock."
(3) Includes ___ shares of Common Stock to be issued in the Exchange Offer.
(4) The Company intends to apply for quotation of the Common Stock on the
Nasdaq National Market.
15
<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 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
<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 (2) ............ -- -- -- -- -- -- 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
</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) 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.
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS,
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE MAKING AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY. 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 at 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 $266.2 million to
date. After giving effect to the Offerings, the Company will have raised $491.2
million of funds, leaving anticipated additional cash needs of approximately
$168.9 million to fund its operations through 1999. The Company anticipates
additional cash requirements of approximately $100.00 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 excercise its option under the Loar
Satellite Contract to purchase and deploy an additional satellite, substantial
additional funds would be required. See "Use of Proceeds." 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 indenture governing the Notes (the "Indenture") and the AEF Agreements (as
defined below) contain, and documents governing any future indebtedness are
likeley to contain, provisions that limit the ability of the Company to incur
additional indebtedness. Failure to secure the necessary financing on a timely
basis could result in delays and increases in the cost of satellite 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
17
<PAGE>
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 purchasers of the shares of Common Stock offered hereby.
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
mdifications 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,
18
<PAGE>
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 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
Company's agreement with Arianespace (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
September 1997. In the event of a significant delay in the Ariane 5 program, the
Company has
19
<PAGE>
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
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
20
<PAGE>
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 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 a non-binding memorandum of
understanding with
21
<PAGE>
a major consumer electronics manufacturer, 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 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.
22
<PAGE>
POSSIBLE FAILURE TO OBTAIN FCC APPROVALS, INCLUDING THE FCC LICENSE
In order to offer CD Radio, the Company is required to obtain a license
from the FCC to launch and operate its satellites. Although 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"),
there is no assurance that the FCC will award the Company an FCC License or that
any such award would be made in a timely fashion. Since the Company's initial
application for an FCC License in 1990, several petitions to deny the Company's
application have been filed by third parties. These petitions are still pending
at the FCC. One such petition to deny the Company's application claimed that the
Company should not be granted an FCC License because the Company's ownership
violated the foreign ownership restrictions specified in the Communications Act
of 1934, as amended (the "Communications Act"). However, at this time, the
pleading cycle is closed, and the FCC may either grant or deny the Company's
application. If the Company's application is denied, the Company can appeal the
decision to the U.S. Court of Appeals. If the Company's application is granted,
any petitioner to deny the Company's application 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, the FCC
requires that changes in ownership of the Company's stock occurring after the
December 15, 1992 cutoff date for satellite radio license applications require
the Company to obtain an exemption from the FCC to permit the Company's license
application to be processed. The Company has applied for, and received, three
such exemptions: (i) in 1994, to permit its initial public offering of Common
Stock; (ii) in June 1997, to authorize the issuance of the Common Stock offered
hereby; and (iii) in July 1997, to permit the Company to undertake private
equity offerings. As a condition of the FCC's grant of these exemptions the
current stockholders and officers of the Company must continue to exercise
day-to-day and actual control over Satellite CD Radio, Inc., the Company's
wholly-owned subsidiary, and the applicant of record for the FCC License. Sales
of Common Stock by persons who were stockholders on the cutoff date could
require the Company to obtain an additional exemption or exemptions from the
FCC. If other stock sales or conversions are contemplated that would change
control of the Company, additional exemptions may be requested. If such
exemptions are not granted and if thereafter additional stock sales or
conversions take place, the Company's application could be dismissed. Once the
FCC License is granted to the Company, all assignments or transfers of control
of such 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 expected
to be 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
23
<PAGE>
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 below) 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
obtain and 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."
As a private carrier, the Company would not be 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 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.
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.
24
<PAGE>
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, including with respect to signal diversity
and memory reception. 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 Indenture and the AEF Agreements contain provisions that limit
the Company's ability to pay dividends.
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
25
<PAGE>
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 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 5,299,486
shares were issued and outstanding as of July 31, 1997. A further ________
shares of Preferred Stoick have been designated New Preferred Stock, of which up
to ____________ shares will be issued and outstanding following the completion
of the Exchange Offer. 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 or 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
26
<PAGE>
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 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 and the certificate of designations for the New Preferred Stock,
respectively), the Company will be required to make a Change of Control offer
for the Notes and the New Preferred Stock. If such a Change of Control 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 seeking to accept the Change of Control offer. The failure of
the Company to make or consummate the Change of Control offer or to pay the
purchase price for 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."
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 has temporarily invested the proceeds from its recent public
and private offerings in investment securities prior to their expenditure, the
Company may fall 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 gives the Company an automatic 60-day
exemption from the provisions of the 1940 Act pending a final determination of
the merits of its application. If the requested relief is 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 sale of the Common Stock
offered hereby in U.S. government securities, pending expenditure of such
proceeds by the Company for its corporate purposes.
27
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Stock Offering, the Company will have
outstanding _______ shares of Common Stock. Of these shares, ________ shares,
including the _______ shares sold in the Stock Offering plus any additional
shares sold upon exercise of the Underwriters' over-allotment option, will be
freely tradable without restriction or further registration under the Securities
Act except for any of such shares held by "affiliates" of the Company.
The remaining _______ shares of Common Stock held by the existing
stockholders are "restricted securities" under the Securities Act. Of these
restricted securities, _______ shares are held by executive officers, directors
and certain shareholders who, together with the Company, have agreed not to
sell, contract to sell, or otherwise dispose of, any shares of Common Stock
without the consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Lehman Brothers Inc. and Unterberg Harris for a period of 180 days after the
date of this Prospectus. Upon expiration of such agreements, _______ of such
shares will be eligible for sale in the public markets in accordance with Rule
144 promulgated under the Securities Act. The remainder will become eligible for
public sale at various times after such date in accordance with the provisions
of Rule 144. Of the _______ shares not subject to such agreements, _______ will
be eligible for sale in the public markets in accordance with Rule 144
immediately following the Stock Offering and the remainder will become eligible
for public sale at various times after the Stock Offering in accordance with the
provisions of Rule 144. See "Shares Eligible for Future Sale."
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.
28
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Stock Offering are estimated
to be approximately $ million ($ million if the Underwriters' over-allotment
option is exercised in full) after deducting estimated underwriting discounts
and estimated expenses relating thereto. Concurrently with the sale of the
shares of Common Stock, the Company intends to complete the Notes Offering and
consummate the Exchange Offer. The net proceeds to the Company from the Notes
Offering are estimated to be approximately $ million after deducting estimated
underwriting discounts and estimated expenses of the Notes Offering. The Company
will receive no proceeds from the Exchange Offer.
The Company expects to use the net proceeds of the Offerings to
partially finance the construction and launch of the Company's satellites in an
amount equal to $448 million. The remainder of the net proceeds of the Offerings
will be used for general corporate purposes, including marketing and working
capital.
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 $266.2 million to date. After
giving effect to the Offerings, the Company will have raised $491.2 million of
funds, leaving anticipated additional cash needs of approximately $168.9 million
to fund its operations through 1999. The Company anticipated 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. There can be no assurance, however, that the Company's cash
requirements will not increase or that such funds will be sufficient. In
addition, although the Company's business plan is based upon 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. The Company intends to seek additional financing through the
issuance of debt or equity securities in the public or private markets. However,
there can be no assurance that the Company will be able to obtain additional
financing on favorable terms, or at all, or that such financing will be
available in a timely manner. See "Risk Factors -- Need for Substantial
Additional Financing."
SOURCES AND USES OF FUNDS BY CD RADIO
The following table describes the estimated sources and uses of funds
by the Company from its inception through the end of 1999 when CD Radio is
targeted to commence commercial operations. Significant additional funds will be
needed to cover the Company's cash needs prior to its generation of sufficient
positive cash flow from operations. The projection of total sources and total
uses of funds is forward looking and could vary, perhaps substantially, from
actual results, due to events outside the Company's control, including
unexpected costs and unforeseen delays.
29
<PAGE>
PRE-OPERATIONAL PERIOD (1)
(IN MILLIONS)
SOURCES OF FUNDS
Funds Committed to Date:
Proceeds from equity investments
prior to the FCC Auction (2) .......................... $ 21.6
Proceeds from issuance of
preferred stock (3) ................................... 120.1
Proceeds from sale of Common
Stock to Loral Space (4) .............................. 24.5
---------
Vendor financing (5) .................................... 100.0
Total to Date ........................................... 266.2
=========
Gross proceeds to the Offerings .............................. 225.0
Pro forma funds to date ...................................... 491.2
Net Future funds (6) ......................................... 168.9
---------
Total pre-operational net sources ............................ $ 660.1
=========
USES OF FUNDS
FCC License .................................................. $ 83.3
CD Radio system:
Satellite contract (7) ................................. 246.8
Launch services and
insurance (8) ........................................ 191.1
Ground segment (9) ..................................... 47.3
Subtotal ..................................................... 485.2
Operating expenses and
working capital (10) ......................................... 60.6
Net cash interest expense (11) ............................... 2.2
Estimated fees and expenses of
Offerings and redemption of
outstanding 5% preferred stock (12) .......................... 28.8
---------
Total pre-operational net uses ............................... $ 660.1
---------
(1) Assumes that CD Radio will commence commercial operations in December
1999. The Company anticipates that it will require total net future funds
of $168.8 million following the Offerings to finance additional expenses
through 1999. The Company anticipates additional funding requirements of
$100.0 million to fund its operations through year end 2000. Many factors,
including the Company's ability to generate significant revenues, could
affect this estimate. See "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Includes proceeds from sales of common stock and units of $14.5 million,
proceeds from exercise of warrants of $4.6 million, proceeds from exercise
of options of $0.2 million, issuance of common stock in satisfaction of
notes and interest of $1.4 million and issuance of common stock for
services rendered of $0.9 million.
(3) In April 1997, the Company issued a total of 5,400,000 shares of 5%
Preferred Stock for aggregate consideration of $135 million in a private
placement transaction. The net proceeds to the Company after fees payable
to the placement agent and the Company's financial advisor and related
expenses were approximately $120.1 million.
(4) On August 5, 1997, the Company completed the sale of 1,905,488 shares of
Common Stock to Loral Space for aggregate consideration of $25 million,
less fees of $0.5 million.
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(5) The Company has available up to $105 million under the AEF Vendor
Financing to finance a portion of the costs of launching two satellites,
and $20 million of deferred payments under the Company's satellite
construction contract with Loral. Under the AEF Agreements not more than
$80 milllion may be converted in to term loans that mature beyond the
launch date of the satellites. See "Description of Certain Indebtedness
-- Vendor Financing." The Company may be required to refinance a portion
or all of the AEF Vendor Financing prior to launch of the satellites. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations --Liquidity."
(6) The Company currently expects to satisfy its additional funding
requirements through the incurrence of debt or the issuance of additional
equity securities in the public or private markets. Although the Company
believes that it will be able to meet its additional funding requirements,
there can be no assurance that such financing will be available on
favorable terms, on a timely basis, or not at all. Among other things, any
financing is subject to market conditions at the time of any proposed
financing. See "Risk Factors -- Need for Substantial Additional Financing"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(7) As of June 30, 1997, the Company had incurred $6.5 million of this amount.
See "Risk Factors -- Dependence on Satellite and Launch Contractors." The
amount shown excludes $30.3 million related to the purchase of the
Company's ground spare (third) satellite which is payable subsequent to
December 31, 1999. The total contract amount of $271.8 million is subject
to a one-time inflation adjustment (estimated to be 2%) for the period
November 1996 to September 1997.
(8) Includes $176 million for launch services and an estimated $15.1 million
for insurance. As of June 30, 1997, the Company had incurred $3.4 million
of this amount. See "Risk Factors -- Dependence on Satellite and Launch
Contractors" and "Business -- The CD Radio Delivery System -- The
Satellites."
(9) Includes an estimated $6.7 million for the National Broadcast Center,
$38.2 million for terrestrial repeaters and $2.4 million for corporate
office capital expenditures.
(10) Includes cumulative historical operating expenses through June 30, 1997 of
$20.8 million, and projected operating expenses from July 1, 1997 through
the end of the pre-operational period of $39.8 million.
(11) Includes estimated cash interest expense of $17.1 million, less cash
interest income of $15.4 million, based on assumed interest rates, cash
balances, borrowing levels and the timing, amount and structure of future
financings.
(12) Includes estimated fees and expenses for the Offerings and the Exchange
Offer of $19.4 million and $9.4 million of cash for redemption of 5% of
the outstanding shares of 5% Preferred Stock.
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<PAGE>
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.
HIGH LOW
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 (through August 27, 1997)................. 20 14
On August 27, 1997, the closing bid price of the Common Stock on the
Nasdaq SmallCap Market was $19 per share. On July 31, 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
Indenture and the AEF Agreements contain provisions that limit the Company's
ability to pay dividends on the Common Stock.
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<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); and (iv) as
adjusted for the estimated net proceeds from the sale of 3,500,000 shares of
Common Stock offered hereby (at the offering price of $ per share, after
deducting the underwriting discounts and commissions and estimated offering
expenses) and the sale of $150 million in principal amount of Notes pursuant to
the Notes Offering.
<TABLE>
<CAPTION>
As of June 30, 1997
--------------------------------------------------------------------
Pro Forma Pro Forma
As Adjusted As Further
for the Adjusted
Exchange for the
Actual Pro Forma Offer Offerings
-------------- -------------- -------------- --------------
(in thousands, except per data)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 30,184 $ 54,684 $ 54,684 $
Designated cash (1) 66,667 66,667 66,667
-------------- -------------- -------------- --------------
Total cash and cash equivalents $ 96,861 $ 121,361 $ 121,361 $
============== ============== ============== ==============
Long term debt
___% Senior Discount Notes $-- -- $-- -- $-- -- $
-------------- -------------- -------------- --------------
TOTAL LONG TERM DEBT -- -- -- -- -- --
-------------- -------------- --------------
5% Delayed Convertible Preferred
Stock, $.001 par value; 5,299,608
shares issued and outstanding actual
and pro forma 111,855 111,855 -- -- -- --
STOCKHOLDERS' EQUITY
Common Stock, $.001 par value;
Actual 10,313,391 shares issued and
outstanding; Pro Forma and
following the Exchange Offer
12,218,879 shares issued and
outstanding; and following the
Exchange Offer and the Stock
Offering 10 12 12
Additional Paid in Capital 75,425 99,923
Subscription receivable (466) (466) (466) (466)
-------------- -------------- -------------- --------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
Pro Forma for June 30, 1997
the Exchange Pro Forma for
June 30, 1997 June 30, 1997 Offer the Offerings
Actual Pro Forma As Adjusted As Adjusted
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Deficit accumulated during the
development stage $ (62,683) $ (62,683) $ (62,683) $ (62,683)
-------------- -------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY $ 12,286 $ 36,786 $ $
============== ============== ============== ==============
</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.
34
<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 THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(in thousands, except 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
<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 (2) ............ -- -- -- -- -- -- 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
</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.
35
<PAGE>
(2) 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.
(3) No cash dividends were declared or paid in any of the periods presented.
36
<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
37
<PAGE>
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.
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.
38
<PAGE>
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.
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 have been classified as designated cash reflecting
the balance due the FCC if and when the FCC License is awarded.
39
<PAGE>
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 $266.2 million to date. After giving effect to the Offerings, the
Company will have raised $491.2 million of funds, leaving anticipated additional
cash needs of approximately $168.9 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
"Use of Proceeds."
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 has been paid as a deposit. The Company will be
required to pay the balance of the winning bid after it is awarded the FCC
License, which is currently expected to occur in September 1997, assuming any
petitions to deny the granting of the FCC License are dismissed.
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 expects to make aggregate payments of $272.8
million under the Loral Satellite Contract and of $176 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 million of the contract price, which is
to be paid in four equal installments of $5 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 earlier of
the period between, February 1998 and 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 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 do not require cash payments until ________, 2003.
Interest on funds borrowed by the Company under the AEF Agreements is deferred
until repayment of such amounts.
40
<PAGE>
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
will be 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
41
<PAGE>
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 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 $168.9 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 Indenture and the AEF Agreements 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 purchasers of the shares
of Common Stock offered hereby. 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 contains, 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.
42
<PAGE>
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. The Company was a winning bidder at an FCC auction in
April 1997 and expects to receive shortly one of two licenses to be awarded by
the FCC to build, launch and operate a national satellite radio broadcast
system. The Company has recently began 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
expected FCC license, the Company will have 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:
o Symphonic o Classic Rock o Soft Rock
o Chamber Music o 50s Oldies o Singers and Songs
o Opera o 60s Oldies o Beautiful Instrumentals
o Today's Country o Folk Rock o Album Rock
o Traditional Country o Latin Ballads o Alternative Rock
o Contemporary Jazz o Latin Rhythms o New Age
o Classic Jazz o Reggae o Broadway's Best
o Blues o Rap o Gospel
o Big Band/Swing o Dance o Children's Entertainment
o Top of the Charts o Urban Contemporary o 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.
43
<PAGE>
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 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.
44
<PAGE>
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."
-------------------------------------------------------------------------
1990: o CD Radio Inc. incorporated
o CD Radio proposes FCC create satellite radio service and files
license application
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1991: o Stationary service simulation conducted
o Nationwide focus groups conducted
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1992: o Satellite radio spectrum allocated at WARC-92
o Radio manufacturer discussions conducted
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1993: o Satellite contract with Loral executed
o Launch slots with Arianespace reserved
o Additional nationwide focus groups conducted
o Miniature satellite dish antenna developed
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1994: o Initial public offering completed
o Signal diversity patents granted
o Mobile service simulation conducted
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1995: o Loral satellite design completed
o Orbital slot registrations filed
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1996: o Memory reception patents granted
o Radio card designed
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1997: o CD Radio wins auction for FCC License
o Raised $135 million of 5% Preferred Stock
o Satellite construction commenced
o Radio manufacturer memorandum of understanding executed
o Arranged $105 million AEF Vendor Financing
o Sale of $25 million of Common Stock to Loral Space completed
o Award of FCC License expected
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1998: o Radio card manufacturer to be selected
o Non-music channel content providers to be selected
o Assembly of music library to continue
o Terrestrial repeating transmitter build-out to begin
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1999: o Construction of National Broadcast Studio to be completed
o Commercial production of radio cards to begin
o Satellite launches to be completed
o Commercial operations to begin
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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.
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
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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 New York City. 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
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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
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.
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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.
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
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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.
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
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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.
[DIAGRAM OF CD RADIO DELIVERY SYSTEM]
THE SATELLITES
SATELLITE DESIGN. The Company's satellites are of the Loral FS-1300
model series. This family of satellites has an estimated total of in-orbit
operation time of 270 years, and to date more than 60 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
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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 Company
currently expects that its two satellites will be placed in a geosynchronous
orbit at equatorial crossings of 80(degree)W and 110(degree)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. The Company has been granted patents on the
multi-satellite design and memory reception features for satellite radio
service.
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.
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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, 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 September 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,
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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 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
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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
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receive CD Radio in a vehicle that has a satellite dish antenna attached to it
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 a non-binding memorandum of understanding with a
major consumer electronics manufacturer, and has commenced discussions with
several other such manufacturers, regarding the manufacture of radio cards,
S-band radios and miniature satellite
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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.
THE NATIONAL BROADCAST STUDIO
The Company plans to originate its 50 channels of programming from its
National Broadcast Studio, to be located in New York City. 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 stationkeeping, which involves
twice-monthly satellite orbital adjustments and the continuous monitoring of the
satellites.
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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 New York
City 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."
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.
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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.
Existing satellite 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 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, PATENTS AND TRADEMARKS
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,
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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 a proposed 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. This application was
opposed by the National
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Association of Broadcasters, an industry trade group that seeks to promote the
interests of the television and AM/FM broadcast industries. In the fall of 1992,
the FCC called for license applications from any parties other than the Company
that might be interested in being licensed to provide a satellite radio service.
The cutoff date for these applications was December 15, 1992. Five other
applicants filed applications by that deadline, two of which were subsequently
withdrawn, leaving the Company and three other applicants. Petitions were filed
on behalf of third parties to deny the applications filed by the Company and the
three other applicants.
On March 3, 1997, the FCC adopted rules for the national satellite
radio broadcast service (the "FCC Licensing Rules") and implemented a spectrum
plan that will accommodate only two national satellite radio broadcast licenses.
Pursuant to the FCC Licensing Rules, an auction was held among the four existing
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. Prior to the commencement of the
auction, each applicant was required to deposit $3 million with the FCC.
Following the auction, the Company was required to deposit with the FCC a
post-auction down payment in an amount equal to twenty percent of its winning
bid, an additional $13.7 million. The Company and the other winning bidder also
were required to supplement their applications on file with the FCC by May 16,
1997. The Company made its post-auction down payment in a timely fashion and, on
May 16, 1997, filed a supplement and amendment to its application. The FCC has
confirmed receipt of the Company's twenty percent payment and has accepted its
amendment for filing. The period during which petitions to deny the Company's
application could be filed with the FCC expired on June 23, 1997. One such
petition was filed, claiming that the Company should not be granted an FCC
License because the Company's ownership violated the foreign ownership
restrictions specified in Section 310(b) of the Communications Act. The Company
filed an opposition to that petition to deny on July 3, 1997, noting that
Section 310(b) does not apply to the Company because the Company is seeking a
license to operate as a private owner and, even if the statute did apply, the
Company's ownership structure complies with the requirements of the statute and
with the FCC's rules. The original petitioner responded on July 11, 1997, by
reiterating its claims. There can be no assurance that the FCC will dismiss this
and any previously filed petitions. If the FCC dismisses this petition and all
previously filed petitions and finds that the Company is eligible to hold an FCC
License under the FCC's rules and the Communications Act, the Company will have
ten business days to submit payment of the balance of its winning bid. In such a
case, petitioners opposing the Company's application will have 30 days to appeal
the decision before the FCC or the U.S. Court of Appeals. If the Company's
application is denied, the Company can appeal the decision before the U.S. Court
of Appeals. The Company cannot predict the ultimate outcome of any of these
proceedings.
Pursuant to the FCC Licensing Rules, if the Company receives an FCC
License, it will be 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. Failure to meet
those milestones could result in revocation of the FCC License. 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.
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The term of the FCC License for each satellite is expected to be 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 complete detailed frequency
coordination with existing operations in Canada and Mexico. 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.
If, during the pendency of the FCC License application, the Company
were to issue Common Stock and, as a result thereof, 50 percent or more of the
voting stock of the Company were to be held by parties who were not stockholders
on the cutoff date (the "cut-off rule"), such issuance may require the filing of
a "major amendment" to the Company's license application. If the Company was
required to file a "major amendment" it may be assigned a new file number which
would result in the loss of entitlement to processing concurrently with the
other three remaining applications that were filed on or before the cutoff date
for national satellite radio broadcast licenses set by the FCC. To avoid this
the Company applied for, and received, exemptions from the FCC, conditioned on
the current stockholders and officers of the Company remaining in day-to-day and
actual control of Satellite CD Radio, Inc., the Company's wholly-owned
subsidiary and the applicant of record for the FCC License. Failure to obtain
further exemptions if required could result in the Company's application being
dismissed. If other stock sales or conversions are contemplated that would
change control of the Company, additional exemptions may be requested. Once the
Company receives the FCC License, all 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.
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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.
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 licensees will be
permitted to choose whether they wish to be classified as broadcasters, common
carriers or private carriers. The Company has requested to be regulated as a
private carrier. Further, as a private carrier, the Company would be free to set
its own prices and serve customers according to its own business judgment,
without economic regulation.
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 Company's ability to obtain its FCC License or the manner
in which its 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 August 25, 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.
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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
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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. Effective August 25, 1997, Mr. Greenebaum will
serve as Executive Vice President and Chief Financial Officer of the Company. He
has held senior management positions with The Walt Disney Company since 1989.
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 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
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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, 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.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------ ------------
Other Securities
Fiscal 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 1995 $100,000 $ -- $ -- --
and Chief Executive Officer 1994 $122,000(1) $ -- $ 26,052(2) 300,000
Robert D. Briskman 1996 $106,249 $20,000 $190,938 117,500
Executive Vice President, 1995 $100,000 $ -- $ 1,340 --
Engineering and 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.
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<PAGE>
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.
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
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<PAGE>
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 the commencement of
his employment with the Company, the Company will pay Mr. Greenebaum an
additional sum of $90,000. The Company has also granted Mr. Greenebaum options
to purchase up to 175,000 of Common Stock of the Company 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 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
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<PAGE>
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, 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
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<PAGE>
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 of
1933, as amended, which changed the eligibility requirements for these
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<PAGE>
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 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 is
exercisable upon the FCC's grant of a license to the Company. 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 are exercisable on September 18, 1997 if, as of such
date, the FCC has granted a license to the Company and if Mr. Briskman is 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.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
--------------------------------------------------- At Assumed Annual Rates of Stock
Percent of Total Price Appreciation For Stock Term
Number Options Granted -----------------------------------
of Options to Employees in Exercise or Base Expiration
Name Granted Fiscal Year Price Per 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 Unexercised
Shares Number of Unexercised In-The-Money Options
Acquired Options at Fiscal Year End at Fiscal Year End
Name on Exercise Value Realized Exercisable/Unexercisable Exercisable/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>
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 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
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<PAGE>
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.
75
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of June 30, 1997 and as adjusted to
reflect the shares of Common Stock issuable upon the completion of the Stock
Offering and assuming no exercise of the Underwriters' over-allotment option, by
(i) each stockholder known by the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock, (ii) each director of the Company,
(iii) 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 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 table also
sets 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. The table does not include 1,905,488 shares of Common
Stock acquired by Loral Space on August 5, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF TOTAL
NAMES AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED BENEFICIALLY OWNED(2)
---------------------------------------- ------------------ ---------------------
<S> <C> <C>
DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
Darlene Friedland (3)...................................... 2,834,500 27.5%
110 Wolseley Road
Point Piper 2027
Sydney, Australia
David Margolese (4)........................................ 1,900,000 17.9%
c/o CD Radio Inc.
Sixth Floor
1001 22nd Street, N.W.
Washington, D.C. 20037
Robertson, Stephens & Company LLC, et al. (5).............. 1,467,000 14.2%
555 California Street, Suite 2600
San Francisco, CA 94104
Robert D. Briskman (6)..................................... 132,500 1.3%
Jack Z. Rubinstein (7)..................................... 227,000 2.2%
Peter K. Pitsch (8)........................................ 70,000 *
Lawrence F. Gilberti (9)................................... 35,000 *
Ralph V. Whitworth (10).................................... 35,000 *
Joseph S. Capobianco (11).................................. 0 *
Keno V. Thomas (12)........................................ 0 *
All Executive Officers and Directors as a Group (13)....... 2,399,500 21.7%
(8 persons)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF TOTAL
NAMES AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED BENEFICIALLY OWNED(2)
---------------------------------------- ------------------ ---------------------
<S> <C> <C>
HOLDERS OF 5% DELAYED CONVERTIBLE PREFERRED STOCK (14)
Continental Casualty Company (15).......................... 1,966,260 16.0%
c/o Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2477
Everest Capital International, Ltd. (16).................. 1,145,932 10%
c/o Morgan Stanley & Co.
One Pierpont Plaza, 10th Floor
Brooklyn, NY 11201
The Mainstay Funds, on behalf of its High Yield Corporate 1,133,214 9.9%
Bond Fund Series (17)....................................
Chemical Bank
A/C State Street Bank & Trust Co.
4 New York Plaza
New York, NY 10004
Everest Capital Fund, L.P. (18)............................ 894,650 7.9%
c/o Morgan Stanley & Co.
One Pierpont Plaza, 10th Floor,
Brooklyn, NY 11201
Grace Brothers, Ltd. (19).................................. 786,505 7.1%
Bradford Whitmore
1560 Sherman Avenue, Suite 900
Evanston, IL 60201
UBS Securities LLC (20).................................... 327,709 3.1%
c/o Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2477
</TABLE>
- -----------------------
* Less than 1%
(1) This table is based upon information supplied by directors, officers and
principal stockholders. Percentage of ownership is based on 10,313,391
shares of Common Stock outstanding on June 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 June 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 June 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) Diane 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.
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<PAGE>
(4) 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.
(5) Shares are owned by a group including the following: The Robertson
Stephens Orphan Fund (which has shared voting and shared dispositive power
over 1,072,200 shares), The Robertson Stephens Orphan Offshore Fund (with
shared voting and shared dispositive power over 214,600 shares), The
Robertson Stephens Global Low-Priced Stock Fund (with shared voting and
shared dispositive power over 72,400 shares), The Robertson Stephens &
Company Investment Management L.P. (with shared voting and shared
dispositive power over 1,359,200 shares), Bayview Investors, LTD (with
shared voting and shared dispositive power over 1,072,200 shares),
Robertson, Stephens & Company, Incorporated ("RS&Co.") (with shared voting
and shared dispositive power over 1,359,200 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 1,359,200 shares), Sanford R. Robertson (with sole
voting and sole dispositive power over 11,620 shares, and shared voting
and shared dispositive power over 1,359,200 shares), Michael G. McCaffery,
G. Randy Hecht, and Kenneth R. Fitzsimmons (the three of whom have shared
voting and shared dispositive power over 1,359,200 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 April 11, 1997 filed by Robertson,
Stephens & Company LLC, et al.
(6) Includes 132,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Does not include 60,000 shares issuable
pursuant to stock options that are not exercisable within 60 days of such
date.
(7) 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.
(8) Includes 60,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(9) Includes 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(10) Includes 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(11) Does not include 50,000 shares issuable pursuant to stock options that are
not exercisable within 60 days.
(12) Does not include 50,000 shares issuable pursuant to stock options that are
not exercisable within 60 days.
(13) Includes 732,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Does not include 560,000 shares issuable
pursuant to options that are not exercisable within 60 days.
(14) 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 June 20, 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% Delayed Convertible 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 the
Common Stock (the "Conversion Price"). The Conversion Price, as of any
date up to and
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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% Delayed
Convertible Preferred Stock."
(15) Includes 938,504 shares of 5% Preferred Stock held on its own behalf and
on behalf of its Designated A/C High Yield Fund.
(16) Includes 1,137,155 shares of 5% Preferred Stock. Everest Capital
International, Ltd. has agreed that it will not, following any conversion
of its shares, be the beneficial owner of more than 10% of the outstanding
Common Stock unless it chooses to waive this restriction upon 61 days
prior notice to the Company. If it waives this restriction upon proper
notice, Everest Capital International, Ltd. would beneficially own
2,382,453 shares of Common Stock, representing 18.77% of the shares
outstanding.
(17) Includes 734,286 shares of 5% Preferred Stock. The Mainstay Funds, on
behalf of its High Yield Corporate Bond Fund Series, 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. If it
waives this restriction upon proper notice, The Mainstay Funds, on behalf
of its High Yield Corporate Bond Fund Series, would beneficially own
1,538,403 shares of Common Stock, representing 12.98% of the shares
outstanding.
(18) Includes 427,020 shares of 5% Preferred. Everest Capital Fund, L.P. has
agreed that it will not, following any conversion of its shares, be the
beneficial owner of more than 10% of the outstanding Common Stock unless
it chooses to waive this restriction upon 61 days prior notice to the
Company. Does not include shares of Common Stock issuable pursuant to
warrants to be issued to Everest Capital Fund, L.P. to purchase 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.
(19) Includes 375,402 shares of 5% Preferred Stock. 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.
(20) Includes 156,417 shares of 5% Preferred Stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
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 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
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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.
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"):
Percentage of Principal Amount
Quarterly Period of Tranche B Loans To Be
Following Launch Date Repaid Per Quarter
--------------------- ------------------------------
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%
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
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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 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,
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(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 CD 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 $0.001 per share, and 50,000,000 shares of
Preferred Stock, par value $0.001 per share.
As of July 31, 1997, the Company had 10,528,394 shares of Common Stock
outstanding held of record by 105 persons, and had reserved for issuance
1,897,500 shares of Common Stock with respect to outstanding options and
warrants.
COMMON STOCK
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." Following completion of the Offering, the
Company intends to apply 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.
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5% DELAYED CONVERTIBLE 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 July 31, 1997, there were
5,299,486 shares of the 5% Preferred Stock outstanding held of record by 48
entities, and the Company had agreed to grant a warrant to purchase an
additional 486,000 shares at $25.00 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.
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 private placement agreement
relating to the sale of 5% Preferred Stock), 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 72.125% (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 an amount equal to one minus the Applicable
Percentage set forth below. The Applicable Percentage is as follows:
Conversion after the Applicable
Following Date Percentage
-------------- ----------
9/15/97 24.875%
10/15/97 25.000%
11/15/97 27.875%
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 72.125%.
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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 one MINUS the Applicable
Percentage. If a Reorganization 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 72.125% of the Maximum Price 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
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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 currently soliciting the approval of its
stockholders including, pursuant to the Solicitation, the holders of the 5%
Preferred Stock, 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 but not in part following the offering of any securities (including
common stock, preferred stock and debt securities or any combination thereof)
for cash in an amount of not less than $100 million on or prior to November 15,
1997.
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.
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
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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.
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 Company's Amended and Restated Certificate of Incorporation (the
"Certificate"), may elect not to be governed by Section 203 effective 12 months
after such adoption. Neither the Certificate nor the Company's Amended and
Restated 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.
88
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Stock Offering, the Company will have
outstanding _______ shares of Common Stock. Of these shares, ________ shares,
including the _______ shares sold in the Stock Offering plus any additional
shares sold upon exercise of the Underwriters' over-allotment option, will be
freely tradable without restriction or further registration under the Securities
Act except for any of such shares held by "affiliates" of the Company.
The remaining _______ shares of Common Stock held by the existing
stockholders are "restricted securities" under the Securities Act. Of these
restricted securities, _______ shares are held by executive officers, directors
and certain shareholders who, together with the Company, have agreed not to
sell, contract to sell, or otherwise dispose of, any shares of Common Stock
without the consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Lehman Brothers Inc. and Unterberg Harris for a period of 180 days after the
date of this Prospectus. Upon expiration of such agreements, _______ of such
shares will be eligible for sale in the public markets in accordance with Rule
144. The remainder will become eligible for public sale at various times after
such date in accordance with the provisions of Rule 144. Of the _______ shares
not subject to such agreements, _______ will be eligible for sale in the public
markets in accordance with Rule 144 immediately following the Stock Offering and
the remainder will become eligible for public sale at various times after the
Stock Offering in accordance with the provisions of Rule 144.
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."
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, _______ 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 this 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. In addition, _______ shares of 5% Preferred Stock that
were convertible into
89
<PAGE>
Common Stock prior to this Stock Offering may be converted into shares of Common
Stock beginning 180 days after the closing date of this Offering and such shares
of Common Stock may be freely sold by such holders who are not deemed affiliates
of the Company.
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.
90
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement
(the "Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Lehman Brothers Inc. and
Unterberg Harris are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company, the number of shares of Common
Stock set forth opposite its name below. In the Purchase Agreement, the several
Underwriters have agreed, subject to the terms and conditions set forth therein,
to purchase all the shares of Common Stock offered hereby, if any are purchased.
In the event of default by an Underwriter, the Purchase Agreement provides that,
in certain circumstances, purchase commitments of the non-defaulting
Underwriters may be increased or the Purchase Agreement may be terminated.
Number
Underwriters of Shares
------------ ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
Lehman Brothers Inc...............................................
Unterberg Harris..................................................
---------
Total.................................................... 3,500,000
The Underwriters have advised the Company that they propose initially
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain dealers at
such price less a concession not in excess of $___ per share of Common Stock.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $___ per share of Common Stock to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
The Company, certain shareholders and certain executive officers have
agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell,
grant any option to purchase or otherwise transfer or dispose of any Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock or file a registration statement under the Securities Act with respect to
the foregoing or (ii) enter into any swap or other agreement or transaction that
transfers, in whole or part, the economic consequence of ownership of the Common
Stock, without the prior written consent of Merrill Lynch, for a period of 180
days after the date of this Prospectus.
91
<PAGE>
The Company has granted an option to the Underwriters, exercisable
within 30 days after the date of this Prospectus, to purchase up to an aggregate
of 525,000 additional shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise this option only to cover
over-allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the Underwriters exercise this option, each Underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares of Common Stock proportionate to such Underwriter's initial amount
reflected in the foregoing table.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over- allotment option described above.
The Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representatives
purchase shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Stock Offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters 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 Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transaction or that
such transactions, once commenced, will not be discontinued without notice.
92
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the securities offered hereby are
being 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 are being passed upon for the Underwriters by Shearman & Sterling,
New York, New York.
EXPERTS
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 (the 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.
93
<PAGE>
================================================================================
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations other than those contained in
this Prospectus in connection with the offer made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriters. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstance,
create an implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus does not constitute an offer or
solicitation by anyone in any state in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation.
------------------
TABLE OF CONTENTS
PAGE
Additional Information................................................... 7
Incorporation of Certain Documents by
Reference............................................................ 7
Special Note Regarding Forward-Looking
Statements........................................................... 8
Prospectus Summary....................................................... 9
Risk Factors............................................................. 17
Use of Proceeds.......................................................... 29
Price Range of Common Stock............................................. 32
Dividend Policy.......................................................... 32
Capitalization........................................................... 33
Selected Historical Financial Information................................ 35
Management's Discussion and
Analysis of Financial Condition
and Results of Operations............................................ 37
Business................................................................. 43
Management............................................................... 65
Principal Stockholders................................................... 75
Description of Certain Indebtedness...................................... 80
Description of Capital Stock............................................. 84
Shares Eligible for Future Sale.......................................... 89
Underwriting............................................................. 91
Legal Matters............................................................ 93
Experts.................................................................. 93
================================================================================
3,500,000 SHARES
[CD RADIO LOGO]
COMMON STOCK
----------
PROSPECTUS
----------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
UNTERBERG HARRIS
_________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The cash expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting compensation, are as
follows:
Securities and Exchange Commission Registration Fee................ $23,175
NASD Filing Fee.................................................... 8,148
Nasdaq Listing Fees................................................ *
Blue Sky Fees and Expenses (includes fees and expenses of counsel.. *
Fees of Transfer Agent and Registrar............................... *
Accounting Fees and Expenses....................................... *
Legal Fees and Expenses............................................ *
Printing, Engraving and Delivery Expenses.......................... *
Financial Consultant Commissions................................... *
======
Total $ *
------------------------
* To be completed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a
corporation to indemnify its directors, officers, employees and agents against
certain liabilities they may incur in such capacities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"), provided
they act in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation. The Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws require
the Company to indemnify its officers and directors to the full extent permitted
by Delaware law.
Section 102 of the Delaware General Corporation Law authorizes a
corporation to limit or eliminate its directors' liability to the corporation or
its stockholders for monetary damages for breaches of fiduciary duties, other
than for (i) breaches of the duty of loyalty, (ii) acts or omissions involving
bad faith, intentional misconduct or knowing violations of the law, (iii)
unlawful payments of dividends, stock purchases or redemptions, or (iv)
transactions from which a director derives an improper personal benefit. The
Company's Amended and Restated Certificate of Incorporation contains provisions
limiting the liability of the directors to the Company and to its shareholders
to the full extent permitted by Delaware law.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
EXHIBIT DESCRIPTION
1** Purchase Agreement
4.1 Description of Capital Stock contained in the Amended and
Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q for the
period ended March 31, 1996).
II-1
<PAGE>
EXHIBIT DESCRIPTION
4.2 Description of Rights of Security Holders contained in the
Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Company's Form 10-Q for the period ended
March 31, 1996).
4.3 Form of Certificate for Shares of Common Stock (incorporated
by reference to Exhibit 4.3 to the Company's Form 10-Q for
the period ended March 31, 1996).
5.1** Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
11.1 Statement Re Computation of Historical Net Loss Per Share
(incorporated by reference to Exhibit 11.1 to the Company's
Form 10-Q for the period ended March 31, 1997).
21.1 List of the Company's Subsidiaries (incorporated by
reference to Exhibit 21.1 to the Company's Form 10-Q for the
period ended March 31, 1997).
23.1 Consent of Coopers & Lybrand L.L.P.
23.2** Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
- ----------
** Document to be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) (1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of a prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
II-2
<PAGE>
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on August 29, 1997.
CD RADIO INC.
By: /s/ David Margolese
------------------------------------
David Margolese
Chairman and Chief Executive Officer
II-4
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints David Margolese or Lawrence F.
Gilberti or either of them his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate in connection therewith, granting unto
such agent, proxy and attorney-in-fact full power and authority to do and
perform each and every act and thing necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact or any of their substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David Margolese Chairman and Chief Executive Officer August 29, 1997
- ----------------------------- (Principal Executive Officer)
David Margolese
/s/ Robert Briskman Director August 29, 1997
- -----------------------------
Robert D. Briskman
/s/ Lawrence Gilberti Director August 29, 1997
- -----------------------------
Lawrence F. Gilberti
/s/ Peter Pitsch Director August 29, 1997
- -----------------------------
Peter K. Pitsch
/s/ Jack Rubinstein Director August 29, 1997
- -----------------------------
Jack Z. Rubinstein
/s/ Ralph Whitworth Director August 29, 1997
- -----------------------------
Ralph V. Whitworth
II-5
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ Andrew J. Greenebaum Principal Financial and Accounting August 29, 1997
- ----------------------------- Officer
Andrew J. Greenebaum
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
1** Purchase Agreement
4.1 Description of Capital Stock contained in the Amended and
Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q for the
period ended March 31, 1996).
4.2 Description of Rights of Security Holders contained in the
Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Company's Form 10-Q for the period ended
March 31, 1996).
4.3 Form of Certificate for Shares of Common Stock (incorporated
by reference to Exhibit 4.3 to the Company's Form 10-Q for
the period ended March 31, 1996).
5.1** Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
11.1 Statement Re Computation of Historical Net Loss Per Share
(incorporated by reference to Exhibit 11.1 to the Company's
Form 10-Q for the period ended March 31, 1997).
21.1 List of the Company's Subsidiaries (incorporated by
reference to Exhibit 21.1 to the Company's Form 10-Q for the
period ended March 31, 1997).
23.1 Consent of Coopers & Lybrand L.L.P.
23.2** Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
II-7
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration
Statement of CD Radio Inc. on Form S-3 of our report dated March 27, 1997, on
our audits of the consolidated financial statements of CD Radio Inc. as of
December 31, 1995 and 1996, for the years ended December 31, 1994, 1995 and
1996, and for the period May 17, 1990 (date of inception) to December 31, 1996,
which report is included in CD Radio Inc.'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. We also consent to the references to our firm under the captions "Summary
Consolidated Financial Data," "Selected Historical Financial Information" and
"Experts."
Coopers & Lybrand L.L.P.
Washington, D.C.
August 29, 1997
