As filed with the Securities and Exchange Commission on October 3, 1997
Registration No. 333-34761
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
CD RADIO INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-1700207
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4899
(Primary Standard Industrial
Classification Code Number)
------------------
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)
------------------
COPY TO:
LEONARD V. QUIGLEY
MITCHELL S. FISHMAN
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
212-373-3000
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------
<PAGE>
2
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Amount of
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Registration
Securities to be Registered Registered Offering Price Per Share Aggregate Offering Price Fee (1)
====================================================================================================================================
<S> <C> <C> <C> <C>
10 1/2% Series C Convertible Preferred Stock,
without par value share....................... 1,500,000 shares ---- ----
Series D Convertible Preferred Stock ........... 7,000,000 shares ---- ----
Common Stock, par value $0.001 per share ....... (2)
Total......................................... ---- $35,369
====================================================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457(f)(2) under the Securities Act of 1933
based on the $120,016,756.00 book value of the 5% Delayed Convertible
Preferred Stock to be received by the Registrant in exchange for the
shares of 10 1/2% Series C Convertible Preferred Stock offered hereby.
This fee was paid in connection with the initial filing of this
Registration Statement.
(2) This Registration Statement also relates to such additional indeterminate
number of shares of Common Stock as may be issued upon (i) conversion of
the 10 1/2% Series C Convertible Preferred Stock, (ii) conversion of the
Series D Convertible Preferred Stock and (iii) the payment of dividends,
at the option of the Company, on the 10 1/2% Series C Preferred Stock in
accordance with the terms thereof. Pursuant to Rule 457(i), no filing fee
is required.
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.
================================================================================
<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, dated October 3, 1997
PROSPECTUS
CD RADIO INC.
OFFER TO EXCHANGE
10 1/2% SERIES C CONVERTIBLE PREFERRED STOCK
FOR 5% DELAYED CONVERTIBLE PREFERRED STOCK
CD Radio Inc. (the "Company") hereby offers, upon the terms and subject to
the conditions set forth in this Prospectus (the "Prospectus") and in the
accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange
(the "Exchange Offer") up to _________ shares of its new 10 1/2% Series C
Convertible Preferred Stock (the "New Preferred Stock") for up to all of the
outstanding 5,222,608 shares of its 5% Delayed Convertible Preferred Stock (the
"5% Preferred Stock") at a rate of one share of New Preferred Stock for each
$100 in Exchange Rate Liquidation Preference represented by shares of 5%
Preferred Stock not previously converted. The "Exchange Rate Liquidation
Preference" shall be the amount determined by dividing the liquidation
preference of the 5% Preferred Stock being exchanged (including accrued and
unpaid dividends on the 5% Preferred Stock) by 0.696145. The liquidation
preference of each share of New Preferred Stock (the "Liquidation Preference")
will be equal to $100.00. The Company will pay cash to exchanging holders of 5%
Preferred Stock in lieu of issuing fractional shares of New Preferred Stock.
Holders of New Preferred Stock will be entitled to the payment of dividends
commencing on November 15, 2002 as described below.
In conjunction with the Exchange Offer, the Company is soliciting (the
"Solicitation") consents ("Consents") from the holders of record of its Common
Stock, par value $.001 per share (the "Common Stock"), and the 5% Preferred
Stock on October 1, 1997 (the "Record Date") to a proposed amendment (the
"Proposed Amendment") to the Certificate of Designations of the 5% Preferred
Stock (the "Certificate of Designations") (i) to allow the Company to redeem the
5% Preferred Stock (to the extent not previously converted) in whole or in part
upon the sale of any equity or debt securities in one or more offerings
occurring on or prior to December 30, 1997 for gross proceeds in an aggregate
cash amount of not less than $100 million (each such offering, a "Qualifying
Offering") and (ii) to amend certain of the redemption provisions relating to
the requirements for the delivery of a notice of redemption in connection
therewith. The Company is conducting the Solicitation pursuant to a separate
Consent Solicitation Statement dated on or about the date hereof (the "Consent
Solicitation Statement"). The Company will make no separate payment for Consents
delivered in the Solicitation. Consents from the holders of a majority of the
issued and outstanding Common Stock and 5% Preferred Stock (the "Requisite
Consents") must be received in order to adopt the Proposed Amendment, and once
the Requisite Consents are received, the Certificate of Designations will be
amended to reflect the Proposed Amendment regardless of whether the Exchange
Offer is consummated.
The Exchange Offer is one component of a financing transaction that
includes an underwritten public offering of 3,500,000 shares of Common Stock
(the "Stock Offering") and an underwritten public offering of the Company's
Senior Discount Notes due 2007 (the "Notes Offering" and, together with the
Stock Offering, the "Offerings"). Separate registration statements have been
filed for each of the Stock Offering and the Notes Offering, and such offers
will be made by separate prospectuses. The
<PAGE>
2
consummation of the Exchange Offer is not conditioned upon the consummation of
either the Notes Offering or the Stock Offering. Each of the Offerings is
conditioned upon consummation of the Exchange Offer.
The Exchange Offer will expire at 12:00 Midnight, New York City time, on
_____, 1997, unless extended (the "Expiration Date"). Tenders of 5% Preferred
Stock may be withdrawn at any time prior to the Expiration Date and, unless
accepted for exchange by the Company, may be withdrawn at any time after forty
business days after the date of this Prospectus.
The terms of the Preferred Stock Investment Agreement (as defined herein)
require that the Company not undertake to conduct any debt or equity financing
that is not either PARI PASSU or junior to the 5% Preferred Stock in seniority,
structure and maturity until the Company completes a Qualifying Offering (as
currently defined).
IF THE PROPOSED AMENDMENT IS NOT APPROVED BY THE COMPANY'S STOCKHOLDERS
AND ANY SHARES OF 5% PREFERRED STOCK REMAIN OUTSTANDING AFTER THE EXCHANGE
OFFER, THE COMPANY WILL NOT BE PERMITTED TO ISSUE ANY DEBT OR EQUITY FINANCING
THAT IS SENIOR TO THE 5% PREFERRED STOCK. THE COMPANY DOES NOT INTEND TO
COMMENCE THE OFFERINGS UNTIL THE SOLICITATION IS SUBSTANTIALLY COMPLETED AND THE
NOTES OFFERING WILL NOT BE CONSUMMATED UNLESS THE EXCHANGE OFFER IS COMPLETED
AND NO SHARES OF THE 5% PREFERRED STOCK REMAIN OUTSTANDING. SEE "THE EXCHANGE
OFFER -- TERMS OF THE EXCHANGE OFFER," "-- THE SOLICITATION" AND "THE PROPOSED
AMENDMENT."
The terms of the New Preferred Stock (including dividend rate, liquidation
preference and conversion and redemption rights) differ in material respects
from the terms of the 5% Preferred Stock for which it may be exchanged pursuant
to the Exchange Offer. For a comparison of certain material terms of the New
Preferred Stock and the 5% Preferred Stock, see "Summary -- Comparison of New
Preferred Stock and 5% Preferred Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 32 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE EXCHANGE OFFER.
The annual dividend rate per share of the New Preferred Stock will be an
amount equal to $10.50 per share. Dividends on the shares of New Preferred Stock
will be cumulative, accruing quarterly without interest at the rate of $2.625
per share, and, when and as declared by the Board of Directors of the Company,
will be payable quarterly initially on November 15, 2002 (the "First Scheduled
Dividend Payment Date") and on February 15, May 15, August 15 and November 15 in
each year thereafter (the "Dividend Payment Dates"). In addition, accrued
dividends on the shares of New Preferred Stock will be paid on the redemption
date of any share of New Preferred Stock redeemed by the Company, on the
purchase date of any share of New Preferred Stock purchased by the Company
pursuant to a Change of Control Offer (defined herein) or on the conversion date
of any share of New Preferred Stock converted into shares of Common Stock on or
after the First Scheduled Interest Payment Date. No accrued dividends will be
paid on any shares of New Preferred Stock that are converted by the Holders
thereof prior to the First Scheduled Dividend Payment Date, unless such shares
of New Preferred Stock are converted on or prior to a redemption date by Holders
thereof electing to convert such shares after having received a notice of
redemption for such shares. Dividends may be paid in cash, shares of Common
Stock or any combination thereto, at the option of the Company. Common Stock
issued to pay dividends will be valued at the average closing price of the
Common Stock as reported in THE WALL STREET JOURNAL for the 20 consecutive
trading days immediately preceding the date of such payment. Dividends on the
shares of
<PAGE>
3
New Preferred Stock will be paid to the holders of record of the shares of New
Preferred Stock on a record date, not more than 40 days nor fewer than 10 days
preceding the payment date thereof.
Except as described below, the shares of New Preferred Stock may not be
redeemed by the Company at its option prior to November 15, 2002. From and after
November 15, 1999 and prior to November 15, 2002, the Company may redeem the
shares of New Preferred Stock, in whole or in part, at a redemption price of
100% of the Liquidation Preference of the shares of New Preferred Stock
redeemed, plus accrued and unpaid dividends, if any, to the redemption date, if
the average closing price of the Common Stock as reported in THE WALL STREET
JOURNAL for the 20 consecutive trading days prior to the notice of redemption
thereof equals or exceeds $31.50 per share (subject to adjustments). From and
after November 15, 2002, the Company may redeem the shares of New Preferred
Stock, in whole or in part, initially at a redemption price of 105.25% of the
Liquidation Preference of the shares of New Preferred Stock redeemed and
thereafter at prices declining ratably to 100% of the Liquidation Preference of
the shares of New Preferred Stock redeemed from and after November 15, 2005,
plus accrued and unpaid dividends, if any, to the redemption date. In addition,
within 30 days of the closing of the Debt Offering (as defined herein), the
Company may redeem up to 50% of the outstanding shares of New Preferred Stock at
100% of the Liquidation Preference of the shares of New Preferred Stock
redeemed, plus accrued and unpaid dividends, if any, to the redemption date. On
November 15, 2012 (the "Mandatory Redemption Date"), the Company is required to
redeem all outstanding shares of New Preferred Stock at a redemption price of
100% of the Liquidation Preference, plus accrued and unpaid dividends, if any,
to the redemption date. The New Preferred Stock will not be subject to any
mandatory sinking fund. Upon the occurrence of a Change in Control (as defined
herein), the Company must make an offer to purchase all outstanding shares of
New Preferred Stock at a purchase price in cash equal to 101% of its Liquidation
Preference, plus all accrued and unpaid dividends, if any, to the date such
shares are purchased. See "Description of New Preferred Stock -- Change in
Control."
Each share of New Preferred Stock may be converted at any time, in whole
or in part, at the option of the holder, into a number of shares of Common Stock
calculated by dividing the Liquidation Preference of the New Preferred Stock
(without accrued and unpaid dividends) by a conversion price (the "Conversion
Price") equal to the lower of $21.00 per share or the issue price per share of
the Common Stock in the first underwritten public offering of the Company's
Common Stock following the issuance of the New Preferred Stock. The Conversion
Price will not be adjusted at any time for accrued and unpaid dividends, but
will be subject to adjustment for the occurrence of certain corporate events
affecting the Common Stock.
If the Company has not consummated one or more Qualifying Offerings
yielding gross proceeds in an aggregate cash amount of at least $100 million by
May 15, 1998 (the "Automatic Exchange Date"), all outstanding shares of New
Preferred Stock shall be exchanged automatically (the "Automatic Exchange") for
shares of the Company's Series D Convertible Preferred Stock (the "Series D
Preferred Stock") on the Automatic Exchange Date at an exchange rate of one
share of Series D Preferred Stock for each $25 of Automatic Exchange Rate
Liquidation Preference represented by the shares of New Preferred Stock. The
"Automatic Exchange Rate Liquidation Preference" for New Preferred Stock shall
be an amount determined by multiplying (x) the Liquidation Preference for the
New Preferred Stock, plus accrued and unpaid dividends thereon by (y) 0.696145.
For a description of the terms, preferences and rights of the Series D Preferred
Stock, see "Description of Capital Stock -- Series D Preferred Stock."
The Exchange Offer is conditioned upon, among other things, (i) receipt by
the Company of the Requisite Consents to the Proposed Amendment, (ii) a minimum
of 4,961,478 shares (95%) of the issued
<PAGE>
4
and outstanding 5% Preferred Stock being tendered for exchange and not withdrawn
prior to the Expiration Date and (iii) the General Conditions (as defined
herein). There can be no assurance that these conditions will be satisfied or
waived. The Company reserves the right to waive certain of the conditions to the
Exchange Offer and to terminate, cancel, withdraw or otherwise amend or modify
the Exchange Offer at any time for any reason. See "The Exchange Offer --
Expiration Date; Extension; Amendments" and "-- Conditions of the Exchange
Offer."
FOR FEDERAL INCOME TAX PURPOSES, IT IS NOT CLEAR WHETHER THE EXCHANGE OF
5% PREFERRED STOCK FOR NEW PREFERRED STOCK WILL BE A TAXABLE EVENT. IF IT IS A
TAXABLE EVENT, GAIN BUT NOT LOSS WILL BE RECOGNIZED. FOR A DISCUSSION OF THESE
AND OTHER UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS RELEVANT TO THE
EXCHANGE OFFER AND THE SOLICITATION, SEE "RISK FACTORS -- POSSIBLE TAX
CONSEQUENCES OF AN EXCHANGE OF 5% PREFERRED STOCK FOR NEW PREFERRED STOCK" AND
"CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES."
------------------------
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.
------------------------
THE DEALER MANAGER FOR THE EXCHANGE OFFER IS:
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is ______, 1997
<PAGE>
5
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE DEALER MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN
THE NEW PREFERRED STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NEW PREFERRED STOCK BY
ANYONE IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION................................................ 7
DOCUMENTS INCORPORATED BY
REFERENCE......................................................... 8
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS................................................ 9
PROSPECTUS SUMMARY.................................................. 10
RISK FACTORS......................................................... 34
PROPOSED FINANCING................................................... 47
USE OF PROCEEDS...................................................... 48
PRICE RANGE OF COMMON STOCK.......................................... 49
DIVIDEND POLICY...................................................... 49
CAPITALIZATION....................................................... 50
SELECTED HISTORICAL FINANCIAL
INFORMATION....................................................... 52
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS........................................................ 55
THE EXCHANGE OFFER................................................... 62
MARKET AND TRADING
INFORMATION....................................................... 71
THE PROPOSED AMENDMENT............................................... 71
BUSINESS............................................................. 73
MANAGEMENT........................................................... 95
PRINCIPAL STOCKHOLDERS............................................... 105
DESCRIPTION OF NEW PREFERRED
STOCK............................................................. 109
DESCRIPTION OF SERIES D PREFERRED
STOCK.............................................................
DESCRIPTION OF CERTAIN
INDEBTEDNESS...................................................... 120
DESCRIPTION OF CAPITAL STOCK......................................... 124
SHARES ELIGIBLE FOR FUTURE SALE
................................................................. 133
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES........................................... 135
LEGAL OPINIONS....................................................... 143
INDEPENDENT ACCOUNTANTS.............................................. 143
<PAGE>
6
<PAGE>
7
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and information may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, New
York, New York 10048; and Chicago Regional Office, Suite 1400, Northwestern
Atrium Center, 500 W. Madison Street, Chicago, Illinois 60661-2511; and copies
of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Such reports, proxy statements and other information concerning the Company also
can be inspected and copied at the offices of the National Association of
Securities Dealers, Inc. (the "NASD"), 1735 K Street, N.W., Washington D.C.
20006, which supervises the Nasdaq SmallCap Market on which the Company's common
stock, par value $0.001 per share (the "Common Stock"), is traded. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's Web site is
http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-4 (herein, together with all amendments and exhibits, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
The Company has also filed a Schedule 13E-4 Issuer Tender Offer Statement (the
"Schedule 13E-4") with the Commission with respect to the Exchange Offer. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information, exhibits and undertakings contained in the Registration
Statement and the Schedule 13E-4. This Prospectus does not contain all of the
information set forth in the Registration Statement and the Schedule 13E-4,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission, and to which reference is hereby made. For further
information, reference is hereby made to the Registration Statement, and the
financial schedules and exhibits filed as a part thereof and to the Schedule
13E-4 and the exhibits thereto. The Registration Statement (including the
exhibits thereto) can be obtained by mail or inspected and copied at the public
reference facilities maintained by the Commission as provided in the prior
paragraph.
<PAGE>
8
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed by the Company with the
Commission pursuant to the Exchange Act are hereby incorporated by reference in
this Prospectus:
1. The Company's Annual Report on Form 10-K, as amended by the Annual
Report on Form 10-K/A, for the year ended December 31, 1996.
2. The Company's Quarterly Report on Form 10-Q, as amended by the
Quarterly Report on Form 10-Q/A, for the period ended March 31,
1997.
3. The Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1997.
4. The Company's Current Report on Form 8-K dated April 10, 1997.
5. The Company's Current Report on Form 8-K dated May 2, 1997.
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).
Each document filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
Expiration Date shall be deemed to be incorporated by reference into this
Prospectus from the date of filing of such document. Any statement contained in
a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of the Registration
Statement and this Prospectus to the extent that a statement contained herein or
in any subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of the Registration Statement or this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT
CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF ANY OF THE 5% PREFERRED
STOCK, TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL
REQUEST OF ANY SUCH PERSON. REQUESTS SHOULD BE DIRECTED TO SECRETARY, CD RADIO
INC., SIXTH FLOOR, 1001 22ND STREET, N.W., WASHINGTON, D.C. 20037. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS ANY REQUEST SHOULD BE MADE BY FIVE
BUSINESS DAYS PRIOR TO THE EXPIRATION DATE.
<PAGE>
9
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.
<PAGE>
10
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. HOLDERS
OF 5% PREFERRED STOCK SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN
UNDER THE CAPTION "RISK FACTORS" AND ARE URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. UNLESS OTHERWISE INDICATED, (I) THE INFORMATION IN THIS PROSPECTUS,
OTHER THAN THE HISTORICAL FINANCIAL INFORMATION, ASSUMES AND GIVES EFFECT TO THE
PROPOSED SALE BY THE COMPANY OF 3,500,000 SHARES OF COMMON STOCK (THE "STOCK
OFFERING") AND THE CONCURRENT OFFERING BY THE COMPANY OF SENIOR DISCOUNT NOTES
DUE 2007 (THE "NOTES") FOR GROSS PROCEEDS OF $150 MILLION (THE "NOTES OFFERING"
AND, TOGETHER WITH THE STOCK OFFERING, THE "OFFERINGS"), AND (II) REFERENCES
HEREIN TO THE "COMPANY" REFER TO CD RADIO INC. AND, WHERE APPROPRIATE, ITS
SUBSIDIARY, SATELLITE CD RADIO, INC.
THE COMPANY
CD Radio Inc. was founded in 1990 to pioneer and commercialize a compact
disc quality, multi-channel radio service broadcast directly from satellites to
vehicles ("satellite radio"). 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 R 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
<PAGE>
11
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 is
within range of one of the Company's terrestrial repeating transmitters.
<PAGE>
12
The ability to broadcast nationwide will also allow the Company to serve
currently underserved radio markets. In the United States, there are more than
45 million people aged 12 and over living in areas with such limited radio
station coverage that the areas are not monitored by The Arbitron Company, a
broadcast industry ratings organization ("Arbitron"). Of these, the Company
believes that approximately 22 million people receive five or fewer FM stations,
1.6 million receive only one FM station and at least one million people receive
no FM stations. This segment of the population also has a limited choice of
radio music formats and is one of CD Radio's primary target markets.
The Company also believes that CD Radio will have a competitive advantage
over conventional radio stations because its music channels will be
commercial-free. In contrast, conventional radio stations interrupt their
broadcasts with up to 18 minutes of commercials in every hour of music
programming, and most stations also frequently interrupt programming with news,
promotional announcements, public service announcements and miscellaneous
information. The Company believes that consumers dislike frequent radio
commercial interruptions and that "station surfing" to avoid them is common.
THE CD RADIO SERVICE
CD Radio will offer motorists: (i) a wide range of finely focused music
formats; (ii) nearly seamless signal coverage throughout the continental United
States; (iii) commercial-free music programming; and (iv) plug and play
convenience.
WIDE CHOICE OF PROGRAMMING. Each of CD Radio's 30 music channels will have
a distinctive format, such as opera, reggae, classic jazz and children's
entertainment, intended to cater to specific subscriber tastes. In most markets,
radio broadcasters target their programming to broad audience segments. Even in
the largest metropolitan markets the variety of station formats generally is
limited, and many of the Company's planned formats are unavailable.
"SEAMLESS" SIGNAL COVERAGE. CD Radio will be available throughout the
continental United States, enabling listeners almost always to be within its
broadcast range. The Company expects its nearly seamless signal will appeal to
motorists who frequently travel long distances, including truck drivers and
recreational vehicle owners, as well as commuters and others who outdrive the
range of their FM signals. In addition, the Company expects its broadcasts will
appeal to the 45 million consumers who live in areas that currently receive only
a small number of FM stations.
COMMERCIAL-FREE MUSIC PROGRAMMING. The Company will provide
commercial-free music programming. The Company's market research indicates that
a principal complaint of radio listeners concerning conventional broadcast radio
is the frequency of commercials. Because CD Radio, unlike most commercial AM and
FM stations, will be a subscription and not an advertiser supported service, its
music channels will not contain commercials.
PLUG AND PLAY CONVENIENCE. Consumers will be able to receive CD Radio
broadcasts by acquiring an adapter (a "radio card") and an easily attachable,
silver dollar-sized satellite dish antenna. Listeners will not be required to
replace their existing car radios and will be able to use the radio card by
plugging it into their radio's cassette or compact disc slot. CD Radio listeners
<PAGE>
13
using a radio card will be able to push a button to switch between AM, FM and CD
Radio. Radio cards will have a visual display that will indicate the channel and
format selected, as well as the title, recording artist and album title of the
song being played. Radio cards will also be portable and will be able to be
moved from car to car. Radio card activation will be accomplished directly via
satellite by calling the Company's customer service center at 888-CD- RADIO.
THE CD RADIO DELIVERY SYSTEM
The CD Radio delivery system will consist of three principal components:
(i) the satellites; (ii) the receivers; and (iii) the national broadcast studio.
THE SATELLITES. The Company has designed the CD Radio delivery system to
transmit an identical signal from two satellites placed in geosynchronous orbit
at 80(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.
There currently are no commercial satellites in orbit capable of
transmitting radio signals on S-band frequencies to the United States. In order
to provide CD Radio the Company must build and launch its own satellites. The
Company has entered into a contract with Space Systems/Loral, Inc. ("Loral"), a
subsidiary of Loral Space & Communications Ltd. ("Loral Space"), to build three
satellites, one of which the Company intends to hold as a spare, and which
grants an option to the Company to purchase an additional satellite (the "Loral
Satellite Contract"). The Company also has contracted for two launch slots (the
"Arianespace Launch Contract") with Arianespace S.A. ("Arianespace"), a leading
supplier of satellite launch services.
THE RECEIVERS. Subscribers to CD Radio will not need to replace their
existing AM/FM car radios. Instead they will be able to receive CD Radio in
their vehicles using a radio card similar in size to a cassette tape or compact
disc that has been designed to plug easily into the cassette or compact disc
slot 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
<PAGE>
14
quantity, S-band radios will be incrementally more expensive than today's car
radios. The Company currently expects that the radio card together with the
miniature satellite dish antenna will be sold at a retail price of approximately
$200. Because subscribers will be able to use the radio card in almost all
existing vehicles, the Company believes that the availability of plug and play
radio cards will be of prime importance to its market penetration for a number
of years.
The Company does not intend to manufacture or distribute radio cards,
S-band radios or miniature satellite dish antennas. The Company has entered into
non-binding memoranda of understanding with two major consumer electronics
manufacturers, and has commenced discussions with several other such
manufacturers, regarding the manufacture of radio cards, S- band radios and
miniature satellite dish antennas for retail sale in the United States.
THE NATIONAL BROADCAST STUDIO. The Company plans to originate its 50
channels of programming from a national broadcast studio (the "National
Broadcast Studio") to be located in the New York area. The National Broadcast
Studio will house the Company's music library, facilities for programming
origination, programming personnel and program hosts, as well as facilities to
uplink programming to the satellites, to activate or deactivate service to
subscribers and to perform the tracking, telemetry and control of the orbiting
satellites.
PROGRESS TO DATE
The Company was formed in May 1990 and at that time proposed that the FCC
create a satellite radio broadcast service and also filed an application with
the FCC for a license to provide such a service. Since that time, the Company
has:
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 of 5% Preferred Stock
<PAGE>
15
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."
PROPOSED FINANCING
The Exchange Offer is part of a proposed financing transaction, which
includes the Stock Offering and the Notes Offering, that is intended to raise
capital to partially finance the construction and launch of the Company's
satellites and for general corporate purposes. The Company expects that the
Offerings will result in net proceeds to the Company of approximately $201.5
million, approximately $58.7 million from the Stock Offering and approximately
$142.8 million from the Notes Offering. The Company will receive no proceeds
from the Exchange Offer. See "Proposed Financing."
RISK FACTORS
The Company's ability to meet its objectives will depend on several
factors, including the timely receipt of necessary governmental approvals,
obtaining additional financing, construction and launch into orbit of two
satellites, the rapid creation of an organization and the management of growth.
The Company estimates that it will require approximately $660.1 million to
develop and commence commercial operation of CD Radio by the end of 1999. Of
this amount, the Company has raised approximately $266.2 million to date. After
giving effect to the Offerings, the Company will have raised approximately
$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. See "Risk Factors" for a discussion of
important factors that should be considered by prospective exchanging
stockholders.
--------------------------
The Company was incorporated in the state of Delaware as Satellite CD
Radio, Inc. on May 17, 1990. On December 7, 1992, the Company's name was changed
to CD Radio Inc., and the Company formed a wholly-owned subsidiary, Satellite CD
Radio, Inc., that is the 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.
<PAGE>
16
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.
<PAGE>
17
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------ ------------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ ----
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ............. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss ....................... (1,551) (6,568) (4,065) (2,107) (2,831) (1,204) (835)
Net loss per share of
Common Stock ................... $ (.23) $ (.79) $ (.48) $ (.23) $ (.29) $ (.13) $ (4.28)(1)
Weighted average shares of
Common Stock and Common
Stock equivalents outstanding 6,715 8,284 8,398 9,224 9,642 9,358 10,307
Accretion on 5% Prefer Stock
added to liquidatio$ed
preference .................. $ -- $ -- $ -- $ -- $ -- $ -- $ (1,406
Deemed dividend on 5%
Preferred Stock ............. $ -- $ -- $ -- $ -- $ -- $ -- $(43,313
Deficiency in the coverage of
combined fixed charges and
preferred dividends by
earnings before fixed charge
and preferred dividend (2) .. $ -- $ -- $ -- $ -- $ -- $ -- $(45,554
Ratio of earnings to combined
fixed charges and preferred
dividends(3) ................ N.A. N.A. N.A. N.A. N.A. N.A. N.A.
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ----- ------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalens . $ 1,883 $ 777 $ 3,400 $ 1,800 $ 4,584 $ 1,371 $ 30,184
Designated cash(4) ....... -- -- -- -- -- -- 66,677
Working capital (deficit) 1,399 (250) 2,908 1,741 4,442 1,293 30,424
Total assets ............. 2,292 1,663 3,971 2,334 5,065 1,874 124,354
Deficit accumulated during
the development stager .. (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) For the purpose of this calculation, the deficiency is computed as the
Company's net loss adjusted for the accretion on the 5% Preferred Stock and
the deemed dividend on the 5% Preferred Stock.
<PAGE>
18
(3) Because the Company has not generated revenues from earnings for the periods
described, the ratio of earnings to fixed charges is not material.
(4) Represents proceeds of the offering of the 5% Preferred Stock which have
been classified as designated cash reflecting the balance due to the FCC for
the Company's FCC License.
<PAGE>
19
THE EXCHANGE OFFER
THE EXCHANGE OFFER......... The Company is offering to exchange pursuant to the
Exchange Offer up to _________ shares of its New
Preferred Stock for up to all of the outstanding
5,222,608 shares of its 5% Preferred Stock at a
rate of one share of New Preferred Stock for each
$100 in Exchange Rate Liquidation Preference
represented by shares of 5% Preferred Stock not
previously converted. The "Exchange Rate
Liquidation Preference" shall be the amount
determined by dividing the actual liquidation
preference of the 5% Preferred Stock being
exchanged (including any accrued and unpaid
dividends on the 5% Preferred Stock), by 0.696145.
The Liquidation Preference of each share of New
Preferred Stock will be equal to $100.00. The terms
of the New Preferred Stock (including the dividend
rate, liquidation preference and conversion and
redemption rights) differ in material respects from
the terms of the 5% Preferred Stock for which it
may be exchanged pursuant to this Exchange Offer.
For a comparison of certain material terms of the
New Preferred Stock and the 5% Preferred Stock, see
"-- Comparison of New Preferred Stock and 5%
Preferred Stock." The 5% Preferred Stock was
originally issued in April 1997. See "The Exchange
Offer -- Terms of the Exchange" and "-- Terms and
Conditions of the Letter of Transmittal,"
"Description of New Preferred Stock" and
"Description of Capital Stock -- 5% Preferred
Stock."
The Exchange Offer is open to all holders of 5%
Preferred Stock.
CONCURRENT CONSENT In conjunction with the Exchange Offer and pursuant
SOLICITATION .............. to the Consent Solicitation Statement, the Company
is soliciting Consents from its stockholders of
record on October 1, 1997 (the "Record Date") to
the Proposed Amendment.
Under the Company's Amended and Restated
Certificate of Incorporation, as currently in
effect, the Company may redeem the 5% Preferred
Stock (to the extent not previously converted), in
whole but not in part, following a sale by the
Company of Common Stock for net cash proceeds to
the Company in an amount not less than $100 million
in a registered underwritten public offering prior
to October 15, 1997. The Company is soliciting the
consent of its stockholders, including the holders
of the 5% Preferred Stock, on Record Date to the
Proposed Amendment that would, among other things,
permit the Company to redeem the 5% Preferred Stock
(to the extent not previously converted) in whole
or in part upon the sale of any equity or debt
securities
<PAGE>
20
in one or more offerings occurring after the date
of the initial issuance of the 5% Preferred Stock
and on or prior to December 30, 1997 for gross
proceeds in an aggregate cash amount of not less
than $100 million. See "The Proposed Amendment."
The terms of the Preferred Stock Investment
Agreement (as defined below) require that the
Company not undertake to conduct any debt or equity
financing that is not either PARI PASSU or junior
to the 5% Preferred Stock in seniority, structure
and maturity until the Company completes a
Qualifying Offering. If the Proposed Amendment is
not approved by the Company's stockholders and any
shares of 5% Preferred Stock remain outstanding
after the Exchange Offer is consummated, the
Company will not be permitted to issue any debt or
equity financing that is senior to the 5% Preferred
Stock. The Company does not intend to commence the
Offerings until the Solicitation is substantially
completed and the Notes Offering will not be
consummated unless the Exchange Offer and the
Solicitation are completed and no shares of the 5%
Preferred Stock remain outstanding.
The Requisite Consents from holders on the Record
Date of a majority of the issued and outstanding 5%
Preferred Stock and the Common Stock must be
received in order to adopt the Proposed Amendment.
If the Proposed Amendment is adopted, then each
non-exchanging holder of 5% Preferred Stock will be
bound by the Proposed Amendment regardless of
whether such holder consented to the Proposed
Amendment. The Company intends to amend the
Certificate of Designations to reflect the Proposed
Amendment as of the expiration date of the
Solicitation if, as of such time, the requisite
consents have been obtained or, if the requisite
consents are obtained later, promptly upon
obtaining the requisite consents. See "The Exchange
Offer -- The Consent Solicitation" and "The
Proposed Amendment."
CONSENT PAYMENT............ The Company will not make a separate payment for
Consents delivered in the Solicitation.
DIVIDEND PAYMENTS.......... Dividends on the 5% Preferred Stock accepted for
exchange pursuant to the Exchange Offer that are
accrued and unpaid from April 15, 1997 to the Issue
Date, will be added to the Exchange Rate
Liquidation Preference of the 5% Preferred Stock in
determining the number of shares of New Preferred
Stock to be received by the holders of the 5%
Preferred Stock participating in the Exchange
Offer. The Company will pay cash to exchanging
holders in lieu of issuing fractional shares
<PAGE>
21
of New Preferred Stock. Dividends on the shares of
the New Preferred Stock will be cumulative and,
when and as declared by the Board of Directors of
the Company, will be payable initially on November
15, 2002 and on February 15, May 15, August 15 and
November 15 in each year thereafter (the "Dividend
Payment Dates").
EXPIRATION DATE............ The Exchange Offer will expire at 12:00 midnight,
New York City time, on ______ ___, 1997, unless
extended (the "Expiration Date"). See "The Exchange
Offer -- Expiration Date; Extension; Amendments"
and "-- Acceptance of 5% Preferred Stock for
Exchange; Delivery of New Preferred Stock."
EXCHANGE DATE.............. The date of acceptance for exchange of the 5%
Preferred Stock (the "Exchange Date") will be the
Expiration Date. Shares of New Preferred Stock will
be delivered as promptly as practicable thereafter.
CONDITIONS OF THE
EXCHANGE OFFER........... The Exchange Offer is conditioned upon, among other
things, (i) receipt of the Requisite Consents to
the Proposed Amendment, (ii) a minimum of 4,961,478
shares (95%) of the issued and outstanding 5%
Preferred Stock being tendered for exchange and not
withdrawn prior to the Expiration Date and (iii)
the General Conditions (as defined herein). There
can be no assurance that these conditions will be
satisfied or waived. The Company reserves the right
to waive certain of the conditions to the Exchange
Offer and to terminate, cancel, withdraw or
otherwise amend or modify the Exchange Offer at any
time for any reason. See "The Exchange Offer --
Expiration Date; Extension; Amendments" and "--
Conditions of the Exchange Offer."
WITHDRAWAL RIGHTS.......... The tender of 5% Preferred Stock pursuant to the
Exchange Offer may be withdrawn at any time prior
to the Expiration Date and unless accepted for
exchange by the Company, may be withdrawn at any
time after forty business days after the date of
this Prospectus. Withdrawal of tendered 5%
Preferred Stock will be deemed a rejection of the
Exchange Offer. See "The Exchange Offer --
Withdrawal Rights."
PROCEDURES FOR
TENDERING............... See "The Exchange Offer -- Tender Procedure."
FEDERAL INCOME TAX
CONSEQUENCES............ As a result of certain provisions of the Taxpayer
Relief Act of 1997 it is not clear whether the
exchange of 5% Preferred
<PAGE>
22
Stock for New Preferred Stock will be a taxable
event. If it is a taxable event, gain but not loss
will be recognized. For a discussion of these and
other United States federal income tax
considerations relevant to the Exchange Offer and
the Solicitation, see "Certain United States
Federal Income Tax Consequences."
USE OF PROCEEDS............ There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer. See
"Use of Proceeds."
NO DISSENTERS' RIGHTS...... Holders of 5% Preferred Stock do not have any
appraisal or dissenters' rights under the Delaware
General Corporation Law or the Certificate of
Designations. See "The Exchange Offer --
Dissenters' Rights."
DEALER MANAGER............. Merrill Lynch & Co. ("Merrill Lynch") is serving as
Dealer Manager in connection with the Exchange
Offer. See "The Exchange Offer -- Dealer Manager."
EXCHANGE AGENT............. MacKenzie Partners, Inc. is serving as Exchange
Agent in connection with the Exchange Offer. See
"The Exchange Offer -- Exchange Agent."
CONSEQUENCE OF
FAILURE TO
EXCHANGE................ Holders of shares of 5% Preferred Stock who do not
exchange their shares of 5% Preferred Stock for
shares of New Preferred Stock pursuant to the
Exchange Offer or whose 5% Preferred Stock is not
accepted for exchange will continue to hold such 5%
Preferred Stock and will be entitled to all the
rights and preferences, and will be subject to all
of the limitations, applicable thereto. Assuming
the Requisite Comments are received, however, the
terms of such 5% Preferred Stock will have been
revised pursuant to the Proposed Amendment. To the
extent that shares of 5% Preferred Stock are
tendered and accepted in the Exchange Offer, the
liquidity and trading market for untendered shares
of 5% Preferred Stock, and the terms upon which
such shares could be sold, could be adversely
affected. See "Risk Factors -- Reduced Trading
Market for 5% Preferred Stock" and "The Exchange
Offer -- Consequence of Failure to Exchange."
POTENTIALLY LIMITED
MARKET FOR NEW
PREFERRED STOCK.........
<PAGE>
23
The New Preferred Stock will be a new issue of
securities with no established trading market. The
Company has been advised by Merrill Lynch that it
intends to make a market in the New Preferred Stock
but is not obligated to do so and may discontinue
market making at any time without notice. No
assurance can be given as to the liquidity of the
trading market for the New Preferred Stock. The
trading market for the 5% Preferred Stock generally
has not been liquid. See "Market and Trading
Information."
RESTRICTIONS ON
TRANSFER .................. Subject to certain exceptions, holders of New
Preferred Stock issued in the Exchange Offer and
holders of New Preferred Stock who convert such New
Preferred Stock into shares of Common Stock
("Converted Stock") will not be permitted to sell,
grant any option to purchase or otherwise transfer
or dispose of (collectively, "Transfer") any New
Preferred Stock or Converted Stock, as the case may
be, until the date (the "Lock-Up Expiration Date")
which is 180 days after the later of the Expiration
Date or the closing date of the Stock Offering. See
"Risk Factors -- Restrictions on Transfer" and
"Description of New Preferred Stock -- Restrictions
on Transfer."
<PAGE>
24
COMPARISON OF NEW PREFERRED STOCK AND 5% PREFERRED STOCK
The following is a brief summary comparison of certain of the principal
terms of the New Preferred Stock and the 5% Preferred Stock.
New Preferred Stock 5% Preferred Stock
------------------- ------------------
DIVIDENDS............. The annual dividend rate The annual dividend rate
per share of New per share of 5%
Preferred Stock will be Preferred Stock is in an
in an amount equal to amount equal to $1.25.
$10.50. Dividends on the Dividends on the shares
shares of the New of 5% Preferred Stock,
Preferred Stock will be when and as declared by
cumulative, accruing the Board of Directors
quarterly without of the Company, are
interest at the rate of cumulative and payable
$2.625 per share, and, on April 15th and
when and as declared by October 15th of each
the Board of Directors year. Any dividend
of the Company, will be payable on the 5%
payable quarterly Preferred Stock may be
initially on November paid, at the option of
15, 2002 (the "First the Company, either (i)
Scheduled Dividend in cash or (ii) by
Payment Date") and on adding the amount of
February 15, May 15, such dividend to the
August 15 and November liquidation preference
15 in each year of the 5% Preferred
thereafter (the Stock. See "Description
"Dividend Payment of Capital Stock -- 5%
Dates"). In addition, Preferred Stock --
accrued dividends on Dividends."
shares of New Preferred
Stock will be paid on
the redemption date of
any share of New
Preferred Stock redeemed
by the Company, on the
purchase date of any
share of New Preferred
Stock purchase by the
Company pursuant to a
Change of Control Offer
(defined herein) or on
the conversion date of
any share of New
Preferred Stock
converted into shares of
Common Stock on or after
the First Scheduled
Dividend Payment Date.
No accrued dividends
will be paid on any
shares of New Preferred
Stock that is converted
by the Holders thereof
prior to the First
Scheduled Dividend
Payment Date, unless
such shares
<PAGE>
25
of New Preferred Stock
are converted on or
prior to a redemption
date by Holders thereof
electing to convert such
shares after having
received a notice of
redemption for such
shares. Any dividends
may be paid in cash or
shares of Common Stock
or any combination
thereof at the option of
the Company. Common
Stock issued to pay
dividends will be valued
at the average closing
price of the Common
Stock as reported in THE
WALL STREET JOURNAL for
the 20 consecutive
trading days immediately
preceding the date of
such payment. Dividends
on the shares of New
Preferred Stock will be
paid to the holders of
record of shares of the
New Preferred Stock on a
record date not more
than 40 days nor less
than 10 days preceding
the payment date
thereof. See
"Description of New
Preferred Stock --
Dividends." The annual
dividend rate per share
of 5% Preferred Stock is
in an amount equal to
$1.25. Dividends on the
shares of 5% Preferred
Stock, when and as
declared by the Board of
Directors of the
Company, are cumulative
and payable on April
15th and October 15th of
each year. 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. See "Description
of Capital Stock -- 5%
Preferred Stock --
Dividends."
MANDATORY
REDEMPTION......... November 15, 2012. If the Company does not
have sufficient shares
of Common Stock reserved
to effect the conversion
of all outstanding
shares of the 5%
Preferred Stock, then at
any time at the request
of any holder of 5%
Preferred Stock, the
Company must purchase
from such holder the
number of shares of the
5% Preferred Stock equal
to such holder's
pro-rata share of the
number of shares of the
5% Preferred Stock that
would not be able to be
converted due to an
insufficient number of
shares of Common Stock
reserved for such
purpose at the Maximum
Price (as defined
below). In addition, if
<PAGE>
26
prior to the earlier of April
21, 1998 or the closing of a
Qualifying Offering (as
defined below), the FCC awards
more than two licenses
(including the license awarded
to the Company) permitting the
licensee to provide satellite
digital audio radio services
and more than two licensees
(including the Company)
commence or announce an
intention to commence
satellite digital audio radio
services, then upon the
request of the holders of more
than one-third of the
outstanding shares of the 5%
Preferred Stock, the Company
must purchase one-half of the
shares of the 5% Preferred
Stock held by each requesting
shareholder at a purchase
price per share equal to the
sum of the liquidation
preference for the 5%
Preferred Stock plus any Cash
Payments (as defined below)
divided by one MINUS the
Applicable Percentage (as set
forth below). If a
Reorganization (as defined
below) 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. If the holder of
shares of 5% Preferred Stock
chooses not to require the
Company to redeem such
holder's shares, the shares
will be convertible into the
number of
<PAGE>
27
shares of stock or other
securities or property
(including cash) to which a
holder of the number of shares
of Common Stock deliverable
upon conversion of such share
of 5% Preferred Stock not so
redeemed would have been
entitled upon the
Reorganization. See
"Description of Capital Stock
-- 5% Preferred Stock --
Required Redemption."
OPTIONAL
REDEMPTION.......... Except as described The 5% Preferred Stock
below, the New Preferred may be redeemed in whole
Stock may not be but not in part at
redeemable prior to 72.125% of the Maximum
November 15, 2002. From Price by the Company at
and after November 15, any time beginning on
1999 and prior to the date that is ten
November 15, 2002, the months after the date of
Company may redeem the original issuance of the
shares of New Preferred 5% Preferred Stock, plus
Stock at a redemption one day for each day
price of 100% of the during which any
Liquidation Preference registration statement
of the shares of New with respect to the
Preferred Stock redeemed Common Stock issuable
plus accrued and unpaid upon conversion of the
dividends, if any, to 5% Preferred Stock is
the redemption date if suspended or the related
the average closing prospectus is not
price of the Common current, complete or
Stock as reported in THE otherwise usable. The
WALL STREET JOURNAL for Company may not exercise
the 20 consecutive its right of redemption
trading days prior to unless (i) the average
the notice of redemption closing price of the
thereof equals or Common Stock as reported
exceeds $31.50 per share in THE WALL STREET
(subject to JOURNAL for the 20
adjustments). From and consecutive trading days
after November 15, 2002, prior to the notice of
the Company may redeem redemption shall equal
the shares of New or exceed $18 per share
Preferred Stock, in (subject to adjustments)
whole or in part, and (ii) the shares of
initially at a Common Stock issuable
redemption price of upon conversion of the
105.25% of the aggregate 5% Preferred Stock are
Liquidation Preference registered for resale by
of the New Preferred an effective
Stock redeemed and registration statement
thereafter at prices under the Securities
declining ratably to Act. The Company also
100% of the Liquidation may redeem the 5%
Preference of the shares Preferred Stock in whole
of New Preferred Stock but not in part at the
redeemed from and after Maximum Price if the
November 15, 2005, plus Company sells Common
accrued Stock for cash in an
amount not less
<PAGE>
28
and unpaid dividends, if than $100 million in a
any, to the redemption registered underwritten
date. In addition, public offering on or
within 30 days of the prior to October 15,
closing of the Debt 1997 (a "Qualifying
Offering (as defined Offering"). The Company
herein), the Company may is soliciting the
redeem up to 50% of the consent of its
outstanding shares of stockholders, including
New Preferred Stock at the holders of the 5%
100% of the Liquidation Preferred Stock, on the
Preference thereof, plus Record Date to an
accrued and unpaid amendment to the
dividends, if any, to Certificate of
the redemption date. The Designations that would
New Preferred Stock will permit the Company to
not be subject to any redeem the 5% Preferred
mandatory sinking fund Stock in whole or in
redemptions. part upon the sale of
any equity or debt
securities in one or
more offerings occurring
after the date of the
initial issuance of the
5% Preferred Stock and
on or prior to December
30, 1997 for gross
proceeds in an aggregate
cash amount of not less
than $100 million. See
"Proposed Financing" and
"Description of Capital
Stock -- 5% Preferred
Stock -- Redemption."
CONVERSION............ Each share of New Shares of 5% Preferred
Preferred Stock may be Stock are convertible at
converted at any time at the option of the holder
the option of the at any time into shares
holder, unless of Common Stock,
previously redeemed, provided that the
into a number of shares Company is not obligated
of Common Stock to honor any request for
calculated by dividing conversion of the 5%
the Liquidation Preferred Stock at any
Preference of the New time if certain
Preferred Stock (without governmental approvals
accrued and unpaid of the issuance of the
dividends) by a Common Stock upon such
conversion price (the con version have not
"Conversion Price") been obtained. If such
equal to the lower of approvals (other than
$21.00 per share or the with respect to a
issue price per share of conversion resulting in
the Common Stock in the a holder or group of
first underwritten holders holding more
public offering of the than 50% of the voting
Company's Common Stock securities of the
following the issuance Company) are not
of the New Preferred obtained within 270 days
Stock. The Conversion after the Initial
Price will not be Registration Deadline
adjusted at any time for (as defined in the
accrued and unpaid Preferred Stock
dividends, but will be Investment Agreement (as
subject to adjustment defined herein) relating
for the occurrence of to sale of the 5%
<PAGE>
29
certain corporate events Preferred Stock), the
affecting the Common Company must, at the
Stock. See "Description request of any holder,
of New Preferred Stock repurchase the shares of
-- Conversion." the 5% Preferred Stock
held by such holder at a
purchase price per share
equal to the sum of the
liquidation preference
of the 5% Preferred
Stock plus any other
cash payments due to
such holder ("Cash
Payments"), divided by
72.125% (the "Maximum
Price"). The number of
shares of Com mon Stock
issuable upon con
version of the shares of
the 5% Preferred Stock
will equal the
liquidation preference
of the shares of 5%
Preferred Stock 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 Con version
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 con
verting holder sold the
Common Stock, in either
case, multiplied by an
amount equal to one
MINUS the Applicable
Percentage. The
Applicable Percentage
increases each month,
from 21.625% for
conversions occurring
after July 15, 1997, to
27.875% for conversions
occurring after November
15, 1997. For a com
plete list of the
Applicable Per centages,
see "Description of
Capital Stock -- 5%
Preferred Stock --
Conversion." At any date
after November 15, 1997,
the 5% Preferred
Conversion Price is
determined in accordance
with a formula based on
the low est of (i)
market prices of the
<PAGE>
30
Common Stock between
October 15, 1997 and
November 15, 1997, (ii)
market prices of the
Common Stock during the
three consecutive
trading days immediately
pre ceding the date of
conversion or (iii)
actual prices at which
the converting holder
sold the Com mon Stock,
in each case, multiplied
by 72.125%. 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. See "Description
of Capital Stock -- 5%
Preferred Stock --
Conversion."
AUTOMATIC
EXCHANGE.............. If the Corporation has
not consummated one or
more Qualifying
Offerings yielding gross
proceeds in an aggregate
cash amount of at least
$100 million by May 15,
1998 (the "Automatic
Exchange Date"), then
all outstanding shares
of New Preferred Stock
shall be exchanged
automatically (the
"Automatic Exchange")
for shares of the
Corporation's Series D
Convertible Preferred
Stock (the "Series D
Preferred Stock") on the
Automatic Exchange Date
at an exchange rate of
one share of Series D
Preferred Stock for each
$25 of Automatic
Exchange Rate
Liquidation Preference
represented by the
shares of New Preferred
Stock. The Automatic
Exchange Rate
Liquidation Preference
for the shares of New
Preferred Stock shall be
an
<PAGE>
31
amount determined by
multiplying (x) the
Liquidation Preference
for the shares of New
Preferred Stock being
exchanged, plus the
amount of accrued and
unpaid dividends thereon
by (y) 0.696145. For a
description of the
terms, preferences and
rights of the Series D
Preferred Stock, see
"Description of Capital
Stock--Series D
Preferred Stock."
LIQUIDATION........... The Liquidation The liquidation
Preference of each share preference of each share
of New Preferred Stock of 5% Preferred Stock is
will be equal to equal to $25.00 plus an
$100.00. See amount equal to accrued
"Description of New and unpaid dividends on
Preferred Stock -- such share of 5%
Liquidation." Preferred Stock. See
"Description of Capital
Stock -- 5% Preferred
Stock -- Dividends."
CASH PAYMENTS......... None. The Company must make a
cash payment in an
amount per share equal
to 3% of the liquidation
preference of the 5%
Preferred Stock or the
equivalent in securities
issued or issuable upon
conversion per month to
each holder if the
Company fails (i) to
honor any request for
conversion of the 5%
Preferred Stock except
as permitted by the
terms and conditions of
the 5% Preferred Stock
or (ii) to maintain the
listing of the Common
Stock on Nasdaq, the New
York Stock Exchange or
the American Stock
Exchange. A similar cash
payment must be made if,
after effecting a
registration statement
with respect to the
resale of Common Stock
issuable upon conversion
of the 5% Preferred
Stock, the use of the
prospectus is suspended
for more than 60
cumulative days in the
aggregate
<PAGE>
32
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. See
"Description of Capital Stock
-- 5% Preferred Stock -- Cash
Payments."
CHANGE IN
CONTROL............. If a Change in Control None.
(as defined below)
occurs, the Company must
make an offer to
purchase all outstanding
New Preferred Stock at a
purchase price in cash
equal to 101% of the
Liquidation Preference,
all accrued and unpaid
dividends, if any, to
the date such shares are
purchased. See
"Description of New
Preferred Stock --
Change in Control."
LIMITATIONS ON
DEBT AND
EQUITY
FINANCING........... None. 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. See
"Proposed Financing" and
"Description of Capital Stock
-- 5% Preferred Stock -- Cash
Payments."
<PAGE>
33
RESTRICTIONS ON
TRANSFER............ Subject to certain
exceptions, holders of
New Preferred Stock
issued in the Exchange
Offer and holders of New
Preferred Stock who
convert such New
Preferred Stock into
shares of Common Stock
("Converted Stock") will
not be permitted to
sell, grant any option
to purchase or otherwise
transfer or dispose of
(collectively,
"Transfer") any New
Preferred Stock or
Converted Stock, as the
case may be, until the
later to occur of (i)
the 181st day following
the Stock Offering or
(ii) the 181st day
following consummation
of the Exchange Offer
(such later date being
herein referred to as
the "Lock-Up Expiration
Date.") See "Risk
Factors -- Restrictions
on Transfer" and
"Description of New
Preferred Stock --
Restrictions on
Transfer."
<PAGE>
34
RISK FACTORS
PROSPECTIVE EXCHANGING STOCKHOLDERS SHOULD CAREFULLY CONSIDER, IN ADDITION
TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, THE FACTORS SET
FORTH BELOW. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF
CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH
BELOW AND ELSEWHERE IN THIS PROSPECTUS. SEE "SPECIAL NOTE REGARDING FORWARD --
LOOKING STATEMENTS."
EXPECTATION OF CONTINUING LOSSES; NEGATIVE CASH FLOW
The Company is a development stage company and its proposed service, CD
Radio, is in an early stage of development. Since its inception, the Company's
activities have been concentrated on raising capital, obtaining required
licenses, developing technology, strategic planning and market research. From
its inception on May 17, 1990 through June 30, 1997, the Company has had no
revenues and has incurred aggregate net losses of approximately $19.4 million,
including net losses of approximately $2.8 million during the year ended
December 31, 1996 and $0.8 million during the six months ended June 30, 1997.
The Company does not expect to generate any revenues from operations until late
1999 or 2000 at the earliest, and expects that positive cash flow from
operations will not be generated until late 2000 at the earliest. The ability of
the Company to generate revenues and achieve profitability will depend upon a
number of factors, including the timely receipt of all necessary FCC
authorizations, the successful and timely construction and deployment of its
satellite system, the development and manufacture of radio cards, S-band radios
and miniature satellite dish antennas by consumer electronics manufacturers, the
timely establishment of its National Broadcast Studio and the successful
marketing and consumer acceptance of CD Radio. There can be no assurance that
any of the foregoing will be accomplished, that CD Radio will ever commence
operations, that the Company will attain any particular level of revenues or
that the Company will achieve profitability.
NEED FOR SUBSTANTIAL ADDITIONAL FINANCING
The Company estimates that it will require approximately $660.1 million to
develop and commence commercial operation of CD Radio by the end of 1999. Of
this amount, the Company has raised approximately $266.2 million to date. After
giving effect to the Offerings, the Company will have raised approximately
$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. Additional funds, however, would be
required in the event of delays, cost overruns, launch failure or other adverse
developments. Furthermore, if the Company were to exercise its option under the
Loral Satellite Contract to purchase and deploy an additional satellite,
substantial additional funds would be required. See "Proposed Financing." The
Company anticipates funding its projected cash requirements through the
completion of additional debt and equity financings. The Company currently does
not have sufficient financing commitments to fund all of its capital needs, and
there can be no assurance that the Company will be able to obtain additional
financing on favorable terms, if at all, or that it will be able to do so on a
timely basis.
<PAGE>
35
The indenture governing the Notes (the "Indenture") and the AEF Agreements (as
defined below) contain, and documents governing any future indebtedness are
likely to contain, provisions that limit the ability of the Company to incur
additional indebtedness. The Company has substantial near-term funding
requirements related to the construction and launch of its satellites. The
Company is committed to make aggregate payments of $272.8 million under the
Loral Satellite Contract and of $176.0 million under the Arianespace Launch
Contract. Under the Loral Satellite Contract, payments are to be made in 22
installments, which commenced in April 1997. Payments due under the Arianespace
Launch Contract commence November 1997 for the first launch, and February 1998
for the second launch. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Funding Requirements." Failure to secure the necessary financing on a timely
basis could result in delays and increases in the cost of satellite construction
or launch or other activities necessary to put CD Radio into operation, could
cause the Company to default on its commitments to its satellite construction or
satellite launch contractors, its creditors or others, could render the Company
unable to put CD Radio into operation and could force the Company to discontinue
operations or seek a purchaser for its business. The issuance by the Company of
additional equity securities could cause substantial dilution of the interest in
the Company of holders of shares of New Preferred Stock received pursuant to the
Exchange Offer who convert their shares of New Preferred Stock into shares of
Common Stock.
POSSIBLE DELAYS AND ADVERSE EFFECT OF DELAY ON FINANCING REQUIREMENTS
The Company currently expects to begin offering CD Radio in late 1999. The
Company's ability to meet that objective will depend on several factors. For
both of the two satellites required for the CD Radio service to be launched and
in operation by the end of 1999, Loral will be required to deliver the second
satellite three months prior to the delivery date specified in the contract,
which cannot be assured. See "Business -- The CD Radio Delivery System -- The
Satellites -- Satellite Construction." Furthermore, the launch of both
satellites will have to occur within the early months of the launch periods
reserved with Arianespace, which also cannot be assured. See "Business -- The CD
Radio Delivery System -- The Satellites -- Launch Services." A significant delay
in the planned development, construction, launch and commencement of operation
of the Company's satellites would have a material adverse effect on the Company.
Other delays in the development or commencement of commercial operations of CD
Radio may also have a material adverse effect on the Company. Any such delays
could result from a variety of causes, including delays associated with
obtaining FCC authorizations, coordinating use of spectrum with Canada and
Mexico, inability to obtain necessary financing in a timely manner, delays in or
modifications to the design, development, construction or testing of satellites,
the National Broadcast Studio or other aspects of the CD Radio system, changes
of technical specifications, delay in commercial availability of radio cards,
S-band radios or miniature satellite dish antennas, failure of the Company's
vendors to perform as anticipated or a delayed or unsuccessful satellite launch
or deployment. During any period of delay, the Company would continue to have
significant cash requirements, including capital expenditures, administrative
and overhead costs, contractual obligations and debt service requirements that
could materially increase the aggregate amount of funding required to permit the
Company to commence operating CD Radio. Additional financing may not be
available on favorable terms or at all during periods of delay. Delay also could
cause the Company to be placed at a competitive disadvantage in relation to any
competitor that succeeds in beginning operations earlier than the Company.
<PAGE>
36
RELIANCE ON UNPROVEN APPLICATIONS OF TECHNOLOGY
CD Radio is designed to be broadcast from two satellites in geosynchronous
orbit that transmit identical signals to radio cards or S-band radios through
miniature satellite dish antennas. This design involves new applications of
existing technology which have not been deployed and there can be no assurance
that the CD Radio system will work as planned. In addition, radio cards, S-band
radios and miniature satellite dish antennas are not currently available. In
certain areas with high concentrations of tall buildings and other obstructions,
such as large urban areas, or in tunnels, signals from both satellites will be
blocked and CD Radio reception will be adversely affected. In urban areas, the
Company plans to install terrestrial repeating transmitters to rebroadcast CD
Radio; however, certain areas with impediments to satellite line-of-sight may
still experience "dead zones." Although management believes that the technology
developed by the Company will allow the CD Radio system to operate as planned,
there can be no assurance that it will do so. See "-- Unavailability of Radio
Cards, S-band radios or Miniature Satellite Dish Antennas," "Business -- The CD
Radio Delivery System" and "Business -- Technology, Patents and Trademarks."
DEPENDENCE UPON SATELLITE AND LAUNCH CONTRACTORS
The Company's business will depend upon the successful construction and
launch of the satellites which will be used to transmit CD Radio. The Company
will rely upon its satellite vendor, Loral, for the construction and timely
delivery of these satellites. Failure by Loral to deliver functioning satellites
in a timely manner could materially adversely affect the Company's business.
Although the Loral Satellite Contract provides for certain late delivery
penalties, Loral will not be liable for indirect or consequential damages or
lost revenues or profits resulting from late delivery or other defaults. Title
and risk of loss for the first and second satellites are to pass to the Company
at the time of launch. The satellites are warranted to be in accordance with the
performance specifications in the Loral Satellite Contract and free from defects
in materials and workmanship at the time of delivery, which for the first two
satellites will be deemed to occur at the time of arrival of the satellites at
the launch base. After delivery, no warranty coverage applies if the satellite
is launched. See "Business -- The CD Radio Delivery System -- The Satellites --
Satellite Construction."
The Company is dependent on its satellite launch vendor, Arianespace, for
the construction of launch vehicles and the successful launch of the Company's
satellites. Failure of Arianespace to launch the satellites in a timely manner
could materially adversely affect the Company's business. The Arianespace Launch
Contract entitles Arianespace to postpone either of the Company's launches for a
variety of reasons, including technical problems, lack of co- passenger(s) for
the Company's launch or the need to conduct a replacement launch for another
customer, a launch of a scientific satellite whose mission may be degraded by
delay, or a launch of another customer's satellite whose launch was postponed.
Although the Arianespace Launch Contract provides liquidated damages for delay,
depending on the length of the delay, and entitles the Company to terminate the
agreement for delay exceeding 12 months, there can be no assurance that these
remedies will adequately mitigate any damage to the Company's business caused by
launch delays. See "-- Possible Delays and Adverse Effect of Delay on Financing
Requirements." The liability of Arianespace in the event of a launch failure is
limited to providing a replacement launch in the case of a total launch failure
or paying an amount based
<PAGE>
37
on lost satellite capacity in the case of a partial launch failure. See
"Business -- The CD Radio Delivery System -- The Satellites -- Launch Services."
SATELLITE LAUNCH RISKS
Satellite launches are subject to significant risks, including launch
failure, satellite destruction or damage during launch and failure to achieve
proper orbital placement. Launch failure rates may vary depending on the
particular launch vehicle and contractor. Although past experience is not
necessarily indicative of future performance, Arianespace has advised the
Company that as of August 8, 1997, 84 of 89 Arianespace launches (or
approximately 94%) have been completed successfully since May 1984. See
"Business -- The CD Radio Delivery System -- The Satellites -- Launch Services."
However, the Ariane 5, the particular launch vehicle intended for the launches
of the Company's satellites, has had only one launch, which was a failure, and
is untested in flight. The next launch of an Ariane 5 currently is planned for
October 1997. In the event of a significant delay in the Ariane 5 program, the
Company has the right to request launch on an Ariane 4 launch vehicle. There is
no assurance that Arianespace's launches of the Company's satellites will be
successful. Satellites also may fail to achieve a proper orbit or be damaged in
space. See "-- Limited Life of Satellites; In-orbit Failure." As part of its
risk management program, the Company plans to construct a third, backup
satellite and to obtain insurance covering a replacement launch to the extent
required to cover risks not assumed by Arianespace under the Arianespace Launch
Contract. See "-- Insurance Risks." The launch of a replacement satellite would
delay the commencement or continuation of the Company's commercial operations
for a period of at least several months, which could have a material adverse
effect on the demand for the Company's services and on its revenues and results
of operations. See "Business -- The CD Radio Delivery System -- The Satellites
- -- Launch Services."
UNCERTAIN MARKET ACCEPTANCE
There is currently no satellite radio service such as CD Radio in
commercial operation in the United States. As a result, the extent of the
potential demand for such a service and the degree to which the Company's
proposed service will meet that demand cannot be estimated with certainty, and
there can be no assurance that there will be sufficient demand for CD Radio to
enable the Company to achieve significant revenues or cash flow or profitable
operations. The success of CD Radio in gaining market acceptance will be
affected by a number of factors beyond the Company's control, including the
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
<PAGE>
37
be damaged or destroyed by electrostatic storms or collisions with other objects
in space. If the Company is required to launch the spare satellite, due to
failure of the launch or in-orbit failure of one of the operational satellites,
its operational timetable would be delayed for approximately six months or more.
The launch or in-orbit failure of two satellites would require the Company to
arrange for additional satellites to be built and could delay the commencement
or continuation of the Company's operations for three years or more. The
Company's satellites are expected to have useful lives of approximately 15
years, after which their performance in delivering CD Radio is expected to
deteriorate. There can be no assurance, however, of the specific longevity of
any particular satellite. The Company's operating results would be adversely
affected in the event the useful life of its initial satellites is significantly
shorter than 15 years.
INSURANCE RISKS
Pursuant to the Loral Satellite Contract and the Arianespace Launch
Contract, the Company is the beneficiary of certain limited warranties with
respect to the services provided under each agreement. However, these limited
warranties do not cover a substantial portion of the risks inherent in satellite
launches or in-orbit operations, and the Company will have to obtain insurance
to adequately protect against such risks.
The Arianespace Launch Contract contains a provision entitling the Company
to a replacement launch in the event of a launch failure caused by the launch
vehicle used to launch the Company's satellites. In such event, the Company
would utilize the spare satellite that it is having constructed. Thus, the
Company does not intend to purchase additional insurance for launch failure of
the launch vehicle. The Company intends to insure against other contingencies,
including a failure during launch caused by factors other than the launch
vehicle and/or a failure involving the second or third satellite in a situation
in which the spare satellite has been used to replace the first or second
satellite. Any adverse change in insurance market conditions may result in an
increase, which may be substantial, in the insurance premiums paid by the
Company. There is no assurance that launch insurance will be available or, if
available, that it can be obtained at a cost or on terms acceptable to the
Company.
If the launch of either of the Company's two satellites is a full or
partial failure or if, following launch, either of the satellites does not
perform to specifications, there may be circumstances in which insurance will
not fully reimburse the Company for its expenditures with respect to the
applicable satellite. In addition, the Company has not acquired insurance that
would reimburse the Company for business interruption, loss of business and
similar losses which might arise from such events or from delay in the launch of
either of the satellites. Any insurance obtained by the Company also will likely
contain certain exclusions and material change conditions that are customary in
the industry. See "Business--The CD Radio Delivery System--The Satellites--Risk
Management and Insurance."
RISK ASSOCIATED WITH CHANGING TECHNOLOGY
The industry in which the Company operates is characterized by rapid
technological advances and innovations. There is no assurance that one or more
of the technologies utilized or under development by the Company will not become
obsolete, or that its services will be in demand at the time they are offered.
The Company will be dependent upon technologies developed by third parties to
implement key aspects of its proposed system, and there can be no
<PAGE>
39
assurance that more advanced technologies will be available to the Company on a
timely basis or on reasonable terms or that more advanced technologies will be
used by the Company's competitors and that such technologies will be available
to the Company. In addition, unforeseen problems in the development of the
Company's satellite radio broadcasting system may occur that could adversely
affect performance, cost or timely implementation of the system and could have a
material adverse effect on the Company.
UNAVAILABILITY OF RADIO CARDS, S-BAND RADIOS OR MINIATURE SATELLITE DISH
ANTENNAS
The Company's business strategy requires that subscribers to CD Radio
purchase radio cards or S-band radios as well as the associated miniature
satellite dish antennas in order to receive the service. See "Business -- The CD
Radio Delivery System." Neither the radio cards, S-band radios nor miniature
satellite dish antennas currently are available, and the Company is unaware of
any manufacturer currently developing such products. The Company does not intend
to manufacture or distribute radio cards, S-band radios or miniature satellite
dish antennas. The Company has entered into non-binding memoranda of
understanding with two major consumer electronics manufacturers, and has
commenced discussions with several other such manufacturers, regarding the
manufacture of radio cards, S-band radios and miniature satellite dish antennas
for retail sale in the United States. The Company currently intends to select
one manufacturer of these products on an exclusive basis for the first year of
CD Radio broadcasts. There can be no assurance, however, that these discussions
or memoranda of understanding will result in a binding commitment on the part of
any manufacturer to produce radio cards, S-band radios and miniature satellite
dish antennas in a timely manner and at an affordable price so as to permit the
widespread introduction of CD Radio in accordance with the Company's business
plan or that sufficient quantities of radio cards, S-band radios and miniature
satellite dish antennas will be available to meet anticipated consumer demand.
The failure to have one or more consumer electronics manufacturers develop these
products for commercial sale in a timely manner, at an affordable price and with
mass market nationwide distribution would have a material adverse effect on the
Company's business. See "Business -- The CD Radio Delivery System," "Business --
Marketing Strategy," and "Business -- Technology, Patents and Trademarks."
NEED TO OBTAIN RIGHTS TO PROGRAMMING
In connection with its music programming, the Company will be required to
negotiate and enter into royalty arrangements with performing rights societies,
such as The American Society of Composers, Authors and Publishers ("ASCAP"),
Broadcast Music, Inc. ("BMI") and SESAC, Inc. ("SESAC"). These organizations
collect royalties and distribute them to songwriters and music publishers.
Copyright users negotiate a fee with these organizations based on a percentage
of advertising and/or subscription revenues. Broadcasters currently pay a
combined total of approximately 3% of their revenues to the performing rights
societies. The Company also will be required to negotiate similar arrangements,
pursuant to the Digital Performance Right in Sound Recordings Act of 1995 (the
"Digital Recording Act"), with the owners of the sound recordings. The
determination of certain royalty arrangements with the owners of sound
recordings under the Digital Recordings Act currently are subject to arbitration
proceedings. The Company believes that it will be able to negotiate royalty
arrangements with these organizations and the owners of sound recordings, but
there can be no assurance as to the terms of any such royalty arrangements
ultimately negotiated or established by arbitration.
<PAGE>
40
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.
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
<PAGE>
41
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 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
<PAGE>
42
The Company is highly dependent on the services of David Margolese,
Chairman and Chief Executive Officer, who is responsible for the Company's
operations and strategic planning. The loss of the services of Mr. Margolese
could have a material adverse effect upon the business and prospects of the
Company. See "Business -- Government Regulation" and "Management."
APPLICATION OF EXPORT CONTROL REGULATIONS
Shipment of the Company's satellites to territory outside the United
States is subject to U.S. export control regulation. Because Arianespace, the
Company's satellite launch vendor, intends to launch the Company's satellites
from an Arianespace launch facility in French Guiana, a department of France,
export licenses will be required under United States export control regulations.
There can be no assurance, however, that the required export licenses will be
obtained.
RISK OF SIGNAL THEFT
The CD Radio signal, like all broadcasts, is subject to the risk of
piracy. Although the Company plans to use encryption technology to mitigate
signal theft, the Company does not believe that any such technology is
infallible. Accordingly, there can be no assurance that theft of the CD Radio
signal will not occur. Signal theft, if widespread, could have a material
adverse effect on the Company.
COMPETITION
The Company will be seeking market acceptance of its proposed service in a
new, untested market and will compete with established conventional radio
stations, which do not charge subscription fees or require the purchase of radio
cards or S-band radios and associated miniature satellite dish antennas to
receive their services. Many radio stations also offer information programming
of a local nature such as local news or traffic reports which the Company will
be unable to offer. In addition, the Company expects that, prior to the
commercial launch of CD Radio, some traditional FM radio broadcasting stations
will begin to transmit digital, compact disc quality signals. The Company also
expects to compete directly with American Mobile Radio Corporation ("AMRC"), a
subsidiary of American Mobile Satellite Corporation ("AMSC"), which was the
other successful bidder for an FCC License. AMSC, which is owned in part by the
Hughes Electronics Corporation subsidiary of General Motors Corporation, has
financial, management and technical resources that greatly exceed those of the
Company. See "Business -- Competition." In addition, the FCC could grant new
licenses which would enable further competition to broadcast satellite radio.
Although successful bidders for such new licenses would face cost and
competition barriers, there can be no assurance that there will not be an
increase in the number of competitors in the satellite radio industry or any
assurance that one or more competitors will not design a satellite radio
broadcast system that is superior to the Company's system, either of which could
have a material adverse effect on the Company.
UNCERTAIN PATENT PROTECTION
The Company has been granted certain U.S. patents covering various types
of satellite radio technology, including with respect to signal diversity and
memory reception. There can
<PAGE>
43
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 Common Stock or as to the liquidity of any such
market, the ability of holders of the Common Stock to sell their securities or
the price at which such holders would be able to sell. Such price may be
influenced by many factors, including, but not limited to, investor perception
of the Company and its industry and general economic and market conditions.
VOLATILITY OF STOCK PRICE
The trading price of the Common Stock has been volatile, and it may
continue to be so. Such trading price could be subject to wide fluctuations in
response to announcements of business and technical developments by the Company
or its competitors, quarterly variations in operating results, and other events
or factors, including expectations by investors and securities analysts and the
Company's prospects. In addition, stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on the
market prices of development stage companies, at times for reasons unrelated to
their operating performance. Such broad market fluctuations may adversely affect
the price of the Common Stock.
POSSIBLE ADVERSE EFFECT OF STATE BLUE SKY RESTRICTIONS ON SECONDARY TRADING OF
COMMON STOCK
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market. If the application is not approved, it may have an adverse
impact on secondary trading of the Common Stock. The Company believes that its
Common Stock is eligible for sale on a secondary market basis in most states
based on various exemptions to state qualification requirements. Limitations on,
or the absence of, those exemptions will under certain circumstances restrict
the ability of a holder to transfer the Common Stock to non-institutional buyers
in some states. This could adversely affect the liquidity of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to
50,000,000 shares of preferred stock (the "Preferred Stock") in one or more
series and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. Of that amount,
8,000,000 shares have been designated as 5% Preferred Stock,
<PAGE>
44
of which 5,222,608 shares were issued and outstanding as of September 30, 1997.
A further _________ shares of Preferred Stock have been designated New Preferred
Stock, of which up to ____ shares will be issued and outstanding following the
completion of the Exchange Offer and ______ shares of Preferred Stock have been
designated Series D Preferred Stock. In addition, the Company intends to adopt a
stockholders rights plan. Any issuance of Preferred Stock, including Preferred
Stock with voting and conversion rights, as well as the New Preferred Stock
which are convertible into shares of Common Stock, may adversely affect the
voting power of the holders of Common Stock. The stockholders rights plan and
any issuance of Preferred Stock may be deemed to have anti-takeover effects and
may delay, deter or prevent a change in control of the Company that a
stockholder might consider to be in his or her best interest. The Company may
also become subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. The effect of these provisions could have the
effect of delaying or preventing a change of control of the Company or adversely
affect the market price of the Company's Common Stock. Furthermore, the
severance provisions of employment agreements with certain members of the
Company's management provide for payments that could discourage an attempted
change in control of the Company.
Any change in the composition of the Company's ownership after Arianespace
Finance S.A. ("AEF") has determined that the Tranche A Loans are eligible for
Conversion (as defined below), which could reasonably be expected to have a
Material Adverse Effect (as defined in the AEF Agreements), would constitute a
default under the AEF Agreements. Therefore, upon the occurrence of such change
in the Company's ownership, AEF would have the right to accelerate its loans to
the 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 that
might be delivered by holders of the Notes or 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
Notes when due will give the trustee under the Indenture and the holders of the
Notes the right to require the Company to prepay all of its outstanding
indebtedness and other obligations under the Notes. The failure of the Company
to make or consummate the Change of Control offer or pay the purchase price for
the New Preferred Stock when due will give the holders of a majority of the New
Preferred Stock the right, voting as a separate class, to elect a number of
directors of the Company equal to the lesser of two directors and the number of
directors constituting at least 25% of the Board of Directors of the Company.
In addition, a change in control of the Company could require FCC
approval. See "Business -- Regulation."
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45
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 gave the Company an automatic 60-day
exemption (the final day of which was September 19, 1997) from the provisions of
the 1940 Act pending a final determination of the merits of its application.
Because the Commission has not yet acted on the Company's application, the
Company intends by no later than October 3, 1997 to invest in U.S. government
securities at least that proportion of its assets as the Company believes will
be sufficient to avoid any determination that it is an "investment company"
within the meaning of the 1940 Act.
If the requested relief is ultimately denied, the Company may be required
to register as an investment company or, in the alternative, to invest a
substantial portion of the proceeds from the Offerings in U.S. government
securities, pending expenditure of such proceeds by the Company for its
corporate purposes.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Stock Offering, the Company will have
16,077,884 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, 9,795,896 shares will be freely tradeable without restriction
under the Securities Act unless such shares are purchased in the Stock Offering
by "affiliates" of the Company, as such term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining 6,281,988 shares of Common
Stock are "restricted securities" as that term is defined in Rule 144 under the
Securities Act (the "Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act. As a result of contractual restrictions described below, and the provisions
of Rules 144 and 701, 3,547,488 Restricted Shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the effective date of the
stock offering (the "Effective Date"). In addition, Darlene Friedland has made a
lock-up agreement relating to her 2,734,500 shares lasting for a period ending,
on a cumulative basis, as to 25% of the shares of Common Stock she owns, on the
expiration of the 15th, 18th, 21st and 24th month following August 26, 1997.
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
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46
the public market, or the perception that such sales could occur, could
adversely affect market prices.
RISK OF INABILITY TO REPURCHASE THE NEW PREFERRED STOCK UPON A CHANGE OF CONTROL
If a Change of Control (as defined herein) occurs and an Offer to Purchase
(as defined herein) is made, there can be no assurance that the Company will
have available funds sufficient to pay the purchase price for any or all of the
shares of New Preferred Stock that might be delivered by holders of the New
Preferred Stock seeking to accept the Offer to Purchase. The failure of the
Company to consummate the Offer to Purchase or pay the purchase price for the
New Preferred Stock when due will give the holders of a majority of the New
Preferred Stock the right, voting as a separate class, to elect a number of
directors of the Company equal to the lesser of two directors and the number of
directors constituting at least 25% of the board of directors of the Company.
See "Description of New Preferred Stock -- Change of Control" and "-- Voting
Rights."
LACK OF ESTABLISHED TRADING MARKET FOR NEW PREFERRED STOCK
The New Preferred Stock constitutes a new issue of securities of the
Company with no established trading market. The liquidity of the New Preferred
Stock will be affected by the number of shares of 5% Preferred Stock accepted in
the Exchange Offer. There can be no assurance that an active market for the New
Preferred Stock will develop or be sustained in the future. Although the Dealer
Manager has indicated to the Company that it intends to make a market in the New
Preferred Stock, it is not obligated to do so and may discontinue any such
market-making at any time without notice. Accordingly, no assurance can be given
as to the liquidity of, or trading markets for, the New Preferred Stock. See
"Market and Trading Information."
REDUCED TRADING MARKET FOR 5% PREFERRED STOCK
To the extent shares of 5% Preferred Stock are tendered and accepted in
the Exchange Offer, and/or the number of holders of 5% Preferred Stock is
reduced to below certain levels, the liquidity and trading market for shares of
5% Preferred Stock outstanding following the Exchange Offer, and the terms upon
which such shares could be sold, could be adversely affected.
The Company may in the future seek to acquire untendered shares of 5%
Preferred Stock in open market or privately negotiated transactions, through
subsequent exchange offers or otherwise. The Company's decision to make such
acquisitions is dependent on many factors, including market conditions at the
time of any contemplated acquisition. Accordingly, the Company cannot predict
whether and to what extent it will acquire any additional shares of 5% Preferred
Stock and the consideration to be paid therefor. See "The Exchange
Offer--Consequences of Failure to Exchange."
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47
PROPOSED FINANCING
In order to raise a portion of the additional funds required to
commercialize its proposed CD Radio service, the Company plans to issue
3,500,000 shares of its Common Stock in a registered public offering
underwritten by Merrill Lynch, Lehman Brothers Inc. and Unterberg Harris and its
Notes for gross proceeds of $150 million in a registered public offering
underwritten by Merrill Lynch and Lehman Brothers Inc. The Offerings will be
made by means of separate prospectuses relating to the Common Stock and the
Notes, respectively, in accordance with the requirements of the Securities Act.
The Common Stock, when issued, would rank junior, and the Notes, when issued,
would rank senior, to the New Preferred Stock in respect of dividends and
distribution of assets of the Company in liquidation.
The net proceeds of the Offerings to the Company are estimated to be
approximately $201.5 million (approximately $58.7 million from the offering of
Common Stock and approximately $142.8 million from the offering of the Notes)
after deducting estimated underwriting discounts and commissions and other
expenses payable by the Company.
The Company expects to use the net proceeds of the Offerings to partially
finance the construction and launch of the Company's satellites. In addition,
net proceeds of the Offerings will be used for general corporate purposes,
including marketing and working capital. There can be no assurance that the
Offerings will be completed or as to the terms on which the Company will be able
to sell the Common Stock or Notes that may be offered.
The Company estimates that it will require approximately $660.1 million to
develop and commence commercial operation of CD Radio by the end of 1999. Of
this amount, the Company has raised approximately $266.2 million to date. After
giving effect to the Offerings, the Company will have raised approximately
$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. In addition, although the Company's
business plan is based upon the deployment of two satellites and the
construction of a third spare satellite, it has the right to exercise an option
under the Loral Satellite Contract to acquire an additional satellite. If the
Company elects to exercise this option, substantial additional funds would be
required and the Company would have to obtain additional regulatory approvals.
Deployment of an additional satellite also could result in a delay in the
introduction of CD Radio. Any decision to deploy a three satellite system would
have to be made prior to the launch of the Company's first satellite.
Under the Company's Amended and Restated Certificate of Incorporation, as
currently in effect, the Company may redeem the 5% Preferred Stock (to the
extent it has not been previously converted), in whole but not in part,
including following a sale by the Company of Common Stock for cash in an amount
of not less than $100 million in a registered underwritten public offering prior
to October 15, 1997. The Company is soliciting the consent of its stockholders,
including the holders of the 5% Preferred Stock, on the Record Date to an
amendment to the Certificate of Designations that would permit the Company to
redeem the 5% Preferred Stock (to the extent not previously converted) in whole
or in part upon the sale of any equity or debt securities in one or more
offerings occurring after the date of the initial issuance
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48
of the 5% Preferred Stock and on or prior to December 30, 1997 for gross
proceeds in an aggregate cash amount of not less than $100 million.
The terms of the Preferred Stock Investment Agreement, dated October 23,
1996, as amended (the "Preferred Stock Investment Agreement"), require that any
additional financings by the Company be PARI PASSU or junior to the 5% Preferred
Stock in seniority, structure and maturity until the Company completes a
Qualifying Offering. If the Proposed Amendment is not approved by the Company's
stockholders and any shares of 5% Preferred Stock remain outstanding after the
Exchange Offer, the Offerings would not constitute a Qualifying Offering and the
issuance of the Notes would not be permitted by the terms of the Preferred Stock
Investment Agreement.
USE OF PROCEEDS
There will be no cash proceeds to the Company from the Exchange Offer.
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48
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............................................ 20 14
On September 30, 1997, the closing bid price of the Common Stock on the
Nasdaq SmallCap Market was $18 7/16 per share. On September 30, 1997, there were
approximately 105 record holders of the Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future. The
Indenture and the AEF Agreements contain provisions that limit the Company's
ability to pay dividends on the Common Stock.
<PAGE>
50
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of June 30, 1997 (i) on an historical basis; (ii) on a pro forma basis,
giving effect to the sale in August 1997 of Common Stock to Loral Space for net
proceeds of $24.5 million; (iii) as adjusted for the Exchange Offer (assuming
100% acceptance by holders of 5% Preferred Stock) after deducting Dealer Manager
fees and other estimated expenses; and (iv) as adjusted for the estimated net
proceeds from the sale of 3,500,000 shares of Common Stock pursuant to the Stock
Offering (at an assumed offering price of $18.44 per share (the closing price of
the Company's Common Stock at September 30, 1997), after deducting the
underwriting discounts and commissions and estimated offering expenses) and the
sale of Notes for gross proceeds of $150 million pursuant to the Notes Offering.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------------------------------
Pro Forma As
Adjusted for Pro Forma As
the Further
Exchange Adjusted for
Actual Pro Forma Offer the Offerings
--------- --------- --------- ---------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Cash and cash equivalents ........... $30,184 $54,684 $50,536 $252,040
Designated cash(1) .................. 66,677 66,677 66,677 66,677
--------- --------- --------- ---------
Total cash and cash equivalents ..... $96,861 $121,361 $117,213 $318,717
========= ========= ========= =========
Long term debt
10% Senior Discount Notes ........... $ -- $ -- $ -- $150,000
--------- --------- --------- ---------
TOTAL LONG TERM DEBT ................ -- -- -- $150,000
--------- ---------
5% Delayed Convertible Prefer
Stock, 5,222,608 shares issued and
outstanding actual and pro forma .... 111,855 -- --
10.5% Series C Convertible Preferred
Stock, no par value, 1,924,134 shares
issued and outstanding, pro forma
STOCKHOLDERS' EQUITY (DEFICIT) ...... -- -- 192,413 192,413
--------- ---------
Common Stock, $.001 par value
Actual 10,313,391 shares issu; ...... 10
outstanding; Pro Forma and foed and
the Exchange Offer 12,218,879llowing
issued and outstanding; and folowing
the Exchange Offer and the Stock
Offering ............................ 10 12 12 16
Additional Paid in Capital .......... 75,425 99,923 43,775 102,425
Subscription receivable ............. (466) (466) (466) (466)
</TABLE>
<PAGE>
51
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------------------------------
Pro Forma As
Adjusted for Pro Forma As
the Further
Exchange Adjusted for
Actual Pro Forma Offer the Offerings
--------- --------- --------- ---------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Deficit accumulated during th
development stage ................... (62,683) (62,683) (91,241) (91,241)
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) $12,286 $36,786 $(47,920) $10,734
========= ========= ========= =========
</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.
<PAGE>
52
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.
<PAGE>
53
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------ ------------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ ----
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ............. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss ....................... (1,551) (6,568) (4,065) (2,107) (2,831) (1,204) (835)
Net loss per share of
Common Stock ................... $ (.23) $ (.79) $ (.48) $ (.23) $ (.29) $ (.13) $ (4.28)(1)
Weighted average shares of
Common Stock and Common
Stock equivalents outstanding 6,715 8,284 8,398 9,224 9,642 9,358 10,307
Accretion on 5% Prefer Stock
added to liquidatio$ed
preference .................. $ -- $ -- $ -- $ -- $ -- $ -- $ (1,406
Deemed dividend on 5%
Preferred Stock ............. $ -- $ -- $ -- $ -- $ -- $ -- $(43,313
Deficiency in the coverage of
combined fixed charges and
preferred dividends by
earnings before fixed charge
and preferred dividend (2) .. $ -- $ -- $ -- $ -- $ -- $ -- $(45,554
Ratio of earnings to combined
fixed charges and preferred
dividends(3) ................ N.A. N.A. N.A. N.A. N.A. N.A. N.A.
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ----- ------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalens . $ 1,883 $ 777 $ 3,400 $ 1,800 $ 4,584 $ 1,371 $ 30,184
Designated cash(4) ....... -- -- -- -- -- -- 66,677
Working capital (deficit) 1,399 (250) 2,908 1,741 4,442 1,293 30,424
Total assets ............. 2,292 1,663 3,971 2,334 5,065 1,874 124,354
Deficit accumulated during
the development stager .. (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) For the purpose of this calculation, the deficiency is computed as the
Company's net loss adjusted for the accretion on the 5% Preferred Stock and
the deemed dividend on the 5% Preferred Stock.
<PAGE>
54
(3) Because the Company has not generated revenues from earnings for the periods
described, the ratio of earnings to fixed charges is not material.
(4) Represents proceeds of the offering of the 5% Preferred Stock which have
been classified as designated cash reflecting the balance due to the FCC for
the Company's FCC License.
<PAGE>
55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
OVERVIEW
The Company was organized in May 1990 and is in its development stage. The
Company's principal activities to date have included technology development,
pursuing regulatory approval for CD Radio, market research, design, development,
contract negotiations with satellite and launch vehicle contractors, technical
efforts with respect to standards and specifications, strategic planning and
securing adequate financing for working capital and capital expenditures. The
Company does not expect to derive any revenues from operations prior to the
commercial launch of CD Radio, which is expected to occur no earlier than the
end of 1999. The Company has incurred substantial losses to date and expects to
incur substantial losses until at least a year after the commercial launch of CD
Radio. In addition, the Company will require substantial additional capital to
complete development and commence commercial operations of CD Radio.
Upon commencing commercial operations, the Company expects its primary
source of revenues to be monthly subscription fees. The Company currently
anticipates that its subscription fee will be approximately $10 per month to
receive CD Radio broadcasts, with a one time, modest activation fee per
subscriber. To receive CD Radio, subscribers will need to purchase a radio card
or S-band radio together with the associated miniature satellite dish antenna.
The Company does not intend to manufacture these products and thus will not
receive any revenues from their sale. Although the Company holds patents
covering certain technology to be used in the radio cards, S-band radios and
miniature satellite dish antennas, the Company expects to license its technology
to manufacturers at no charge. As the number of subscribers to CD Radio
increases, the Company also may derive revenues from payments from producers of
sports, news and talk programming for providing national distribution of their
programming to subscribers.
The Company expects that the operating expenses associated with commercial
operations will consist primarily of costs to acquire programming; costs to
maintain and operate its satellite broadcasting system and National Broadcasting
Studio; and sales, general and administrative costs. Costs to acquire
programming are expected to include payments to build and maintain an extensive
music library and royalty payments for broadcasting music (calculated based on a
percentage of revenues). Sales, general and administrative costs are expected to
consist primarily of advertising costs, salaries of executives, studio
personnel, program hosts, administrators, technical staff, rent and other
administrative expenses. The Company expects that the number of its employees
will increase from ten to approximately 100 by the time it commences commercial
operations.
In addition to funding initial operating losses, the Company will require
funds for working capital, interest and financing costs on borrowings and
capital expenditures. The Company's interest expense will increase significantly
as a result of its financing plan. However,
<PAGE>
56
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.
<PAGE>
57
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.
<PAGE>
58
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 approximately $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 "Proposed Financing."
In April 1997, the Company was the winning bidder in an FCC auction for
one of two national satellite broadcast licenses with a winning bid of $83.3
million, of which $16.7 million 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 is committed to make aggregate payments of
$272.8 million under the Loral Satellite Contract and of $176.0 million under
the Arianespace Launch Contract. Under the Loral Satellite Contract, with the
exception of a payment made at the time of the signing of the Loral Satellite
Contract in March 1993, payments are to be made in 22 installments commencing in
April 1997 and ending in November 2000, the expected delivery date for the third
satellite. Approximately half of these payments are contingent on Loral meeting
specified milestones in the manufacture of the three satellites. In addition,
Loral has agreed to defer a total of $20.0 million of the contract price, which
is to be paid in four equal installments of $5.0 million commencing November
2001 until March 2003. See "-- Sources of Funding." Amounts due under the
Arianespace Launch Contract, except for payments made for each of the two
launches prior to the execution of the Arianespace Launch Contract, are due
between November 1997 and July 1999 for the first launch, and, for the second
launch, the period between February 1998 and the earlier of October 1999, or ten
days prior to the second launch.
The Company also will require funds for construction of its National
Broadcast Studio, working capital, interest on borrowings, acquisition of
programming, financing costs and operating expenses until 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
<PAGE>
59
payments. The Notes are not expected to require cash payments until 2003.
Interest on funds borrowed by the Company under the AEF Agreements is deferred
until repayment of such amounts.
SOURCES OF FUNDING
The Company historically has funded its operations through equity capital.
As of June 30, 1997, the Company had received a total of $186.8 million in
equity capital and had no outstanding indebtedness. A significant portion of the
Company's equity capital was received in April 1997 as a result of the Company's
issuance of 5,400,000 shares of 5% Preferred Stock for aggregate net proceeds of
$120.5 million in a private placement transaction. These proceeds 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
<PAGE>
60
agreed to defer payment of $20 million from two milestone payments due in June
and September of 1998. The deferred amount will be paid in four installments of
$5 million, with the first payment to be made twenty-seven months after the
delivery of the first satellite, the second payment to be made twenty-seven
months after delivery of the second satellite, the third payment to be made 365
days after the first payment date and the fourth payment to be made 365 days
after the second payment date.
In the event of a satellite or launch failure, Company will be required to
pay Loral the full deferred amount for the affected satellite no later than 120
days after the date of the failure. If the Company should elect to put a
satellite into ground storage, rather than having it shipped to the launch site,
the full deferred amount for the affected satellite will become due within 60
days of such election.
As a condition to the deferred payments, Company has agreed to provide
Loral a security interest in the properties and assets of the Company and its
subsidiaries, of substantially the same nature and 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 holders of 5% Preferred Stock who
receive shares of Common Stock pursuant to the Exchange Offer. 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
<PAGE>
61
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.
<PAGE>
62
THE EXCHANGE OFFER
GENERAL
Participation in the Exchange Offer is voluntary and holders of 5%
Preferred Stock should carefully consider whether to accept. Neither the Board
of Directors of the Company nor the Company makes any recommendation to holders
of the 5% Preferred Stock as to whether to tender or refrain from tendering in
the Exchange Offer. Holders of the 5% Preferred Stock are urged to consult their
financial and tax advisors in making their own decisions on what action to take
in light of their own particular circumstances.
The Exchange Offer is open to all holders of 5% Preferred Stock.
PURPOSE OF THE EXCHANGE OFFER
The principal purpose of the Exchange Offer is to improve the Company's
capital structure and to prevent dilution to the holders of the Company's Common
Stock by replacing the 5% Preferred Stock, which, particularly after November
1997, may be convertible into an increasing number of shares of Common Stock,
with New Preferred Stock, which has a higher dividend rate, but less favorable
conversion rights. The Exchange Offer is part of the financing transaction that
also includes the Stock Offering and the Notes Offering. The consummation of the
Exchange Offer is not conditioned upon the consummation of either the Notes
Offering or the Stock Offering. Each of the Offerings is conditioned upon
consummation of the Exchange Offer.
The principal purpose of the Solicitation is to amend the Certificate of
Designations to allow the Company to redeem the 5% Preferred Stock (to the
extent not previously converted) in whole or in part upon the sale of any equity
or debt securities in one or more offerings occurring after the date of the
initial issuance of the 5% Preferred Stock and on or prior to December 30, 1997
for gross proceeds in an aggregate cash amount of not less than $100 million.
The Proposed Amendment, if approved by the Company's stockholders, will provide
the Company with additional flexibility in consummating the Offerings.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus, up to _________ shares of its New Preferred Stock for up to all of
the outstanding 5,222,608 shares of its 5% Preferred Stock at a rate of one
share of New Preferred Stock for each $100 in Exchange Rate Liquidated
Preference represented by shares of 5% Preferred Stock not previously converted.
The "Exchange Rate Liquidation Preference" shall be the amount determined by
dividing the actual liquidation preference of the 5% Preferred Stock being
exchanged (including accrued and unpaid dividends on the 5% Preferred Stock) by
0.696145. The Liquidation Preference of each share of New Preferred Stock will
be equal to $100.00. The terms of the New Preferred Stock (including the
dividend rate, liquidation preference and conversion and redemption rights)
differ in material respects from the terms of the 5% Preferred Stock for which
it may be exchanged pursuant to this Exchange Offer. See "Description of New
Preferred Stock" and "Description of Capital Stock -- 5% Preferred Stock." The
5% Preferred Stock was originally issued in April 1997.
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63
Tendering holders of the 5% Preferred Stock will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the 5% Preferred
Stock pursuant to the Exchange Offer.
THE SOLICITATION
In conjunction with the Exchange Offer and pursuant to the Consent
Solicitation Statement, the Company is soliciting Consents from the holders of
record on the Record Date of the Common Stock and the 5% Preferred Stock to the
Proposed Amendment.
Under the Company's Amended and Restated Certificate of Incorporation, as
currently in effect, the Company may redeem the 5% Preferred Stock (to the
extent it has not been previously converted), in whole but not in part,
following a sale by the Company of Common Stock for cash in an amount of not
less than $100 million in a registered underwritten public offering prior to
October 15, 1997. The Company is soliciting the consent of its stockholders,
including the holders of the 5% Preferred Stock, on the Record Date to the
Proposed Amendment to the Certificate of Designations (i) to allow the Company
to redeem the 5% Preferred Stock (to the extent not previously converted) in
whole or in part upon the sale of any equity or debt securities in one or more
offerings occurring after the date of the initial issuance of the 5% Preferred
Stock and on or prior to December 30, 1997 for gross proceeds in an aggregate
cash amount of not less than $100 million and (ii) to amend certain of the
redemption provisions relating to the requirements for the delivery of a notice
of redemption in connection therewith.
See "The Proposed Amendment."
The terms of the Preferred Stock Investment Agreement, dated October 23,
1996, as amended (the "Preferred Stock Investment Agreement"), require that the
Company not undertake to conduct any debt or equity financing that is not PARI
PASSU or junior to the 5% Preferred Stock in seniority, structure and maturity
until the Company completes a Qualifying Offering. If the Proposed Amendment is
not approved by the Company's stockholders and any shares of 5% Preferred Stock
remain outstanding after the Exchange Offer, the Company will not be permitted
to issue any debt or equity financing that is senior to the 5% Preferred Stock.
The Company does not intend to commence the Offerings until the Solicitation is
substantially completed and the Notes Offering will not be consummated unless
the Exchange Offer and the Solicitation are completed and no shares of the 5%
Preferred Stock remain outstanding.
The Requisite Consents from the holders of a majority of the issued and
outstanding 5% Preferred Stock and the Common Stock on the Record Date must be
received in order to adopt the Proposed Amendment. The Company intends to amend
the Certificate of Designations to reflect the Proposed Amendment as of the
Solicitation Execution Date if, as of such time, the Requisite Consents have
been obtained or, if the Requisite Consents are obtained later, promptly upon
obtaining the Requisite Consents. If the Proposed Amendment is adopted, then
each non- exchanging holder will be bound by the Proposed Amendment regardless
of whether such holder consented to the Proposed Amendment.
THE COMPANY WILL MAKE NO SEPARATE PAYMENT FOR CONSENTS DELIVERED IN THE
SOLICITATION.
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64
EXPIRATION DATE; EXTENSION; AMENDMENTS
The Exchange Offer will expire on the Expiration Date. The term
"Expiration Date" means 12:00 midnight, New York City time, on ________ ___,
1997, unless the Company in its sole discretion extends the period during which
the Exchange Offer is open, in which event the term "Expiration Date" shall mean
the latest time and date on which the Exchange Offer, as so extended by the
Company, shall expire. The Company reserves the right to extend the Exchange
Offer at any time and from time to time by giving oral or written notice to the
Exchange Agent and making a public announcement thereof. There can be no
assurance that the Company will exercise its right to extend the Exchange Offer.
During any extension of the Exchange Offer, all 5% Preferred Stock previously
tendered and not withdrawn pursuant to the Exchange Offer will remain subject to
the Exchange Offer subject to the right of a tendering holder to withdraw its
shares of 5% Preferred Stock. See "-- Withdrawal Rights."
The Company also expressly reserves the right, subject to applicable law,
(i) to delay acceptance for exchange of any shares of 5% Preferred Stock or
terminate the Exchange Offer and not accept for exchange any shares of 5%
Preferred Stock and promptly return all such shares to the tendering holders
thereof in the event that any of the conditions specified in "-- Conditions of
the Exchange Offer" below are not satisfied or waived by the Company or to
comply with applicable law, by giving oral or written notice of such delay or
termination to the Exchange Agent, (ii) to waive any condition to the Exchange
Offer and accept all shares of 5% Preferred Stock previously tendered pursuant
thereto, (iii) to amend the Exchange Offer in any respect or (iv) to terminate,
cancel, withdraw or otherwise amend or modify the Exchange Offer at any time for
any reason. If the Exchange Offer is so amended, the term "Exchange Offer" shall
mean the Exchange Offer as so amended. The reservation by the Company of the
right to delay acceptance for exchange of shares of 5% Preferred Stock is
subject to the provisions of Rule 13e-4 and Rule 14e-1(c) under the Exchange
Act, which require that the Company pay the consideration offered or return the
shares of 5% Preferred Stock deposited by or on behalf of holders thereof
promptly after the termination or withdrawal of the Exchange Offer.
Any extension, delay, termination or amendment of the Exchange Offer will
be followed as promptly as practicable by a public announcement thereof. Without
limiting the manner in which the Company may choose to make a public
announcement of any extension, delay, termination or amendment of the Exchange
Offer, the Company will have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by issuing a release to the
Dow Jones News Service, except in the case of an announcement of an extension of
the Exchange Offer, in which case the Company will have no obligation to
publish, advertise or otherwise communicate such announcement other than by
issuing a notice of such extension by press release or other public
announcement, which notice will be issued no later than 9:00 A.M., New York City
time, on the next business day after the previously scheduled Expiration Date.
TENDER PROCEDURE
The tender to the Company of 5% Preferred Stock by a holder thereof
pursuant to one of the procedures set forth below and the acceptance thereof by
the Company will constitute a binding agreement between such holder and the
Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal. This Prospectus,
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65
Vtogether with the Letter of Transmittal, will first be sent out on or about
October ___, 1997, to all holders of 5% Preferred Stock known to the Company and
the Exchange Agent.
A holder of 5% Preferred Stock may tender the same by properly completing
and signing the Letter of Transmittal or a facsimile thereof (all references in
this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the shares of 5% Preferred Stock being tendered and
any other documents required by the Letter of Transmittal, to the Exchange Agent
at its address set forth on the Letter of Transmittal on or prior to the
Expiration Date (or complying with the procedure for book-entry transfer
described below).
If tendered shares of 5% Preferred Stock are registered in the name of the
signer of the Letter of Transmittal and the shares of New Preferred Stock to be
issued in exchange therefor are to be issued (and any untendered shares of 5%
Preferred Stock are to be reissued) in the name of the registered holder (which
term, for the purposes described herein, shall include any participant in The
Depository Trust Company (also referred to as a "book-entry transfer facility")
whose name appears on a security listing as the owner of the shares of 5%
Preferred Stock), the signature of such signer need not be guaranteed. In any
other case, the tendered shares of 5% Preferred Stock must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Company and duly executed by the registered holder, and the signature on the
endorsement or instrument of transfer must be guaranteed by a commercial bank or
trust company located or having an office, branch, agency or correspondent in
the United States, or by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. (any of the
foregoing hereinafter referred to as an "Eligible Institution"). If the New
Preferred Stock and/or 5% Preferred Stock not exchanged are to be delivered to
an address other than that of the registered holder appearing on the stock
register for the 5% Preferred Stock, the signature in the Letter of Transmittal
must be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF THE 5% PREFERRED STOCK AND ALL OTHER DOCUMENTS
IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED
THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. NO
LETTERS OF TRANSMITTAL OR SHARES OF 5% PREFERRED STOCK SHOULD BE SENT TO THE
COMPANY.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the 5% Preferred Stock at the
book-entry transfer facility for the purpose of facilitating the Exchange Offer,
and subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of the 5% Preferred Stock by causing such book-entry transfer facility
to transfer such 5% Preferred Stock into the Exchange Agent's account with
respect to the 5% Preferred Stock in accordance with the book-entry transfer
facility's procedures for such transfer. Although delivery of 5% Preferred Stock
may be effected through book-entry transfer into the Exchange Agent's accounts
at the book-entry transfer facility, an appropriate Letter of Transmittal with
any required signature guarantee and all other required documents must in each
case be
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66
transmitted to and received or confirmed by the Exchange Agent at its address
set forth on the Letter of Transmittal on or prior to the Expiration Date.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the 5% Preferred Stock (or a confirmation of book-entry transfer
of such 5% Preferred Stock into the Exchange Agent's account at the book-entry
transfer facility) is received by the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of shares of 5% Preferred
Stock will be determined by the Company, whose determination will be final and
binding. The Company reserves the absolute right to reject any shares of 5%
Preferred Stock not properly tendered or the acceptance for exchange of which
may, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the absolute right to waive any defect or irregularity in the tender of
any shares of 5% Preferred Stock. Unless waived, any defects or irregularities
in connection with tenders of shares of 5% Preferred Stock for exchange must be
cured within such reasonable period of time as the Company will determine. None
of the Company, the Exchange Agent or any other person will be under any duty to
give notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer.
The party tendering 5% Preferred Stock for exchange (the "Transferor")
exchanges, assigns and transfers the 5% Preferred Stock to the Company and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the 5% Preferred Stock to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the 5%
Preferred Stock and to acquire New Preferred Stock issuable upon the exchange of
such tendered 5% Preferred Stock, and that, when the same are accepted for
exchange, the Company will acquire good and unencumbered title to the tendered
5% Preferred Stock, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered 5% Preferred Stock or transfer
ownership of such 5% Preferred Stock on the account books maintained by a
book-entry transfer facility. All authority conferred by the Transferor will
survive the death or incapacity of the Transferor and every obligation of the
Transferor will be binding upon the heirs, legal representatives, successors,
assigns, executors and administrators of such Transferor.
WITHDRAWAL RIGHTS
Tenders of 5% Preferred Stock pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
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67
To be effective, a written, telegraphic, telex or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the Letter of Transmittal, and with respect to a facsimile
transmission, must be confirmed by telephone and an original delivered by
guaranteed overnight delivery. Any such notice of withdrawal must specify the
person named in the Letter of Transmittal as having tendered 5% Preferred Stock
to be withdrawn, the certificate numbers of the shares of 5% Preferred Stock to
be withdrawn, a statement that such holder is withdrawing his election to have
such shares of 5% Preferred Stock exchanged, and the name of the registered
holder of such shares of 5% Preferred Stock, and must be signed by the holder in
the same manner as the original signature on the Letter of Transmittal
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Company that the person withdrawing the tender has succeeded
to the beneficial ownership of the shares of 5% Preferred Stock being withdrawn.
The Exchange Agent will return the properly withdrawn shares of 5% Preferred
Stock promptly following receipt of notice of withdrawal. If shares of 5%
Preferred Stock have been tendered pursuant to the procedure for book-entry
transfer, any notice of withdrawal must specify the name and number of the
account at the book-entry transfer facility to be credited with the withdrawn
shares of 5% Preferred Stock or otherwise comply with the book-entry transfer
procedure. All questions as to the validity of notices of withdrawals, including
time of receipt, will be determined by the Company, and such determination will
be final and binding on all parties.
Any shares of 5% Preferred Stock so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any
shares of 5% Preferred Stock which have been tendered for exchange but which are
not exchanged for any reason will be returned to the holder thereof without cost
to such holder (or, in the case of shares of 5% Preferred Stock tendered by
book-entry transfer into the Exchange Agent's account at the book-entry transfer
facility pursuant to the book-entry transfer procedures described above, such
shares will be credited to an account with such book-entry transfer facility
specified by the holder) as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn shares of 5%
Preferred Stock may be retendered by following one of the procedures described
under "-- Tender Procedure" above, at any time on or prior to the Expiration
Date.
THE WITHDRAWAL OF TENDERED 5% PREFERRED STOCK WILL BE DEEMED TO BE A
REJECTION OF THE EXCHANGE OFFER.
ACCEPTANCE OF 5% PREFERRED STOCK FOR EXCHANGE; DELIVERY OF NEW PREFERRED STOCK
Upon the satisfaction or waiver of all the terms of the Exchange Offer,
the acceptance for exchange of 5% Preferred Stock validly tendered and not
withdrawn will be made on the Exchange Date and the issuance of the New
Preferred Stock will be made as promptly as practicable thereafter. For the
purposes of the Exchange Offer, the Company shall be deemed to have accepted for
exchange validly tendered shares of 5% Preferred Stock when, as and if the
Company has given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of 5%
Preferred Stock for the purposes of receiving New Preferred Stock from the
Company and causing the 5% Preferred Stock to be assigned, transferred and
exchanged. Upon the terms of the Exchange Offer, delivery of New Preferred Stock
to be issued in exchange for accepted 5% Preferred Stock
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68
will be made by the Exchange Agent promptly after the Exchange Date. Tendered 5%
Preferred Stock not accepted for exchange by the Company will be returned
without expense to the tendering holders promptly following the Expiration Date
as described above under "-- Withdrawal and Revocation Rights."
ACCRUED DIVIDENDS
Holders of shares of 5% Preferred Stock accepted for exchange pursuant to
the Exchange Offer will not receive dividends accrued from April 15, 1997 (the
last regular dividend payment period with respect to the 5% Preferred Stock) on
such 5% Preferred Stock.
Dividends on shares of 5% Preferred Stock not exchanged in the Exchange
Offer will continue to accrue and be payable, when and as declared by the Board
of Directors.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
will not be required to accept for exchange, or, subject to any applicable rules
and regulations of the Commission, including Rule 14e-1(c) (relating to the
Company's obligation to exchange and issue shares of New Preferred Stock for or
return tendered shares of 5% Preferred Stock promptly after termination of the
Exchange Offer), exchange and issue shares of New Preferred Stock for any shares
of 5% Preferred Stock tendered and may postpone the acceptance for exchange of
or, subject to the restriction set forth above, the exchange and issuance of,
shares of New Preferred Stock for shares of 5% Preferred Stock tendered and to
be exchanged and may terminate or amend the Exchange Offer if (i) the Requisite
Consents to the Proposed Amendment are not received, (ii) a minimum of 95% of
the issued and outstanding shares of the 5% Preferred Stock are not tendered for
exchange and not withdrawn prior to the Expiration Date or (iii) the General
Conditions (see below) are not satisfied.
For purposes of the preceding paragraph, all of the "General Conditions"
shall be deemed to have been satisfied unless any of the following conditions
shall occur on or after the date of this Prospectus and prior to the acceptance
for exchange of the 5% Preferred Stock tendered pursuant to the Exchange Offer:
(a) any change (or any condition, event or development involving a
prospective change) shall have occurred or been threatened in the
business, properties, assets, liabilities, capitalization,
stockholders' equity, financial condition, operations, results of
operations or prospects of the Company, or in the general economic
or financial market conditions in the United States or abroad, which
is or may be materially adverse to the Company or its stockholders
or to the value of the 5% Preferred Stock or there shall have been a
significant decrease in the market prices of or trading in the 5%
Preferred Stock, or the Company shall have become aware of any fact
or occurrence which is or may be materially adverse with respect to
the value of the 5% Preferred Stock or with respect to the
contemplated benefits to the Company of the Exchange Offer or the
Proposed Amendment; or
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69
(b) there shall have occurred (1) any general suspension of trading in,
or limitation on prices for, securities on any national securities
exchange or the over-the-counter market, (2) a declaration of a
banking moratorium or any suspension of payments in respect of banks
in the United States, (3) declaration of a national emergency or a
commencement of a war, armed hostilities or other national or
international calamity directly or indirectly involving the United
States, (4) any limitation (whether or not mandatory) by any
governmental or regulatory authority on, or any other event which
might affect, the nature or extension of credit by banks or other
financial institutions, (5) any significant adverse change in the
United States securities or financial markets, or (6) in the case of
any of the foregoing existing at the time of the commencement of the
Exchange Offer, a material acceleration, escalation or worsening
thereof; or
(c) there shall have been any action taken or threatened, or any
statute, rule, regulation, judgment, order or injunction proposed,
sought, promulgated, enacted, entered, enforced or deemed applicable
to the Exchange Offer or the Proposed Amendment by any local, state,
federal or foreign government or governmental authority or by any
court, domestic or foreign, that might, directly or indirectly, (1)
make the acceptance for exchange of some or all of the shares of 5%
Preferred Stock or the issuance of shares of New Preferred Stock in
exchange therefor illegal or otherwise restrict or prohibit
consummation of the Exchange Offer, (2) result in a delay in, or
restrict the ability of the Company, or render the Company unable,
to accept for exchange some or all of the shares of 5% Preferred
Stock or to issue some or all of the shares of New Preferred Stock
in exchange therefor, (3) otherwise adversely affect the Company or
the Exchange Offer or (4) result in a material limitation in the
benefits expected to be derived by the Company from, or as a result
of the transactions contemplated by, the Exchange Offer or the
Proposed Amendment; or
(d) there shall be threatened, instituted or pending any action,
proceeding or claim by or before any court or governmental,
administrative or regulatory agency or authority or any other person
or tribunal, domestic or foreign, challenging the making of the
Exchange Offer, the acquisition by the Company of any shares of 5%
Preferred Stock or the adoption of the Proposed Amendment, or
seeking to obtain any material damages as a result thereof, or
otherwise adversely affecting the Company or the value of the 5%
Preferred Stock which makes it inadvisable to proceed with the
Exchange Offer, the acceptance for exchange of shares of 5%
Preferred Stock or the issuance of the shares of New Preferred Stock
in exchange therefor.
All of the foregoing conditions are for the sole benefit of the Company
and may be asserted by the Company regardless of the circumstances giving rise
to such condition and may be waived by the Company, in whole or in part, at any
time and from time to time, in the sole discretion of the Company. The failure
by the Company at any time to exercise any of the foregoing rights will not be
deemed a waiver of any such right, and each such right will be deemed an ongoing
right which may be asserted at any time and from time to time. Any determination
by the Company concerning the foregoing conditions will be final and binding.
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70
If any of the foregoing conditions shall not be satisfied (or, with
respect to the above enumerated events, shall have occurred), the Company may,
subject to applicable law, (i) terminate the Exchange Offer and return all
shares of 5% Preferred Stock tendered pursuant to the Exchange Offer to
tendering security holders as described above under "-- Withdrawal Rights" (ii)
extend the Exchange Offer and retain all tendered shares of 5% Preferred Stock
until the Expiration Time for the extended Exchange Offer; or (iii) waive the
unsatisfied conditions with respect to the Exchange Offer and accept all shares
of 5% Preferred Stock tendered pursuant to the Exchange Offer. In addition, the
Company reserves the right to terminate, cancel, withdraw or otherwise amend or
modify any or all of the Exchange Offer at any time for any reason.
DISSENTERS' RIGHTS
Holders of 5% Preferred Stock do not have any appraisal or dissenters'
rights under the Delaware General Corporation Law or the Certificate of
Designations in connection with the Exchange Offer.
DEALER MANAGER
The Company has retained Merrill Lynch to act as Dealer Manager in
connection with the Exchange Offer. Additionally, Merrill Lynch is acting as an
underwriter in connection with the Offerings. Merrill Lynch is also acting as
financial advisor to the Company and, as such, is advising the Company with
respect to, among other things, the terms and timing of the Exchange Offer. In
its capacity as Dealer Manager, Merrill Lynch may contact holders of the 5%
Preferred Stock regarding the Exchange Offer and may request brokers, dealers
and other nominees to forward this Prospectus and related materials to
beneficial owners of the 5% Preferred Stock. Questions and requests for
assistance may be directed to the Dealer Manager at its address and telephone
number set forth on the back cover of this Prospectus.
The Company has agreed to pay Merrill Lynch for its services as Dealer
Manager and financial advisor in connection with the Exchange Offer a fee equal
to 2.0% of the aggregate Liquidation Preference of all New Preferred Stock
issued and cash paid as consideration pursuant to the Exchange Offer. In
addition, the Company will reimburse the Dealer Manager for its reasonable
out-of-pocket expenses, including without limitation, reasonable attorneys'
fees. The Company also has agreed to indemnify the Dealer Manger and its
affiliates against certain liabilities caused by, relating to, arising out of or
in connection with the Exchange Offer or the engagement of Merrill Lynch as
financial advisor. Other than as described above, the Company will not make any
payments to brokers, dealers or others for soliciting acceptance of the Exchange
Offer.
EXCHANGE AGENT
MacKenzie Partners, Inc. has been appointed as the Exchange Agent for the
Exchange Offer. The Company will pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses. Letters of Transmittal must be addressed to the Exchange Agent at its
address set forth on the Letter of Transmittal.
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71
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE
A VALID DELIVERY.
TRANSFER TAXES
Holders who tender their shares of 5% Preferred Stock for exchange will
not be obligated to pay any transfer taxes in connection therewith, except that
holders who instruct the Company to register shares of New Preferred Stock in
the name of, or request that shares of 5% Preferred Stock not tendered or not
accepted in the Exchange Offer be returned to, a person other than the
registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of shares of 5% Preferred Stock who do not exchange their shares
of 5% Preferred Stock for shares of New Preferred Stock pursuant to the Exchange
Offer or whose 5% Preferred Stock is not accepted for exchange will continue to
hold such shares of 5% Preferred Stock and will be entitled to all the rights
and preferences, and subject to all of the limitations, applicable thereto. To
the extent that shares of 5% Preferred Stock are tendered and accepted in the
Exchange Offer, the liquidity and trading market for untendered shares of 5%
Preferred Stock, and the terms upon which such shares could be sold, could be
adversely affected.
MARKET AND TRADING INFORMATION
There is no established trading market for the 5% Preferred Stock. The New
Preferred Stock will be a new issue of securities with no established trading
market. The Company has been advised by Merrill Lynch that it intends to make a
market in the New Preferred Stock but is not obligated to do so and may
discontinue marketmaking at any time without notice. No assurance can be given
as to the liquidity of the trading market for the New Preferred Stock. The
trading market for the 5% Preferred Stock generally has not been liquid.
THE PROPOSED AMENDMENT
The Certificate of Designations, as currently in effect, provides that the
Company is authorized to redeem the 5% Preferred Stock, in whole but not in
part, upon a registered underwritten public offering in which the Company sells
Common Stock for net cash proceeds to the Company in an amount not less than
$100 million prior to October 15, 1997.
The Company is soliciting the consent of its stockholders, including the
holders of the 5% Preferred Stock, on the Record Date to the Proposed Amendment
to the Certificate of Designations (i) to allow the Company to redeem the 5%
Preferred Stock (to the extent not previously converted) in whole or in part
upon the sale of any equity or debt securities in one or more offerings
occurring after the date of the initial issuance of the 5% Preferred Stock and
on or prior to December 30, 1997 for gross proceeds in an aggregate cash amount
of not less than
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72
$100 million and (ii) to amend certain of the redemption provisions relating to
the requirements for the delivery of a notice of redemption in connection
therewith. The Proposed Amendment does not affect any terms or rights of the
Common Stock.
If the Proposed Amendment is approved by the Company's stockholders, the
Company will promptly file a Certificate of Amendment to the Certificate of
Designations with the Secretary of State of the State of Delaware and will take
any other action necessary to effect the Proposed Amendment.
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74
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
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74
uplink programming to the satellites, to activate or deactivate service to
subscribers and to perform the tracking, telemetry and control of the orbiting
satellites.
THE CD RADIO OPPORTUNITY
The Company believes that there is a significant market for music and
other radio programming delivered through advanced radio technology. While
television technology has advanced steadily - from black and white to color,
from broadcast to cable, and from ordinary to high-definition television - the
last major advance in radio technology was the introduction of FM broadcasts. CD
Radio will provide a new generation of radio service, offering a wide variety of
music formats available on demand, "seamless" signal coverage throughout the
United States and commercial-free, compact disc quality programming. The
Company's planned multiplicity of formats currently is not available to
motorists in any market within the United States.
CD Radio is primarily a service for motorists. The Yankee Group, a market
research organization, estimates that there will be approximately 198 million
registered private motor vehicles in the United States by the end of 1999, when
the Company expects to commence broadcasting. At present, approximately 89% of
all private vehicles have a radio that could easily be utilized to receive 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
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market, there are no radio stations devoted solely to such programming as opera,
blues, chamber music, soundtracks, reggae, children's programming and many
others. CD Radio's wide choice of formats is expected to appeal to a large
number of currently underserved listeners.
In addition, the limited coverage area of conventional radio broadcasting
means that listeners often travel beyond the range of any single station. Unlike
conventional FM stations, which have an average range of only approximately 30
miles before reception fades, CD Radio's signal will cover the entire
continental United States enabling listeners to always remain within its
broadcast range. The Company's satellite delivery system is designed to permit
CD Radio to be received by motorists in all outdoor locations where the vehicle
has an unobstructed line-of-sight with one of the Company's satellites or is
within range of one of the Company's terrestrial repeating transmitters.
The ability to broadcast nationwide will also allow the Company to serve
currently underserved radio markets. In the United States, there are more than
45 million people aged 12 and over living in areas with such limited radio
station coverage that the areas are not monitored by Arbitron. Of these, the
Company believes approximately 22 million people receive five or fewer FM
stations, 1.6 million receive only one FM station and at least one million
people receive no FM stations. This segment of the population also has a limited
choice of radio music formats and is one of CD Radio's primary target markets.
The Company also believes that CD Radio will have a competitive advantage
over conventional radio stations due to its music channels being
commercial-free. In contrast, conventional radio stations interrupt their
broadcasts with up to 18 minutes of commercials in every hour of music
programming, and most stations also frequently interrupt programming with news,
promotional announcements, public service announcements and miscellaneous
information. The Company believes that consumers dislike frequent radio
commercial interruptions and that "station surfing" to avoid them is common.
PROGRESS TO DATE AND SIGNIFICANT DEVELOPMENT MILESTONES
The following chart sets forth the Company's past and projected
development milestones. There can be no assurance that the Company will commence
commercial operations in late 1999 as planned. See "Risk Factors -- Possible
Delays and Adverse Effect of Delay on Financing Requirements."
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1990: o CD Radio Inc. incorporated
o CD Radio proposes FCC create satellite radio service and files license
application
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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 of Common Stock 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 memoranda 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.
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"SEAMLESS" SIGNAL COVERAGE. CD Radio will be available throughout the
continental United States, enabling listeners almost always to be within its
broadcast range. The Company expects its nearly seamless signal will appeal to
motorists who frequently travel long distances, including truck drivers and
recreational vehicle owners, as well as commuters and others who outdrive the
range of their FM signals. In addition, the Company expects its broadcasts will
appeal to the 45 million consumers who live in areas that currently receive only
a small number of FM stations.
COMMERCIAL-FREE MUSIC PROGRAMMING. The Company will provide
commercial-free music programming. The Company's market research indicates that
a principal complaint of radio listeners concerning conventional broadcast radio
is the frequency of commercials. Because CD Radio, unlike most commercial AM and
FM stations, will be a subscription and not an advertiser-supported service, its
music channels will not contain commercials.
PLUG AND PLAY CONVENIENCE. Consumers will be able to receive CD Radio
broadcasts by acquiring a radio card and an easily attachable, silver
dollar-sized satellite dish antenna. Listeners will not be required to replace
their existing car radios and will be able to use the radio card by plugging it
into their radio's cassette or compact disc slot. CD Radio listeners using a
radio card will be able to push a button to switch between AM, FM and CD Radio.
Radio cards will be portable and will be able to be moved from car to car. Radio
card activation will be accomplished directly via satellite by calling the
Company's customer service center at 888-CD- RADIO.
The Company intends to offer 30 channels of commercial-free, all-music
programming and 20 additional channels of other formats that do not require
compact disc quality audio, such as all-news, all-sports and all-talk
programming. Each music channel will have a distinctive format, intended to
cater to specific subscriber tastes. The Company expects the initial
subscription fee for CD Radio, which will entitle subscribers to receive all CD
Radio channels, will be $10 per month.
The Company intends to recruit program managers from the recording,
broadcasting and entertainment industries to manage the development of daily
programming for each CD Radio channel. In order to be accessible to these
industries, the Company plans to locate its programming operations and the
National Broadcast Studio in the New York area. Program managers also will
coordinate the Company's continuing market research to measure audience
satisfaction, refine channel definitions and themes and select program hosts for
those channels that have hosts.
Music programming will be selected from the Company's music library. The
Company intends to create an extensive music library which will consist of a
deep range of recorded music in each genre broadcast. In addition to updating
its music library with new recordings as they are released, the Company will
seek to acquire recordings that in certain cases are no longer commercially
available. The Company recently began acquiring selected recordings for its
music library.
The Company believes that CD Radio will provide an opportunity for the
recording industry to expose and promote new releases and artists to targeted
listener groups nationwide. The Company plans to solicit promotional copies of
new recordings, and contemplates
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showcasing these releases as part of a service to be developed for record
companies. The Company intends to work with the recording industry and
performing artists to develop innovative programming formats.
In connection with its music programming, the Company will be required to
negotiate and enter into royalty arrangements with performing rights societies,
such as ASCAP, BMI and SESAC. These organizations collect royalties and
distribute them to songwriters and music publishers. Copyright users negotiate a
fee with these organizations based on a percentage of revenues. Broadcasters
currently pay a combined total of approximately 3% of their revenues to the
performing rights societies. The Company also will be required to negotiate
similar arrangements, pursuant to the Digital Recordings Act, with the owners of
the sound recordings. The determination of certain royalty arrangements with the
owners of sound recordings under the Digital Recordings Act currently are
subject to arbitration 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.
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GENERATING SUBSCRIPTIONS TO CD RADIO
The Company also intends to focus its initial efforts on a number of
demographic groups that it believes represent potential target markets for CD
Radio, including commuters, niche music listeners, truck drivers, recreational
vehicle owners, consumers in areas with sparse radio coverage and operators of
rental car fleets. In addition, the Company intends to aggressively target early
adopters of new technologies, who it believes are likely to have a high level of
interest in CD Radio.
COMMUTERS. Of the 110 million commuters, the Company has identified 34
million as highly addressable by virtue of their commute times averaging between
one and two hours daily. To reach these commuters, the Company plans to purchase
radio advertising spots on stations with frequent traffic reports, purchase
outdoor billboard advertising on long commute roads and place inserts in
gasoline credit card bills.
NICHE MUSIC LISTENERS. Niche music categories, such as classical, jazz,
rap, gospel, soundtracks, oldies and children's programming, constitute
approximately 27% of the market for recorded music sales. To reach niche music
listeners, the Company intends to work with the recording industry to include
print material about CD Radio inside niche music compact disc packaging, place
print advertising in specialty music magazines targeted to niche music listeners
and members of fan clubs, conduct direct mailings to specialized music mailing
lists of record clubs and sponsor and advertise at certain music events.
TRUCK DRIVERS. According to the U.S. Department of Transportation, there
are approximately three million professional truck drivers in the United States,
of whom approximately 1.1 million are long-distance haulers. The Company intends
to place sampling displays at truck stops and to advertise in publications and
on internet sites which cater to truck drivers.
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.
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SALES OF RADIO CARDS AND S-BAND RADIOS
Consumers will receive CD Radio through radio cards or S-band radios and
associated miniature satellite dish antennas. Although the Company does not
intend to manufacture or distribute radio cards, S-band radios or miniature
satellite dish antennas, their availability will be critical to the Company
because they are the only means by which to receive CD Radio. Accordingly, the
Company has devised strategies to make radio cards and S-band radios together
with their associated miniature satellite dish antennas widely available to
consumers.
SALES OF RADIO CARDS. The Company believes that the availability of radio
cards will be critical to the Company's market penetration for a number of years
following the introduction of CD Radio. The Company expects that radio cards
will be sold at retail outlets and mass merchandisers that sell consumer
electronics. The retail price of the radio card together with the miniature
satellite dish currently is expected to be approximately $200.
SALES OF S-BAND RADIOS. Distribution of S-band radios is an important
element in the Company's marketing strategy. In 1996, U.S. consumers spent
approximately $3 billion on autosound equipment for aftermarket installation in
their vehicles, which the Company believes included approximately 4.6 million
new AM/FM radios. The Company believes that this autosound equipment market is
comprised largely of young, music oriented early adopters of new technology and
that, in the course of purchasing a new car radio, some of these consumers would
select one with built-in S-band capability. The Company expects S-band radios to
be sold at retail outlets that sell consumer electronics, as well as at
autosound specialty dealers. Like existing autosound equipment, S-band radios
will require installation by the retailer or a third party.
The Company's long term objective is to promote the adoption of S-band
radios as standard equipment or a factory-installed option in every vehicle sold
in the United States. The Company, however, expects sales of radio cards and
S-band radios through the consumer electronics retail distribution system to be
the primary distribution channel for receivers capable of receiving CD Radio for
many years.
SUBSCRIPTION AND BILLING
The Company intends to contract out customer service and billing functions
to a national teleservices company, whose functions will include the handling of
orders from subscribers, establishing and maintaining customer accounts, inbound
telemarketing, billing and collections.
Access to the Company's customer service center will be via the Company's
toll-free number, 888-CD-RADIO, with all interaction with subscribers being
conducted under the CD Radio name. Payment to the Company's selected
teleservices company is expected to be based on transaction volumes, and the
Company plans to charge subscribers a modest one-time activation fee to cover
certain transaction costs. The Company will require payment for CD Radio with a
national credit or debit card.
THE CD RADIO DELIVERY SYSTEM
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The Company has designed the CD Radio delivery system to transmit an
identical signal from two satellites placed in geosynchronous orbit. The two
satellite system will permit CD Radio to provide "seamless" signal coverage
throughout the continental United States. This means that listeners will always
be within the broadcast range of CD Radio, unlike current FM radio broadcasts,
which have an average range of only approximately 30 miles. The CD Radio system
is designed to provide clear reception in most areas despite variations in
terrain, buildings and other obstructions. The system is designed to enable
motorists to receive CD Radio in all outdoor locations where the vehicle has an
unobstructed line-of-sight with one of the Company's satellites or is within
range of one of the Company's terrestrial repeating transmitters.
The portion of the S-band located between 2320 MHz and 2345 MHz has been
allocated by the FCC exclusively for national satellite radio broadcasts, and
will augment traditional AM and FM radio bands. This portion of the spectrum was
selected because there are virtually no other users of this frequency band in
the United States, thus minimizing potential signal interference. In addition,
this frequency band is relatively immune to weather related attenuation, which
is not the case with higher frequencies.
The Company expects to use 12.5 MHz of bandwidth in the 7025.0-7075.0 MHz
band (or some other suitable frequency) for uplink transmissions from the
National Broadcast Studio to the Company's satellites. Downlink transmission
from the satellites to subscribers' radio cards or S-band radios will use 12.5
MHz of bandwidth in the 2320-2332.5 MHz frequency band.
The CD Radio delivery system will consist of three principal components:
(i) the satellites; (ii) the receivers; and (iii) the National Broadcast Studio.
THE SATELLITES
SATELLITE DESIGN. The Company's satellites are of the Loral FS-1300 model
series. This family of satellites has 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
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maintenance and continuing technological upgrade without the need to launch
replacement satellites.
SPREAD SPECTRUM (CODE DIVISION MULTIPLEX). The Company's radio
transmission system will utilize Code Division Multiplex ("CDM") and spread
spectrum technology which permits a large number of program channels to utilize
a single radio frequency band. The system, incorporating CDM and spread spectrum
modulation, combined with multiple satellite coverage and terrestrial repeating
transmitters, is designed to provide a high capacity, high quality service.
SIGNAL DIVERSITY. The Company believes that two satellites are the minimum
number required to provide nearly seamless signal coverage throughout the
continental United States. The Company plans to position its two satellites in
complementary orbital locations so as to achieve efficient signal diversity and
thereby mitigate service interruptions which can result from signal blockage and
fading. The 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.
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Title and risk of loss for the first and second satellites are to pass to
the Company at the time of launch. Title for the third satellite is to pass to
the Company at the time of shipment of the satellite to the designated storage
site. The satellites are warranted to be in accordance with the performance
specifications in the Loral Satellite Contract and free from defects in
materials and workmanship at the time of delivery. After delivery, no warranty
coverage applies, unless a satellite is not launched, in which case the warranty
extends two years from the date of delivery. In the event of any delay in the
construction of the satellites that is caused by the Company, the Loral
Satellite Contract provides that the terms of the contract will be equitably
adjusted.
Following the launch of each satellite, Loral will conduct in-orbit
performance verification. In the event that such testing shows that a satellite
is not meeting the satellite performance specifications contained in the Loral
Satellite Contract, Loral and the Company have agreed to negotiate an equitable
reduction in the final payment to be made by the Company for the affected
satellite.
LAUNCH SERVICES. The Company entered into the Arianespace Launch Contract
for two satellite launches with Arianespace on July 22, 1997. The initial launch
period for the first launch extends from August 1, 1999 to January 31, 2000. The
initial launch period for the second launch extends from October 1, 1999 to
March 31, 2000. These initial launch periods will be reduced to three-month
periods at least twelve months prior to the start of the respective initial
launch periods. One-month launch slots will be selected for each of the launches
at least eight months prior to the start of the respective shortened launch
periods. Launch dates will be selected for each of the launches at least four
months prior to the start of the respective launch periods. The Company is
entitled to accelerate the second launch by shipping the satellite to the launch
base and preparing the satellite for launch at the next available launch
opportunity.
If the Company's satellites are not available for launch during the
prescribed periods, the Company will arrange to launch the satellites on the
first launch dates available after the satellites are completed. While the
Company has been able to reschedule its reserved launch dates with Arianespace
in the past, there can be no assurance that it will be able to do so in the
future. If the Company postpones a launch for more than 12 months, or postpones
a launch within 12 months of a scheduled launch, postponement fees may be
charged under the terms of the Arianespace Launch Contract.
Satellite launches are subject to significant risks, including satellite
destruction or damage during launch or failure to achieve proper orbital
placement. Launch failure rates vary depending on the particular launch vehicle
and contractor. Arianespace, one of the world's leading commercial satellite
launch service companies, has advised the Company that as of August 8, 1997, 84
of 89 Arianespace launches (approximately 94%) have been completed successfully
since May 1984. See "Risk Factors -- Dependence upon Satellites," "Risk Factors
- -- Dependence upon Satellite and Launch Contractors" and "Risk Factors --
Satellite Launch Risks." However, the Ariane 5, the particular launch vehicle
being planned for the launch of the Company's satellites, has had only one
launch, which was a failure, and is untested in flight. The next launch of the
Ariane 5 currently is planned for October 1997. There is no assurance that
Arianespace's launches of the Company's satellites will be successful. If the
second and third qualification flights of the Ariane 5 launch vehicle result in
a failure, or if for any reason there have not been at least two successful
Ariane 5 launches prior to each of Company's
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84
scheduled launches, or if Arianespace postpones one of Company's launches for
more than six months due to a delay in the development of the Ariane 5 program,
then, under the terms of the Arianespace Launch Contract, the Company has the
right to require Arianespace to negotiate in good faith an amendment to the
Arianespace Launch Contract to provide for launches using the Ariane 4 launch
vehicle, with launch dates on the first available Ariane 4 launch opportunities
after the scheduled launch dates, unless the Company agrees to earlier launch
dates.
Assuming use of an Ariane 5 launch vehicle, if a Company satellite is lost
or destroyed during launch, or if, due to an anomaly occurring during launch
caused by the launch vehicle or a co-passenger satellite, a Company satellite
loses more than 50% of its operational capacity, Arianespace has agreed to
perform a replacement launch at no cost. If, under the same circumstances, the
Company satellite loses more than 20% but not more than 50% of its operational
capacity, Arianespace is required to pay Company an amount based on the percent
of lost capacity. If the Company purchases launch insurance on the commercial
market, these percentages will be amended to match those contained in the
insurance policy. If, following launch, a satellite should fail for any reason,
including reasons unrelated to the launch, within 27 months after launch, the
Company is entitled to purchase at the then applicable price a replacement
launch from Arianespace with a one-month launch slot that falls within ten
months of the request for the replacement launch.
The Company will rely upon Arianespace for the timely launch of the
satellites. Failure of Arianespace to launch the satellites in a timely manner
could materially adversely affect the Company's business. The Arianespace Launch
Contract entitles Arianespace to postpone either of Company's launches for a
variety of reasons, including technical problems, lack of co- passenger(s) for
the Company's launch, the need to conduct a replacement launch for another
customer, a launch of a scientific satellite whose mission may be degraded by
delay, or a launch of another customer's satellite whose launch was postponed.
Although the Arianespace Launch Contract provides liquidated damages for delay,
depending on the length of the delay, and entitles the Company to terminate the
agreement for delay exceeding 12 months, there can be no assurance that these
remedies will adequately mitigate any damage to the Company's business caused by
launch delays.
Under the terms of the Arianespace Launch Contract, the Company and
Arianespace each agree to bear any damage to property or bodily injury that it
or its associates may sustain caused by a launch or satellite failure.
Arianespace is required to take out launch and in-orbit insurance policies to
protect itself and the Company against liability for losses that third parties
may sustain caused by a launch vehicle or any satellite on the launch vehicle,
and to indemnify the Company against any such losses that exceed the limits of
the insurance policy.
Arianespace has assisted the Company in securing financing for the launch
service prices through its subsidiary, AEF. The Company and AEF have entered
into the AEF Agreements, which govern the provisions of such financing. See
"Description of Certain Indebtedness -- Vendor Financing."
RISK MANAGEMENT AND INSURANCE. Two custom-designed, fully dedicated
satellites are required to broadcast CD Radio. The Company has selected a launch
service supplier that has achieved the most 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
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provision entitling the Company to a replacement launch in the event of a launch
failure caused by the Arianespace launch vehicle. In such event, the Company
would utilize the spare satellite that will be constructed. Thus, the Company
does not intend to insure for this contingency. The Company intends to insure
against other contingencies, including a failure during launch caused by factors
other than the launch vehicle and/or a failure involving the second satellite in
a situation in which the spare satellite has been used to replace the first
satellite. If the Company is required to launch the spare satellite due to
failure of the launch of one of the operational satellites, its operational
timetable would be delayed for approximately six months or more. The launch or
in-orbit failure of two satellites would require the Company to arrange for
additional satellites to be built and could delay the commencement or
continuation of the Company's operations for three years or more. See "Risk
Factors -- Dependence upon Satellites," "Risk Factors -- Dependence upon
Satellite and Launch Contractors" and "Risk Factors -- Satellite Launch Risks."
Once properly deployed and operational, the historical risk of premature
total satellite failure has been less than one percent for U.S. geosynchronous
commercial communication satellites. Insurance against in-orbit failure is
currently available and typically is purchased after the satellite is tested in
orbit and prior to the expiration of launch insurance. In recent years, annual
premiums have ranged from 1.3% to 2.5% of coverage. After the Company has
launched the satellites and begun to generate revenues, the Company will
evaluate the need for business interruption insurance.
Satellites are designed to minimize the adverse effects of transmission
component failure through the incorporation of redundant components which
activate automatically or by ground command upon failure. If multiple component
failures occur as the satellite ages, and the supply of redundant components is
exhausted, the satellite generally will continue to operate, but at reduced
capacity. In that event, signal quality may be preserved by reducing the number
of channels broadcast until a replacement satellite can be launched.
Alternatively, the number of broadcast channels may be preserved by reducing the
signal quality until a replacement satellite can be launched.
THE RECEIVERS
Subscribers to CD Radio will not need to replace their existing AM/FM car
radios. Instead, they will be able to receive CD Radio in their vehicles using a
radio card that has been designed to plug easily into the cassette or compact
disc slot of their existing radio. Customers also will be able to receive CD
Radio using an S-band radio. CD Radio reception with either a radio card or an
S-band radio will be via a miniature silver dollar-sized satellite dish antenna
mounted on a small base housing a wireless transmitter that will relay the CD
Radio signal to the vehicle's radio card or S-band radio. Neither the radio
cards, S-band radios nor the miniature satellite dish antennas currently are
available and the Company is unaware of any manufacturer currently developing
such products.
The Company anticipates that radio cards will be easy to install because
they will require no wiring or other assembly and will be installed simply by
inserting the card into the radio's cassette or compact disc slot. Upon
insertion of the card into the radio, listeners will be able to switch between
AM, FM and CD Radio. The radio card can be removed by pushing the radio's
"eject" button. Radio cards are portable and will be able to be moved from car
to car, if desired.
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86
S-band radios will be capable of receiving AM, FM and S-band radio
transmissions. The Company anticipates that S-band radios will be similar to
conventional AM/FM radios in size and appearance. Like existing conventional
radios, a number of these radios may also incorporate cassette or compact disc
players.
In addition to a radio card or S-band radio, a vehicle must be equipped
with a miniature satellite dish antenna in order to receive CD Radio. To satisfy
this requirement, the Company has designed a miniature satellite dish antenna.
The battery powered satellite dish antenna is approximately the size and shape
of a silver dollar, measuring 2" in diameter and 1/8" thick. The base of the
satellite dish antenna will have an adhesive backing, so that consumers will be
able to easily attach the satellite dish antenna to a car's rear window.
Miniature satellite dish antennas will also be sold separately, so that
consumers will be able to receive CD Radio in a vehicle that has a satellite
dish antenna attached to it 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.
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87
The Company believes that, when manufactured in quantity, S-band radios
will be incrementally more expensive than today's car radios, while radio cards,
which will have no installation costs if the customer has a radio with a
cassette or compact disc slot, will be substantially less expensive. The Company
expects that the satellite dish antenna will be substantially less expensive
than the radio card for consumers wishing to purchase additional dish antennas
separately. The Company believes that the availability and pricing of plug and
play radio cards will be of prime importance to the Company's market penetration
for a number of years.
Neither the radio cards, S-band radios nor miniature satellite dish
antennas currently are available, and the Company is unaware of any manufacturer
currently developing such products. The Company has entered into non-binding
memoranda of understanding with two major consumer electronics manufacturers,
and has commenced discussions with several other such manufacturers, regarding
the manufacture of radio cards, S-band radios and miniature satellite dish
antennas for retail sale in the United States. The Company currently intends to
select one manufacturer to manufacture radio cards, S-band radios and miniature
satellite dish antennas for retail sale in the United States on an exclusive
basis for the first year of CD Radio broadcasts. There can be no assurance that
these discussions will result in a binding commitment on the part of any
manufacturer to produce radio cards, S-band radios and miniature satellite dish
antennas in a timely manner so as to permit the widespread introduction of CD
Radio in accordance with the Company's business plan or that sufficient
quantities of these will be available to meet anticipated consumer demand.
Failure to have at least one manufacturer develop and widely market radio cards
and the associated miniature satellite dish antennas, and to a lesser extent S-
band radios, at affordable prices, or to develop and widely market such products
upon the launch of CD Radio, would have a material adverse effect on the
Company's business.
THE NATIONAL BROADCAST STUDIO
The Company plans to originate its 50 channels of programming from its
National Broadcast Studio, to be located in the New York area. The National
Broadcast Studio will house the Company's music library, facilities for
programming origination, programming personnel and program hosts, as well as
facilities to uplink programming to the satellites, to activate or deactivate
service to subscribers and to perform the tracking, telemetry and control of the
orbiting satellites.
The Company's music library will be located at the National Broadcast
Studio. The Company intends to create an extensive music library which will
consist of a deep range of recorded music. In addition to updating its music
library with new recordings as they are released, the Company will seek to
acquire recordings that in certain cases are no longer commercially available.
The Company recently began purchasing collections of recordings for its music
library.
Programming will be originated at the National Broadcast Studio and
transmitted to the Company's two satellites for broadcast to CD Radio
subscribers. The Company expects that its broadcast transmissions will be
uplinked to its satellites at frequencies in the 7025.0-7075.0 MHz band. The
satellites will receive and convert the signal to the 2320.0-2332.5 MHz band.
The satellites then will broadcast the signal to the United States, at a power
sufficient to enable its receipt directly by the miniature satellite dish
antennas to be used by subscribers.
<PAGE>
88
Service-related commands also will be relayed from the National Broadcast
Studio to the Company's satellites for retransmission to subscribers' radio
cards and S-band radios. These service-related commands include those required
to (i) initiate and suspend subscriber service, (ii) change the encryption
parameters in radio cards and S-band radios to reduce piracy of CD Radio and
(iii) activate radio card and S-band radio displays to show program-related
information.
Tracking, telemetry and control operations for the Company's orbiting
satellites also will be performed from the National Broadcast Studio. These
activities include controlling the routine station keeping, which involves
twice-monthly satellite orbital adjustments and the continuous monitoring of the
satellites.
The Company expects that the National Broadcast Studio, which will include
its executive offices, will be approximately 30,000 square feet in size. The
Company currently is searching for appropriate space to lease in the New York
area and has commenced development of plans for its facility with a broadcast
studio design firm.
DEMONSTRATIONS OF THE CD RADIO SYSTEM
In support of the Company's application for the FCC License, the Company
conducted a demonstration of its proposed radio service from November 1993
through November 1994. The demonstration involved the transmission of S-band
signals to a prototype S-band radio and miniature satellite dish antenna
installed in a car to simulate certain transmission techniques the Company
intends to employ. Because there currently are no commercial satellites in orbit
capable of transmitting S-band frequencies to the United States, the Company
constructed a terrestrial simulation of its planned system. For this purpose,
the Company selected a test range covering several kilometers near Washington,
D.C. which included areas shadowed by buildings, trees and overpasses. The
Company placed S-band transmitters on the rooftops of a number of tall buildings
in such a way as to simulate the signal power and angle of arrival of satellite
transmissions to be used for its proposed service. The Company also modified the
standard factory installed sound system of a Lincoln Mark VIII automobile to
create a radio receiving AM, FM and S-band, and integrated the Company's
satellite dish antenna into the car roof. The demonstrations included the
reception of 30 channels of compact disc quality stereo music by the prototype
radio while the car was driven throughout the range. Prior to testing with
orbiting satellites, miniature satellite dish antennas and radio cards or S-band
radios suitable for commercial production, there can be no assurance that the CD
Radio system will function as intended. See "Risk Factors -- Reliance on
Unproven Technology."
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
<PAGE>
89
characteristics of other radio stations in the market. Many of the Company's
radio broadcasting competitors have substantially greater financial, management
and technical resources than the Company.
Unlike the Company, the radio industry has a well established market for
its services and generally offers "free" broadcast reception paid for by
commercial advertising rather than by a subscription fee. In addition, certain
AM and FM stations, such as National Public Radio, offer programming without
commercial interruption. Many radio stations also offer information programming
of a local nature, such as local news or traffic reports, which the Company will
be unable to offer. CD Radio will compete with conventional radio stations on
the basis of its targeted programming formats, nearly seamless signal coverage,
freedom from advertising and compact disc quality sound, features which are
largely unavailable on conventional broadcast radio.
The Company believes that cassettes and compact discs generally are used
in automobiles as supplements to radio rather than as substitutes, and that
these media are used primarily as backup when radio reception is unavailable or
unsatisfactory, or when desired programming is unavailable or unsatisfactory.
Cassettes and compact discs lack the convenience of radio, as well as the
spontaneity and freshness that characterize radio programming. According to a
1996 market study, although almost all vehicles contain either a cassette or
compact disc player, 87% of automobile commuters listened to the radio an
average of 50 minutes a day while commuting. Accordingly, the Company does not
view its service as directly competitive with these media.
Currently, radio stations broadcast by means of analog signals, as opposed
to digital transmission. The Company believes, however, that prior to the
commencement of CD Radio, terrestrial broadcasters may be able to place digital
audio broadcasts into the bandwidth occupied by current AM and FM stations and
simultaneously transmit both analog and digital signals on the AM and FM bands.
The limited bandwidth assigned to AM stations will result in lower quality
digital signals than can be broadcast by FM stations. As a result, the Company
expects that the use of this technology will permit digital AM sound quality to
approach monaural FM sound quality and permit digital FM broadcasts to approach
compact disc sound quality. In order to receive these digital AM/FM broadcasts,
listeners will need to purchase new digital radios which currently are not
commercially available. While the development of digital broadcasting would
eliminate one of the advantages of CD Radio over FM radio, the Company does not
believe it would affect broadcasters' ability to address the other advantages of
CD Radio. In addition, the Company views the growth of terrestrial digital
broadcasting as a positive force that would be likely to encourage radio
replacement and thereby facilitate the introduction of S-band radios.
Although certain existing satellite operators currently provide music
programming to customers at fixed locations, these operators are incapable of
providing CD Radio type service to vehicles as a result of some or all of the
following reasons: (i) these operators do not broadcast on radio frequencies
suitable for reception in a mobile environment; (ii) CD Radio type service
requires fully dedicated satellites; (iii) CD Radio type service requires a
custom satellite system design and (iv) CD Radio type service requires
regulatory approvals, which existing satellite operators do not have.
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90
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, 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.
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91
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 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. On September 9, 1997, the Company filed an
updated ownership report that reflected the new 15 percent investment by Loral
Space & Communications, Ltd. ("Loral"), a Bermuda corporation. If Loral were
considered by the FCC to be an alien corporation, CD Radio's ownership structure
would be above the threshold for foreign ownership in Section 310(b) of the
Communications Act. Based on the Company's
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92
application to be a private carrier, the Company noted that the statutory
foreign ownership rule should not apply regardless of Loral's nationality. The
Company also noted in its ownership report that prior FCC decisions granting
subsidiaries of Loral satellite licenses have considered Loral to have a home
market in the United States, not Bermuda, and therefore Loral would not be
treated as an alien corporation. The Company asked the FCC to reaffirm that, if
even if the foreign ownership restrictions were to apply, Loral would be
regarded as a United States company and CD Radio's ownership would continue to
be below the statutory limit. There can be no assurance, however, that the FCC
will not apply the alien ownership restrictions or that the FCC will treat Loral
as a United States company. 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.
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
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93
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.
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.
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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 October 1, 1997, the Company had ten employees, of whom three were
involved in technology development, three in business development and four in
administration. In addition, the Company relies upon a number of consultants and
other advisors. During 1997, the Company expects to increase the number of its
employees to approximately 20. By commencement of operations, the Company
expects to have approximately 100 employees. The extent and timing of the
increase in staffing will depend on the availability of qualified personnel and
other developments in the Company's business. None of the Company's employees is
represented by a labor union, and the Company believes that its relationship
with its employees is good.
PROPERTY
The Company's executive offices are located at Sixth Floor, 1001 22nd
Street, N.W., Washington, D.C. 20037, and are leased pursuant to a lease
agreement that will expire on October 31, 1998.
LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the directors,
executive officers and certain key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
- ------------------------ ----- ----------------------------------------------------
<S> <C> <C>
David Margolese......... 39 Chairman, Chief Executive Officer and Director
Robert D. Briskman...... 64 Executive Vice President, Engineering and Operations
and Director
Andrew J. Greenebaum.... 35 Executive Vice President and Chief Financial Officer
Keno V. Thomas.......... 39 Executive Vice President, Marketing
Joseph S. Capobianco.... 48 Executive Vice President, Content
Paul Sharma............. 49 Executive Director, Space Segment
Brian Stockwell......... 61 Executive Director, Launch Services
Lawrence F. Gilberti.... 46 Director and Secretary
Peter K. Pitsch......... 45 Director
Jack Z. Rubinstein...... 48 Director
Ralph V. Whitworth...... 41 Director
</TABLE>
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Officers are elected by
and serve at the discretion of the Board of Directors.
DAVID MARGOLESE. Mr. Margolese was elected Chief Executive Officer of the
Company in November 1992 and Chairman in August 1993 and has served as a
director since August 1991. In 1991, Mr. Margolese founded a consortium with
AT&T Corp. and Hutchison Telecommunications Ltd., a subsidiary of Hutchison
Whampoa Limited, a diversified conglomerate based in Hong Kong, to bid for
Israel's national cellular telephone license and served as Chairman of this
consortium until June 1993. From 1987 until August 1991, Mr. Margolese was a
private investor. In 1982, Mr. Margolese co-founded Cantel Inc., Canada's
national cellular telephone company, and served as Vice President, RCC
Operations, there until 1984. In 1980, Mr. Margolese co-founded Canadian Telecom
Inc., a radio paging company, and served as that company's President until its
sale in 1987.
ROBERT D. BRISKMAN. Mr. Briskman has served as Executive Vice President,
Engineering and Operations and as a director of the Company since October 1991
and as President of Satellite CD Radio, Inc., a subsidiary of the Company, since
September 1994. In addition, Mr. Briskman served as Chief Executive Officer of
the Company from April to November 1992. From March 1991 to June 1992, Mr.
Briskman was President of Telecommunications Engineering Consultants, which
provided engineering and consulting services to the Company. From March 1986 to
March 1991, Mr. Briskman was Senior Vice President, Engineering and Operations
at Geostar Corporation, a satellite company, responsible for the development,
design, implementation and operation of a nationwide satellite message
communication service. Prior to 1986, Mr. Briskman held senior management
positions at
<PAGE>
96
Communications Satellite Corporation ("COMSAT"), a satellite operator, where he
was employed for over 20 years. Prior to joining COMSAT, Mr. Briskman was a
communications specialist with IBM and the National Aeronautics and Space
Administration. Mr. Briskman holds a bachelor's degree in engineering from
Princeton and a master's degree in electrical engineering from the University of
Maryland. He has published over 50 technical papers, holds a number of U.S.
patents, and is a Fellow of the Institute of Electrical and Electronics
Engineers and the American Institute of Aeronautics and Astronautics.
ANDREW J. GREENEBAUM. Mr. Greenebaum has served as Executive Vice
President and Chief Financial Officer of the Company since August 1997. 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
<PAGE>
97
Head of the Ariane Launch Vehicle Program for the European Space Agency. Prior
to that, he was Communications Satellite Systems Manager with the European Space
Agency from September 1969.
LAWRENCE F. GILBERTI. Mr. Gilberti was elected Secretary of the Company
in November 1992 and has served as a director since September 1993. Since
December 1992, he has been the Secretary and sole director of, and from December
1992 to September 1994 was the President of, Satellite CD Radio, Inc. Mr.
Gilberti has been a partner in the law firm of Fischbein Badillo Wagner Harding
since August 1994, and has provided legal services to the Company since 1992.
From 1987 to August 1994, Mr. Gilberti was an attorney with the law firm of
Goodman Phillips & Vineberg.
PETER K. PITSCH. Mr. Pitsch became a director of the Company in January
1995. Since September 1989, Mr. Pitsch has been the principal of Pitsch
Communications, a telecommunications law and economic consulting firm that has
rendered legal services to the Company since 1991. From April 1987 to August
1989, he served as Chief of Staff at the Federal Communications Commission. From
November 1981 to April 1987, he served as Chief of the Office of Plans and
Policy at the Federal Communications Commission. He is an adjunct fellow at the
Hudson Institute, Inc.
JACK Z. RUBINSTEIN. Mr. Rubinstein became a director of the Company in
January 1995. Since May 1991, Mr. Rubinstein has been the General Partner of
Dica Partners, L.P., a hedge fund based in Hartsdale, New York. From September
1988 to October 1990, Mr. Rubinstein was a consultant to institutional clients
at Morgan Stanley & Co. Incorporated, an investment bank. From February 1978 to
September 1988, he was an Associate Director at Bear Stearns & Co. Inc., an
investment bank, responsible for corporate insider portfolio management.
RALPH V. WHITWORTH. Mr. Whitworth became a director of the Company in
March 1994. Since April 1996, he has been a managing member at Relational
Investors, LLC, a financial management firm. In January 1997, Mr. Whitworth
became a partner of Batchelder & Partners, Inc., a financial advisory firm. From
August 1988 to December 1996, he was President of Whitworth and Associates, a
Washington, D.C.-based consulting firm. Mr. Whitworth was President of United
Shareholders Association, a shareholders' association, from its founding in 1986
to 1993. From 1989 to 1992, he served as President of Development of United
Thermal Corporation, the owner of the district heating systems for the cities of
Baltimore, Philadelphia, Boston and St. Louis.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS
The following table sets forth the compensation for services rendered
during the three-year period ending December 31, 1996 for the executive officers
of the Company whose 1996 salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<PAGE>
98
<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.
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.
<PAGE>
99
Effective January 1, 1994, the Company entered into an employment
agreement to employ David Margolese as Chairman and Chief Executive Officer of
the Company for a term of five years. The agreement provided for an annual base
salary of $300,000, subject to increase from time to time by the Board of
Directors. An amendment to this agreement, dated as of June 8, 1994, provided
for an annual base salary of $100,000, effective June 8, 1994. Subsequently, Mr.
Margolese waived his base salary payable for the three-month period ended
December 31, 1994. In January 1997, the Board of Directors increased Mr.
Margolese's annual base salary to $150,000. In July 1997, the Board of Directors
increased Mr. Margolese's annual base salary to $400,000. Under his original
employment agreement and pursuant to the Company's 1994 Stock Option Plan, the
Company granted to Mr. Margolese an option to purchase 300,000 shares of Common
Stock at $5.00 per share, which option is fully vested and exercisable. If Mr.
Margolese is terminated without Cause, as defined in the agreement, or if Mr.
Margolese resigns for "Good Reason," as defined in the agreement, the Company is
obligated to pay to Mr. Margolese the sum of $800,000. In January 1994, Mr.
Margolese was paid $162,000 for deferred salary earned in 1993 and $216,000 in
recognition of his service without pay in 1992. The employment agreement
restricts Mr. Margolese from engaging in any business involving the transmission
of radio entertainment programming in North America for a period of two years
after the termination of his employment.
Effective January 1, 1994, the Company entered into an agreement to employ
Robert D. Briskman as the Vice President and Chief Technical Officer of the
Company. The agreement provided for an annual base salary of $150,000. An
amendment to this agreement, dated as of June 8, 1994, provided for an annual
base salary of $100,000, effective June 8, 1994. In October 1996, the Board of
Directors increased Mr. Briskman's annual base salary to $150,000 and in January
1997, extended the term of the agreement until January 1, 1998. In addition,
under his original employment agreement and pursuant to the Company's 1994 Stock
Option Plan, the Company granted to Mr. Briskman an option to purchase 80,000
shares of Common Stock at $1.00 per share, which option is fully vested and
exercisable. In May 1997, the Board of Directors named Mr. Briskman the
Company's Executive Vice President, Engineering and Operations and extended the
term of the agreement until December 31, 2000. The Board of Directors also
increased Mr. Briskman's annual base salary to $235,000, effective May 1, 1997,
with an additional increase to $260,000, effective January 1, 1998. The original
employment agreement also provides for the grant to Mr. Briskman of options to
purchase 112,500 shares of Common Stock at $1.00 per share upon completion of
certain milestones prior to December 31, 1994. Such options were granted to Mr.
Briskman on December 23, 1994 and are fully vested and exercisable. In January
1996, Mr. Briskman exercised options to purchase 80,000 shares of the Company's
Common Stock. On July 9, 1997, the Board of Directors granted Mr. Briskman
further options to purchase up to 57,500 shares of Common Stock at a price per
share of $14.50. The options will vest and become exercisable in two stages
contingent upon Mr. Briskman's continued employment with the Company and the
replenishment of the 1994 Stock Option Plan by the Company. If Mr. Briskman's
employment is terminated for any reason other than cause, as defined in the
agreement, the Company is obligated to pay to Mr. Briskman a sum equal to 50% of
his then annual salary and, at Mr. Briskman's option, to repurchase all of the
shares of Common Stock then owned by him at a price of $1.25 per share. The
Company also has entered into a proprietary information and non-competition
agreement with Mr. Briskman. Under this agreement, Mr. Briskman may not (i)
disclose any proprietary information of the Company during or after his
employment with the Company or (ii) engage in any business directly
<PAGE>
100
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 paid 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 at a price per share of $15.125, however the
options relating to 10,500 of such shares are subject to replenishment of the
Plan by the Company. The options will vest and be exercisable in three stages
contingent upon the commencement and continued employment of Mr. Greenebaum with
the Company at predetermined dates. The dismissal of Mr. Greenebaum other than
for "cause" (as defined in the agreement) subsequent to the passing of certain
milestones, however, will cause the options otherwise exercisable only at the
end of that stage to vest immediately notwithstanding the dismissal. If Mr.
Greenebaum's employment is terminated for any reason other than by the Company
for "Cause," as defined in the agreement, or by Mr. Greenebaum voluntarily, Mr.
Greenebaum will be entitled to receive, in addition to any other sums then due
to him, an amount equal to his annualized base salary then in effect. The
Company and Mr. Greenebaum also have entered into a proprietary information and
non-competition agreement. Under this agreement, Mr. Greenebaum may not (i)
during his employment with the Company and for three years thereafter disclose
any proprietary information of the Company or (ii) during his employment with
the Company and for one year thereafter engage in any business involving any
satellite radio broadcast service or any subscription-based digital audio radio
service delivered to cars or other mobile vehicles in North America.
The Company has entered into employment and noncompetition agreements to
employ Joseph S. Capobianco as Executive Vice President, Content, and Keno V.
Thomas as Executive Vice President, Marketing, both for terms of three years.
The agreement with Mr. Capobianco, effective April 16, 1997, provided for an
annual base salary of $200,000, subject to increase from time to time by the
Board of Directors. The agreement with Mr. Thomas, effective April 28, 1997,
provided for an annualized base salary of $225,000 through December 31, 1997,
increasing to an annualized base salary of $250,000 thereafter through the term
of the agreement, subject to increase from time to time by the Board of
Directors. The Company has granted each of Mr. Capobianco and Mr. Thomas an
option to purchase 50,000 shares of Common Stock at $13 and $12.875 per share,
respectively, each such option to vest pursuant to the schedule set forth in the
applicable option agreement. On July 9, 1997, the Company granted each of
Messrs. Capobianco's and Thomas further options to purchase up to 25,000 shares
of Common Stock at a price per share of $14.50. These options will vest and
become exercisable in two stages contingent upon Messrs. Capobianco's and
Thomas', respective, continued employment with the Company and the replenishment
of the 1994 Stock Option Plan by the Company. If either Mr. Capobianco or Mr.
Thomas is terminated except by the Company for "Cause," as defined in the
agreement, or by the applicable executive voluntarily, the Company will be
obligated to pay to Mr. Capobianco an amount equal to one-third of his then
annual salary if the termination is on or prior to October 16, 1997 and one-half
of his then annual salary thereafter, and to pay to
<PAGE>
101
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 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
<PAGE>
102
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
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.
<PAGE>
103
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.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Indiviadual Grants
------------------------------------------------
Potential Realizable Value
At Assumed Annual Rates
of Stock Price Appreciation
Percent of Total 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> <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 Excercise 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
<PAGE>
104
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 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.
<PAGE>
105
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of September 30, 1997 of (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.
<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) .................................... 2,734,500 21.7%
110 Wolseley Road
Point Piper 2027
Sydney, Australia
Loral Space & Communications Ltd. (4) .................... 1,905,488 15.2%
600 Third Avenue
New York, New York 10017
David Margolese (5) ...................................... 1,900,000 15.1%
c/o CD Radio Inc.
Sixth Floor
1001 22nd Street, N.W.
Washington, D.C. 20037
Robertson, Stephens & Company LLC, et al. (6) ............ 1,467,000 11.7%
555 California Street, Suite 2600
San Francisco, CA 94104
Robert D. Briskman (7) ................................... 132,500 1.1%
Jack Z. Rubinstein (8) ................................... 227,000 1.8%
Peter K. Pitsch (9) ...................................... 70,000 *
Lawrence F. Gilberti (10) ................................ 35,000 *
Ralph V. Whitworth (11) .................................. 35,000 *
Joseph S. Capobianco (12) ................................ 0 *
Keno V. Thomas (13) ...................................... 0 *
Andrew J. Greenebaum (14) ................................ 59,000 *
All Executive Officers and Directors as a Group (15) 2,399,500 19.1%
(9 persons)
</TABLE>
<PAGE>
106
<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 (16)
Everest Capital International, Ltd. (17).................. 2,194,368 14.9%
c/o Morgan Stanley & Co.
One Pierpont Plaza, 10th Floor
Brooklyn, NY 11201
Continental Casualty Company (18)......................... 2,150,881 14.6%
c/o Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2477
The Mainstay Funds, on behalf of its High
Yield Corporate Bond Fund Series (19)................... 1,309,012 9.5%
Chemical Bank
A/C State Street Bank & Trust Co.
4 New York Plaza
New York, NY 10004
Libra Investments, Inc. (20) ............................. 937,834 6.9%
11766 Wiltshire Blvd.
Suite 870
Los Angeles, CA 90025
Grace Brothers, Ltd. (21) ............................... 869,399 6.5%
Bradford Whitmore
1560 Sherman Avenue, Suite 900
Evanston, IL 60201
Everest Capital Fund, L.P. (22) .......................... 824,020 6.2%
c/o Morgan Stanley & Co.
One Pierpont Plaza, 10th Floor,
Brooklyn, NY 11201
</TABLE>
- -----------------------
* Less than 1%
(1) This table is based upon information supplied by directors, officers and
principal stockholders. Percentage of ownership is based on 12,577,884
shares of Common Stock outstanding on September 25, 1997. Unless otherwise
indicated, the address of the beneficial owner is the Company.
(2) Determined in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, as amended. Under this rule, a person is deemed to be the
beneficial owner of securities that can be acquired by such person within 60
days from September 25, 1997 upon the exercise of options, and each
beneficial owner's percentage ownership is determined by assuming that
options that are held by such person (but not those held by any other
person) and that are exercisable within 60 days from September 25, 1997 have
been exercised. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
(3) Darlene Friedland is the spouse of Robert Friedland. Robert Friedland was a
director of the Company from June 1993 until October 1993. From May 1992,
Mr. Friedland, and Ivanhoe Capital Corporation, a venture capital firm he
controls, collectively were the Company's largest shareholder until their
shares were transferred to Darlene Friedland in October 1993.
(4) Subject to demand registration rights after the Company's two satellites are
launched and operational.
(5) Includes 300,000 shares issuable pursuant to stock options that are
exercisable within 60 days. Does not include 400,000 shares issuable
pursuant to stock options that are not exercisable within 60 days.
<PAGE>
107
(6) Shares are owned by a group including the following: The Robertson Stephens
Orphan Fund (which has shared voting and shared dispositive power over
1,069,200 shares), The Robertson Stephens Orphan Offshore Fund (with shared
voting and shared dispositive power over 226,800 shares), The Robertson
Stephens Global Low-Priced Stock Fund (with shared voting and shared
dispositive power over 70,000 shares), The Robertson Stephens & Company
Investment Management L.P. (with shared voting and shared dispositive power
over 1,366,000 shares), Bayview Investors, LTD (with shared voting and
shared dispositive power over 1,069,200 shares), Robertson, Stephens &
Company, Incorporated ("RS&Co.") (with shared voting and shared dispositive
power over 1,366,000 shares), and RS&Co.'s five shareholders, namely Paul H.
Stephens (with sole voting and sole dispositive power over 96,880 shares,
and shared voting and shared dispositive power over 1,366,000 shares),
Sanford R. Robertson (with sole voting and sole dispositive power over
11,620 shares, and shared voting and shared dispositive power over 1,366,000
shares), Michael G. McCaffery, G. Randy Hecht, and Kenneth R. Fitzsimmons
(the three of whom have shared voting and shared dispositive power over
1,366,000 shares). Messrs. Stephens, Robertson, McCaffery, Hecht, and
Fitzsimmons disclaim any beneficial ownership with respect to shares of the
Company that RS&Co. may be deemed to beneficially own. The source of the
information in this footnote is the Schedule 13D dated August 13, 1997 filed
by Robertson, Stephens & Company LLC, et al.
(7) Represents 132,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Does not include 117,500 shares issuable
pursuant to stock options that are not exercisable within 60 days of such
date.
(8) Includes 195,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days and 7,700 shares of Common Stock held in trust
for his daughters. Excludes 20,000 shares held by DICA Partners, L.P. of
which Mr. Rubinstein is the General Partner.
(9) Includes 60,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(10)Represents 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(11)Represents 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(12)Does not include 75,000 shares issuable pursuant to stock options that are
not exercisable within 60 days.
(13)Does not include 75,000 shares issuable pursuant to stock options that are
not exercisable within 60 days.
(14)Represents 59,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Does not include 116,000 shares of Common Stock
issuable pursuant to stock options not exercisable within 60 days.
(15)Includes 732,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Does not include 857,000 shares issuable
pursuant to options that are not exercisable within 60 days.
(16)Estimated solely for the purposes of this table. Such beneficial ownership
represents an estimate of the number of shares of Common Stock issuable upon
the conversion of shares of 5% Preferred Stock beneficially owned by such
person, assuming a conversion date of September 25, 1997 and all dividends
on shares of the 5% Preferred Stock are paid, in lieu of cash, in additional
shares of 5% Preferred Stock. (See "Description of Capital Stock -- 5%
Preferred Stock" for definitions of capitalized terms.) The number of shares
of Common Stock issuable upon conversion of the shares of the 5% Preferred
Stock would equal the Liquidation Preference of the shares being converted
plus any Cash Payments divided by the then-effective conversion price
applicable to the Common Stock (the "Conversion Price"). The Conversion
Price, as of any date up to and including November 15, 1997, is determined
in accordance with a formula based on market prices of the Common Stock or
actual prices at which the converting holder sold the Common Stock, in
either case multiplied by an amount equal to 1 minus the Applicable
Percentage. The actual number of shares of Common Stock upon conversion is
subject to adjustment and could be materially less or more than the
estimated amount indicated depending upon factors which cannot be predicted
by the Company at this time, including, among others, application of the
conversion provisions based on market prices prevailing at the actual date
of conversion and whether dividends on shares of 5% Preferred Stock are paid
in cash or added to the Liquidation Preference. This presentation is not
intended to constitute a prediction as to the future market price of the
Common Stock or as to when holders will elect to convert shares of the 5%
Preferred Stock into shares of Common Stock. See "Description of Capital
Stock -- 5% Preferred Stock."
(17)Represents 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
<PAGE>
108
this restriction upon proper notice, Everest Capital International, Ltd.
would beneficially own 2,382,453 shares of Common Stock, representing 15.9%
of the shares outstanding.
(18)Represents 1,114,630 shares of 5% Preferred Stock held on its own behalf and
on behalf of its Designated A/C High Yield Fund.
(19)Represents 678,350 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 10.9% of the shares outstanding.
(20)Represents 486,000 shares of 5% Preferred Stock that are issuable pursuant
to warrants to be issued to Libra Investments, Inc.
(21)Represents 450,536 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.
(22)Represents 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 issued
to Everest Capital Master Fund, L.P. and The Ravich Revocable Trust of 1989,
affiliates of Everest Capital Fund, L.P., to purchase 1,740,000 shares of
Common Stock at a purchase price of $50.00 per share. The warrants are
exercisable from June 15, 1998 through and including June 15, 2005.
<PAGE>
109
DESCRIPTION OF NEW PREFERRED STOCK
GENERAL
The following description of the New Preferred Stock set forth herein does
not purport to be complete and is subject to, and qualified in its entirety by,
the provisions of the Company's Amended and Restated Certificate of
Incorporation filed as an exhibit to the Registration Statement, and the
Certificate of Designations relating to the New Preferred Stock, the form of
which will be filed as an exhibit to the Registration Statement and which will
be filed with the Secretary of State of the State of Delaware prior to the
issuance of the New Preferred Stock.
RANK
The New Preferred Stock, with respect to dividend rights and rights upon
liquidation, winding up or dissolution, ranks (i) senior and prior to the Common
Stock and to any other stock issued by the Company designated as junior to the
New Preferred Stock, (ii) junior to the 5% Preferred Stock and (iii) on a parity
with any other class or series of stock of the Company, the terms of which
specifically provide that such class or series shall rank on a parity with the
New Preferred Stock.
DIVIDENDS
The annual dividend rate per share of the New Preferred Stock will be in
an amount equal to $10.50 per share. Dividends on the shares of New Preferred
Stock will be cumulative, accruing quarterly without interest at the rate of
$2.625 per share, and, when and as declared by the Board of Directors of the
Company, will be payable quarterly initially on November 15, 2002 (the "First
Scheduled Dividend Payment Date") and on February 15, May 15, August 15 and
November 15 in each year thereafter (the "Dividend Payment Dates"). In addition,
accrued dividends on the shares of New Preferred Stock will be paid on the
redemption date of any share of New Preferred Stock redeemed by the Company, on
the purchase date of any share of New Preferred Stock purchase by the Company
pursuant to a Change of Control Offer (defined herein) or on the conversion date
of any share of New Preferred Stock converted into shares of Common Stock on or
after the First Scheduled Dividend Payment Date. No accrued dividends will be
paid on any shares of New Preferred Stock that are converted by the Holders
thereof prior to the First Scheduled Dividend Payment Date, unless such shares
of New Preferred Stock are converted on or prior to a redemption date by Holders
thereof electing to convert such shares after having received a notice of
redemption for such shares. Dividends may be paid in cash, shares of Common
Stock or any combination thereto, at the option of the Company. Common Stock
issued to pay dividends will be valued at the average closing price of the
Common Stock as reported in THE WALL STREET JOURNAL for the 20 consecutive
trading days immediately preceding the date of such payment. Dividends on the
shares of New Preferred Stock will be paid to the holders of record of the
shares of New Preferred Stock on a record date, not more than 40 nor fewer than
10 days preceding the payment date thereof. Dividends with respect to any share
of New Preferred Stock will accumulate from November 15, 1997.
If and so long as any full cumulative dividends payable on the shares of
New Preferred Stock in respect of all prior dividend periods will not have been
paid or set apart for payment, the Company will not pay any dividends or make
any distributions of assets on or redeem, purchase or otherwise acquire for
consideration shares of capital stock of the Company ranking junior to or on a
par with the New Preferred Stock in payment of dividends.
<PAGE>
110
Dividends on the New Preferred Stock are payable to the holders of record
thereof as they appear on the stock register of the Company on such record date,
not exceeding 40 days preceding the payment date thereof, as will be fixed by
the Board of Directors or by a duly authorized committee thereof. Dividends on
account of arrears for any past dividend periods may be declared and paid at any
time, without reference to any Dividend Payment Date, to holders of record on
such date, not more than 40 days nor less than 10 days preceding the payment
date thereof, as may be fixed by the Board of Directors or by a duly authorized
committee thereof. Dividends paid in cash will be paid to each holder of record
in United States dollars by check mailed to such holders at their respective
addresses appearing on the books of the Company. All shares of Common Stock
issued as a dividend for shares of New Preferred Stock will thereupon be duly
authorized, validly issued, fully paid and non-assessable. No partial shares of
Common Stock will be issued as dividends, holders will receive cash payments in
lieu thereof.
REDEMPTION
Except as described below, the shares of New Preferred Stock may not be
redeemed by the Company at its option prior to November 15, 2000. From and after
November 15, 1999 and prior to November 15, 2002, the Company may redeem the
shares of New Preferred Stock at any time at a redemption price of 100% of the
aggregate Liquidation Preference of the shares of New Preferred Stock redeemed
plus accrued and unpaid dividends, if any, to the redemption date, if the
average closing price of the Common Stock as reported in THE WALL STREET JOURNAL
for the 20 consecutive trading days prior to the notice of redemption shall
equal or exceeds $31.50 per share (subject to adjustments). From and after
November 15, 2002, the Company may redeem the shares of New Preferred Stock, in
whole or in part, at the following redemption prices (expressed as percentages
of the Liquidation Preference thereof) per share if redeemed during the 12-month
period beginning November 15 in the year indicated below.
Year Percentage
---- ----------
2002....................................105.25%
2003....................................102.63%
2004....................................101.81%
2005 and thereafter.....................100.00%
plus, in each case, accrued and unpaid dividends, if any, to the redemption
date.
Within 30 days of the closing date of a public offering by the Corporation
of debt securities in excess of $50,000,000 pursuant to a registration statement
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act") or pursuant to Rule 144A under the
Securities Act (the "Debt Offering"), the Company may redeem up to 50% of the
outstanding shares of New Preferred Stock at 100% of Liquidation Preference of
the New Preferred Stock redeemed, plus accrued and unpaid dividends, if any, to
the redemption date. On November 15, 2012 (the "Mandatory Redemption Date"), the
Company is required to redeem all outstanding shares of New Preferred Stock at a
redemption price of 100% of the Liquidation Preference, plus accrued and unpaid
dividends, if any, to the Mandatory
<PAGE>
111
Redemption Date. The New Preferred Stock will not be subject to any mandatory
sinking fund redemption.
The amount of the redemption price allocable to the Liquidation Preference
upon the redemption of New Preferred Stock shall be paid in cash and the amount
of the redemption price allocable to any accrued and unpaid dividends to be paid
on the shares of New Preferred Stock redeemed upon such redemption date may be
paid in cash or shares of Common Stock, or any combination thereof, at the
option of the Company.
The Company is required to give notice of any proposed redemption of
shares of New Preferred Stock upon not less than 15 nor more than 40 days (such
date to be determined by the Company, the "Redemption Record Date") prior to the
date of redemption, to the holders of record on the Redemption Record Date of
the shares to be redeemed at their addresses appearing on the books of the
Company. Each such notice will specify the shares called for redemption, the
redemption price and the time, place and date of redemption. Neither failure to
mail such notice, nor any defect therein or in the mailing thereof, to any
particular holder shall affect the sufficiency of the notice or the validity of
the proceedings for redemption with respect to the other holders. On or after
the redemption date, each holder of shares of New Preferred Stock being redeemed
will present and surrender such holder's certificate or certificates evidencing
such shares to the Company at the place set forth in the redemption notice,
whereupon the Company will cancel such shares and will pay to such holders the
redemption price for such surrendered shares, plus accrued and unpaid dividends
thereon, if any. If fewer than all the shares of New Preferred Stock represented
by any holder's certificate are redeemed, the Company will issue a new
certificate representing the unredeemed shares.
In the event fewer than all of the outstanding shares of New Preferred
Stock are being redeemed, the shares to be redeemed shall be selected pro rata
or by lot or in such other manner as the Board of Directors of the Company may
determine, provided that only whole shares shall be selected for redemption.
Any shares of New Preferred Stock which have been called for redemption
may be converted into shares of Common Stock before being redeemed provided that
the holder thereof gives written notice to the Company, prior to the close of
business on the business day immediately preceding the date of redemption, of
such holder's election to convert such shares of New Preferred Stock into shares
of Common Stock, together with the certificate or certificates evidencing such
shares, duly endorsed or assigned to the Company, and any necessary transfer tax
payment as described below. See "--Conversion."
CHANGE IN CONTROL
Upon the occurrence of a Change in Control, the Company must make an offer
to purchase (an "Offer to Purchase") all outstanding shares of New Preferred
Stock at a purchase price (the "Change in Control Purchase Price") in cash equal
to 101% of their Liquidation Preference, plus all accrued and unpaid dividends,
if any, to the date such shares are purchased (the "Change in Control Purchase
Date"). A "Change in Control" is defined as the occurrence of any of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) other than a Preferred Holder, as
defined herein is or becomes the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange
<PAGE>
112
Act, except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 40% of the total outstanding Voting Stock (as defined
herein) of the Company; (b) the Company consolidates with, or merges with or
into another Person or conveys, transfers, leases or otherwise disposes of all
or substantially all of its assets to any Person, or any Person consolidates
with or merges with or into the Company, in any such event, pursuant to a
transaction in which the outstanding Voting Stock of the Company is converted
into or exchanged for cash, securities or other property, other than, at all
times when the Notes are outstanding, transactions that are not deemed a "Change
of Control" under the terms of the Indenture; (c) during any consecutive
two-year period, individuals who at the beginning of such period constituted the
Board of Directors of the Company (together with any new directors whose
election to such Board of Directors, or whose nomination for election by the
stockholders of the Company, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of the Company
then in office; or (d) the Company is liquidated or dissolved or a special
resolution is passed by the shareholders of the Company approving the plan of
liquidation or dissolution, other than, at all times when the Notes are
outstanding, transactions that are not deemed a "Change of Control" under the
terms of the Indenture.
Within 30 days following any Change in Control, the Company must give
written notice of such Change in Control to each holder of New Preferred Stock
by first-class mail, postage prepaid, at his address appearing in the stock
register of the Company, stating, among other things, the purchase price and
that the purchase date shall be a Business Day no earlier than 30 days nor later
than 60 days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Exchange Act; that any New
Preferred Stock not tendered will continue to accumulate dividends; that, unless
the Company defaults in the payment of the purchase price, any New Preferred
Stock accepted for payment pursuant to the Offer to Purchase shall cease to
accumulate dividends after the Change in Control Purchase Date; and certain
other procedures that a holder of New Preferred Stock must follow to accept an
Offer to Purchase or to withdraw such acceptance.
If an Offer to Purchase is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change in Control
Purchase Price for any or all of the New Preferred Stock that might be delivered
by holders of the New Preferred Stock seeking to accept the Offer to Purchase
and, accordingly, none of the holders of the New Preferred Stock may receive the
Change in Control Purchase Price for their New Preferred Stock in the event of a
Change in Control.
The existence of a holder's right to require the Company to repurchase
such holder's New Preferred Stock upon a Change in Control may deter a third
party from acquiring the Company in a transaction which constitutes a Change in
Control. Furthermore, the possibility that a third party would be deterred from
acquiring the Company may have an adverse effect on the market price of the
Company's Common Stock.
<PAGE>
113
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with an Offer to Purchase.
CONVERSION
Each share of New Preferred Stock will be convertible at any time, at the
option of the holder, unless previously redeemed, into a number of shares of
Common Stock calculated by dividing the Liquidation Preference of the New
Preferred Stock (without accrued and unpaid dividends) by a conversion price
(the "Conversion Price") equal to the lower of $21.00 per share or the issue
price per share of the Common Stock in the first underwritten public offering of
the Company's Common Stock following the issuance of the New Preferred Stock.
The Conversion Price will not be adjusted at any time for accrued and unpaid
dividends, but will be subject to adjustment for the occurrence of certain
corporate events affecting the Common Stock. Upon conversion, at any time after
the First Scheduled Dividend Payment Date, holders of the New Preferred Stock
will be entitled to receive all accrued and unpaid dividends upon the shares of
New Preferred Stock converted payable in cash or shares of Common Stock, or a
combination thereof, at the option of the Company. No accrued dividends will be
paid on any shares of New Preferred Stock that is converted by the holders
thereof prior to the First Scheduled Dividend Payment Date, unless such shares
of New Preferred Stock are converted on or prior to a redemption date by Holders
thereof electing to convert such shares after having received a notice of
redemption for such shares. Common Stock issued to pay dividends will be valued
at the average closing price of the Common Stock as reported in THE WALL STREET
JOURNAL for the 20 consecutive trading days immediately preceding the date of
such payment.
To convert shares of New Preferred Stock into Common Stock, the registered
holder of such shares of New Preferred Stock must surrender at the office of the
Transfer Agent, or at such other office or offices, if any, as the Board of
Directors may designate, the certificate or certificates therefor, duly endorsed
or assigned to the Company or in blank, and give written notice to the Company
at such office that it elects to convert such shares.
No adjustments in the Conversion Price or other payments, except as
described under "--Dividend" will be made by the Company upon any conversion on
account of any dividends accrued and unpaid on the shares of New Preferred Stock
surrendered for conversion or on account of any dividends on the Common Stock
issued upon conversion.
Shares of New Preferred Stock will be deemed to have been converted
immediately prior to the close of business on the day of the surrender of such
shares for conversion, and the person or persons entitled to receive the Common
Stock issuable upon such conversion will be treated for all purposes as the
record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Company will issue and deliver
at such office a certificate or certificates for the number of full shares of
Common Stock issuable upon such conversion, together with payment in lieu of any
fraction of a share, to the person or persons entitled to receive the same. In
case shares of New Preferred Stock are called for redemption, the right to
convert such shares will terminate at the close of business on the business day
prior to the date fixed for redemption, unless default shall be made in payment
of the redemption price.
<PAGE>
114
The Conversion Price for shares of New Preferred Stock may be subject to
adjustment in certain events, including (i) dividends and other distributions
payable in Common Stock on any class of capital stock of the Company, (ii) the
issuance to all holders of Common Stock of rights or warrants entitling them to
subscribe for or purchase Common Stock at less than fair market value, (iii)
subdivisions, combinations and reclassifications of the Common Stock, (iv)
distributions to all holders of Common Stock of evidences of indebtedness of the
Company or assets and (v) a consolidation or merger to which the Company is a
party or the sale or transfer of all or substantially all of the assets of the
Company.
The Company will pay any and all stamp or other similar taxes that may be
payable in respect of the issue or delivery of shares of Common Stock on
conversion of shares of New Preferred Stock. The Company will not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue and delivery of shares of Common Stock in a name other than that in
which the shares of New Preferred Stock so converted were registered, and no
such issue or delivery will be made unless and until the person requesting such
issue has paid to the Company the amount of any such tax, or has established to
the satisfaction of the Company that such tax has been paid.
AUTOMATIC EXCHANGE
If the Company has not consummated one or more Qualifying Offerings
yielding gross proceeds in an aggregate cash amount of at least $100 million by
May 15, 1998 (the "Automatic Exchange Date"), all outstanding shares of New
Preferred Stock shall be exchanged automatically for shares of the Series D
Preferred Stock on the Automatic Exchange Date at an exchange rate of one share
of Series D Preferred Stock for each $25 of Automatic Exchange Rate Liquidation
Preference represented by the shares of New Preferred Stock. The "Automatic
Exchange Rate Liquidation Preference" for New Preferred Stock shall be an amount
determined by multiplying (x) the Liquidation Preference for the New Preferred
Stock, plus accrued and unpaid dividends thereon by (y) 0.696145. For a
description of the terms, preferences and rights of the Series D Preferred
Stock, see "Description of Series D Preferred Stock."
In the event of an Automatic Exchange, the Company will give written
notice to the holders of record on the Automatic Exchange Date of shares of New
Preferred Stock at their addresses appearing on the books of the Company that
the shares of New Preferred Stock have been automatically exchanged into shares
of Series D Preferred Stock. The notice of exchange will specify the number of
shares of Series D Preferred Stock into which the shares of New Preferred Stock
have been automatically exchanged and the place where the holders are to deliver
the certificates evidencing shares of New Preferred Stock in exchange for
certificates evidencing shares of Series D Preferred Stock. Thereafter, the
holders will surrender their certificates evidencing shares of New Preferred
Stock at the place designated in the notice of exchange. As promptly as
practicable after receipt of such certificates, the Company will issue and
deliver to each holder a certificate or certificates for the number of shares of
Series D Preferred Stock to which such holder is entitled. Shares of Series D
Preferred Stock will be deemed to have been exchanged immediately prior to the
close of business on the Automatic Exchange Date and the holders of the New
Preferred Stock of record on such date shall be treated for all purposes as the
record holders of the Series D Preferred Stock at such time.
<PAGE>
115
No fractional shares of Series D Preferred Stock will be issued upon the
Automatic Exchange of shares of New Preferred Stock and, in lieu thereof, the
Company will pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction of the liquidation preference of the Series D
Preferred Stock at the close of business on the Automatic Exchange Date.
The Company will pay any documentary, stamp or similar issue or transfer
tax due on the issue of Series D Preferred Stock upon the Automatic Exchange.
The holders, however, will pay any such tax that may be due in the event that
any shares of the Series D Preferred Stock are issued in a name other than the
name of the record holder, as requested by such holder. All shares of Series D
Preferred Stock issued upon the Automatic Exchange shall be validly issued,
fully paid and nonassessable.
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 New Preferred Stock will have no voting rights. Consent of the holders of
a majority of the New Preferred Stock will be required before the Company may
take certain corporate actions, including (i) any amendment, alteration or
repeal of any of the provisions of the Company's Certificate of Incorporation or
Bylaws which affects adversely the voting powers, rights or preferences of the
holders of the shares of New Preferred Stock, (ii) the issuance of any class of
equity securities that ranks senior to or, in certain circumstances, on a parity
with the New Preferred Stock and (iii) the merger or consolidation of the
Company with or into any other entity, unless the resulting corporation will
thereafter have no class or series of shares and no other securities either
authorized or outstanding ranking prior to, or on a parity with, the New
Preferred Stock in the payment of dividends or the distribution of its assets on
liquidation, dissolution or winding up. In addition, if (i) the Company fails to
pay dividends in cash for six or more quarters in the aggregate (whether or not
consecutive); or (ii) the Company fails to redeem all of the outstanding shares
of New Preferred Stock on the Mandatory Redemption Date, or (iii) the Company
fails to make an Offer to Purchase upon a Change of Control, holders of a
majority of the outstanding New Preferred Stock, voting as a class, will be
entitled to elect (i) one director in the event that there are seven or less
directors on the Board of Directors at such time or (ii) two directors in the
event that there are eight or more directors on the Board of Directors at such
time.
In exercising the voting rights set forth herein or when otherwise granted
voting rights by operation of law, each share of New Preferred Stock will be
entitled to one vote per share.
No consent of holders of the New Preferred Stock will be required for (i)
the creation of any indebtedness of any kind of the Company or (ii) the
authorization or issuance of any class of capital stock of the Company ranking
junior to the New Preferred Stock in payment of dividends or upon liquidation,
dissolution or winding up of the Company.
LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, before any distribution of the assets of the Company
to holders of Common Stock or any other capital stock of the Company ranking
junior to the New Preferred Stock upon
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116
liquidation, dissolution or winding up of the Company, the holders of the New
Preferred Stock will be entitled to receive out of the assets of the Company
available for distribution to its stockholders, whether from capital, surplus or
earnings, an amount per share of New Preferred Stock equal to $100.00 plus an
amount equal to accrued and unpaid dividends on such share of New Preferred
Stock to the date of final distribution.
If, upon any liquidation, dissolution or winding up of the Company, the
amounts payable with respect to the New Preferred Stock or any capital stock
ranking on a par with the New Preferred Stock are not paid in full, then such
holders will share ratably in any such distribution of assets, or proceeds
thereof, in proportion to the full respective preferential amounts to which they
are entitled. Neither a consolidation nor a merger of the Company with one or
more other corporations, nor a sale or a transfer of all or substantially all of
the assets of the Company, will be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of the Company.
RESTRICTIONS ON TRANSFER
Subject to certain exceptions, holders of New Preferred Stock and holders
of New Preferred Stock who convert such New Preferred Stock into shares of
Common Stock ("Converted Stock") will not be permitted to Transfer such shares,
as the case may be, until the Lock-Up Expiration Date. SINKING FUND
The New Preferred Stock will not be subject to any mandatory sinking fund
redemption.
TRANSFER AGENT
_____________________ is the transfer agent for the New Preferred Stock.
DESCRIPTION OF SERIES D PREFERRED STOCK
GENERAL
The Series D Preferred Stock will be issued pursuant to a certificate of
designation (the "Series D Certificate of Designation"). The provisions of the
Series D Preferred Stock are substantially similar to those of the Preferred
Stock, except that certain milestones, deadlines and other reference dates
included in the certificate of designation for the Preferred Stock are, due to
the passage of time, no longer applicable with respect to the Series D Preferred
Stock and are, thus, not included in the Series D Certificate of Designation.
The following description of the Series D Preferred Stock set forth herein
does not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of the Company's Amended and Restated Certificate of
Incorporation filed as an exhibit to the Registration Statement, and the Series
D Certificate of Designation, the form of which will be filed as an exhibit to
the Registration Statement and which will be filed with the Secretary of State
of the State of Delaware prior to the issuance of the Series D Preferred Stock.
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RANK
The Series D Preferred Stock, with respect to dividend rights and rights
upon liquidation, winding up or dissolution, ranks senior to any other class or
series of capital stock of the Company, including the Common Stock.
DIVIDENDS
Each share of the Series D 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, when and as declared by the Board of Directors, in
preference and priority to any payment of any dividend on the Common Stock or
any other class or series of stock of the Company. Such dividends shall accrue
on any given share from the date of original issuance of the Series D Preferred
Stock and shall accrue from day to day whether or not earned or declared, based
on the actual days elapsed and a 360-day year of 12 30-day months. Any dividend
payable on the Series D Preferred Stock may be paid, at the option of the
Company, either (i) in cash or (ii) by adding the amount of such dividend to the
liquidation preference of the Series D Preferred Stock.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of the Series D Preferred Stock
shall be entitled to receive, prior and in preference to any distribution of any
assets of the Company to the holders of any other class or series of shares, the
amount of $25 per share plus any accrued but unpaid dividends.
REDEMPTION
The Series D Preferred Stock may be redeemed in whole but not in part at
72.125% of the Maximum Price by the Company at any time PROVIDED, HOWEVER, that
the Company may not exercise its right of redemption unless the average closing
price of the Common Stock as reported in The Wall Street Journal for the twenty
consecutive trading days prior to the notice of redemption shall equal or exceed
$18 per share (subject to adjustment for stock dividends, stock splits and
reverse stock splits).
CONVERSION
The Series D Preferred Stock is convertible into shares of Common Stock at
any time, PROVIDED that the Company is not obligated to honor any request for
conversion of the Series D Preferred Stock at any time to the extent that
approval of the FCC of the issuance of shares of Common Stock upon such
conversion is or would be required and has not been obtained. If such FCC
approval (other than with respect to a conversion resulting in a holder or group
of holders holding more than 50% of the voting securities of the Company) are
not obtained by
, 1998, the Company is required, at the request of any holder of Series D
Preferred Stock, to repurchase the shares of Series D Preferred Stock held by
such holder at a purchase price per share equal to the sum of the liquidation
preference plus any Cash Payments (as defined below) due to such holder, divided
by 72.125% (the "Maximum Price").
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The number of shares of Common Stock issuable upon conversion of the
shares of the Series D Preferred Stock will equal the liquidation preference of
the shares being converted plus any Cash Payments divided by the then-effective
conversion price applicable to the Common Stock (as defined below, the "Series D
Preferred Conversion Price").
The Company must make a cash payment in an amount per share equal to
3% of the Liquidation Preference of the Series D Preferred Stock per month to
each holder if the Company fails (i) to honor any request for conversion of the
Series D Preferred Stock as permitted by the terms and conditions of the Series
D Preferred Stock or (ii) to maintain the listing of the Common Stock on the
Nasdaq Small Capitalization Market, the Nasdaq National Market, the New York
Stock Exchange or the American Stock Exchange. In addition, if the Company fails
at any time to reserve a sufficient number of shares of Common Stock for
issuance upon conversion of the Series D 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 Series D Preferred Stock. The cash payments referred to in this
paragraph are, collectively, "Cash Payments."
"Series D Preferred Conversion Price" equals 72.125% multiplied by the
lowest of (i) the average of the daily means between the low trading price of
the Common Stock and the closing price of the Common Stock for all the trading
days between October 15, 1997 and November 15, 1997, (ii) the average of the
daily means between the low trading price of the Common Stock and the closing
price of the Common Stock during the three consecutive trading days immediately
preceding the date of conversion and (iii) the weighted-average (based upon the
number of shares sold) of the actual selling price (but not less than the low
trading price on the date of such trade as reported on the principal market for
the Common Stock), at which the holder shall have sold shares of Common Stock
received or receivable upon conversion of the Series D Preferred Stock, reduced
by any trading commissions or underwriting spreads paid by such holder, as
certified to the Company by such holder and subject to the meeting of certain
notice requirements by such holder.
In the event that during any period of consecutive trading days provided
for above, the Company shall declare or pay any dividend on the Common Stock
payable in Common Stock or in rights to acquire Common Stock, or shall effect a
stock split or reverse stock split, or a combination, consolidation ro
reclassification of the Common Stock, then the Conversion Price shall be
proportionately decreased or increased, as appropriate, to give effect to such
event.
FORCED CONVERSION
Afte , the Company may require the holders of the Series D Preferred Stock
to convert such shares into Common Stock at the then applicable Series D
Preferred Conversion Price and all 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
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The Company must reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Series D Preferred Stock, at least such number of shares of
its Common Stock that is the greater of (i) ten million shares and (ii) 1.5
times the number as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series D Preferred Stock. If the
Company does not have sufficient shares of Common Stock reserved to effect the
conversion of all outstanding shares of Series D Preferred Stock, then at any
time at the request of any holder of shares of the Series D Preferred Stock, the
Company must purchase from such holder the number of shares of Series D
Preferred Stock equal to such holder's pro-rata share of the number of shares of
Series D Preferred Stock that would not be able to be converted due to an
insufficient number of shares of Common Stock reserved for such purpose at the
Maximum Price.
In addition, if, prior to April 21, 1998, the FCC awards more than two
licenses (including any license awarded to the Company) permitting the licensee
to provide satellite digital audio radio services and more than two licensees
(including the Company) commence or announce an intention to commence satellite
digital audio radio services, then upon the request of the holders of more than
one-third of the outstanding shares of the Series D Preferred Stock, the Company
must purchase one-half of the shares of the Series D Preferred Stock held by
each requesting shareholder at the Maximum Price.
If a Reorganization occurs or is proposed, each holder of the Series D
Preferred Stock may require the Company to redeem the Series D Preferred Stock
at the 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 Series D Preferred Stock chooses not to
require the Company to redeem such holder's shares, the shares will be
convertible into the number of shares of stock or other securities or property
(including cash) to which a holder of the number of shares of Common Stock
deliverable upon conversion of such share of Series D Preferred Stock not so
redeemed would have been entitled upon the Reorganization.
VOTING RIGHTS
The Company shall not undertake the following actions without the consent
of the holders of a majority of the Series D Preferred Stock: (i) modify its
Certificate of Incorporation or Bylaws so as to amend or change any of the
rights, preferences or privileges of the Series D Preferred Stock; or (ii)
purchase or otherwise acquire for value any Common Stock or other equity
security of the Company or any non-wholly-owned subsidiary thereof not held by
the Company or any wholly-owned subsidiary while there exists any arrearage in
the payment of cumulative dividends hereunder or any Cash Payments due or the
liquidation preference exceeds $25. The Company shall not, in connection with a
repurchase of any shares of Series D Preferred Stock undertake any of the
following actions without the consent of all holders of the Series D Preferred
Stock: (i) reduce the amount of Series D Preferred Stock whose holders must
consent to an amendment or waiver, (ii) reduce the rate of, or change the time
for payment of, dividends on the Series D Preferred Stock or alter the
liquidation preference or (iii) alter the conversion provisions with respect to
the Series D Preferred Stock.
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Other than the consent rights described above, holders of the Series D
Preferred Stock have no voting rights.
ANTI-DILUTION
The Series D Preferred Stock is at all times subject to customary
anti-dilution adjustments for events such as stock splits, stock dividends,
reorganizations and certain mergers affecting the Common Stock.
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR DISCOUNT NOTES DUE 2007
The Notes are expected to have the following terms when issued.
Capitalized terms used in this section and not otherwise defined shall have the
meanings ascribed thereto in the Indenture. The Notes will mature in 2007, are
expected to be issued for approximately $150 million gross proceeds and will be
unsecured obligations of the Company. The Notes will accrete the original issue
discount for five years at a rate to be determined, and thereafter will bear
interest at a rate to be determined, payable in cash semiannually in arrears.
The Indenture will not provide for a sinking fund. The Notes will be subject to
redemption at any time on or after a date to be determined in 2002, at the
option of the Company, in whole or in part, in amounts of principal at maturity
of $1,000 or an integral multiple of $1,000 at declining redemption prices set
forth in the Indenture. Notwithstanding the foregoing, during the first 36
months after the date of the Indenture, the Company may redeem up to 33% of the
initial accreted value of the Notes with the net proceeds of any public equity
offerings at a redemption price to be determined, together with accrued and
unpaid interest, if any, to the redemption date (subject to the right of holders
of record on relevant record dates to receive interest due on an interest
payment date).
The indebtedness of the Company evidenced by the Notes will rank senior in
right of payment to all existing and future subordinated indebtedness of the
Company and PARI PASSU in right of payment with all other existing and future
unsubordinated indebtedness of the Company. The Indenture will contain a number
of covenants restricting the operations of the Company and its subsidiaries,
including those restricting the incurrence of indebtedness; the making of
restricting payments (in the form of the declaration or payment of certain
dividends or distributions, the purchase, redemption or other acquisition of any
capital stock of the company and the voluntary prepayment of PARI PASSU or
subordinated indebtedness); transactions with stockholders and affiliates; the
incurrence of liens; the making of investments, loans and advances; the transfer
of assets; the purchase of Notes, at the option of the holder, upon the
occurrence of a change in control; issuances and sales of capital stock of
subsidiaries; the incurrence of guarantees by subsidiaries; dividend and other
payment restrictions affecting subsidiaries; and consolidation, merger or sale
of substantially all of the Company's assets. The events of default under the
Indenture will include provisions that are typical of senior debt financings,
including a cross-acceleration to a default by the Company or any material
subsidiary or any indebtedness that has an aggregate principal amount in excess
of certain levels. Upon the occurrence of such an event of default, the trustee
or the holders of not less than 25% in principal
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amount at maturity of the outstanding Notes may immediately accelerate the
maturity of all the Notes as provided in the Indenture.
VENDOR FINANCING
On July 22, 1997, the Company entered into the AEF Agreements with AEF to
finance approximately $105 million of the estimated $176 million price of the
launch services to be provided by Arianespace for the Company's two satellites.
Under the AEF Agreements, the Company is able to borrow funds to meet the
progress payments due to Arianespace for the construction of each launch vehicle
and other launch costs (the "Tranche A Loans"). Interest on the Tranche A Loans
will be capitalized and will accrue at a rate of 3% per annum above the rate at
which dollar deposits are offered in the London interbank market for three
months or, during a certain time period following the Conversion Commitment Date
(defined below), one month (the "Interest Basis"). Unless the Company satisfies
the conditions for conversion of the Tranche A Loans to long-term loans, the
Company will be 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
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two years following the original launch date; (iii) an initial launch has not
occurred by April 12, 2002; (iv) a replacement launch results in a launch
failure; or (v) the satellite fails to enter commercial service within eight
months following launch. The Company also will be required to make a prepayment
of the loans in proportion to any prepayment (whether voluntary or mandatory)
made by the Company under any other financing agreement relating to the
construction, launch and operation of the satellites. Following Conversion, the
Company will be required to apply a percentage of its excess cash flow (cash
flow not needed to service debt, pay taxes or fund capital expenditures) to
prepay the Tranche B Loans on certain specified dates, with the percentage so
applied decreasing as the outstanding principal amount of the Tranche B loan
decreases.
If Conversion occurs, the Company will not be permitted to pay any
dividends on any shares of its stock or purchase any capital stock or other
equity interest in, or make any loan to or investment in, any of its affiliates
unless the aggregate amount of all such payments for the applicable time period
is less than or equal to the amount of the Company's excess cash flow for such
period minus the amounts needed to make required prepayments of the Tranche B
loans and not used during such period to make loans, investments, capital
expenditures, scheduled payments on subordinated indebtedness or other purposes.
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
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Company's interests in gateway, ground reception and similar facilities and the
FCC License (the "Collateral"). In connection with such liens, the Company must
execute certain agreements (the "Collateral Documents"), including an assignment
and security agreement granting the liens to the security agent, a mortgage on
any tracking, telemetry, control and monitoring equipment owned by the Company
and an intercreditor agreement. All obligations of the Company under the AEF
Agreements will be secured by such liens from and following the date of
execution of the Collateral Documents, subject to the condition that neither AEF
nor any member of the bank group providing funds to AEF may direct the security
agent to exercise rights with respect to the Collateral prior to Conversion.
From and following the date of execution of any Collateral Document, the Company
will be prohibited from creating or incurring any lien on the Collateral other
than liens in favor of AEF (or the other parties to the intercreditor agreement)
and certain specified permitted liens. From such date, the Company will be
prohibited from selling or transferring any Collateral having an aggregate fair
market value in excess of $1.0 million.
Following the Conversion Commitment Date, neither the Company nor its
subsidiaries may sell or transfer any assets (other than permitted dispositions
of the Collateral), except for (i) sales of inventory in the ordinary course of
business, (ii) the trade-in of machinery or equipment in connection with the
acquisition of similar machinery or equipment, (iii) the sale of obsolete or
worn-out property having a value not exceeding $1.5 million in the aggregate in
any fiscal year and (iv) sales or transfers of assets that (x) do not exceed in
the aggregate 2% of the Company's total assets in any fiscal year, (y) together
with all prior permitted sales or transfers do not exceed in the aggregate 5% of
the Company's total assets at the time of such action or (z) do not have a fair
market value in excess of $1.0 million per item.
Commencing on the Conversion Commitment Date, prior to incurring
additional indebtedness in an aggregate principal amount of $10.0 million or
more, the Company will be required to deliver to AEF a certificate stating that
no default will occur as a result of the incurrence of such indebtedness. From
and after Conversion, the Company also will be required to maintain certain
financial ratios relating to its ability to service debt. If the Company is
placed in Category 3 (as anticipated), it will be 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,
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through and including the third anniversary of Conversion, 5.5 to 1, (iii)
thereafter, through and including the fourth anniversary of Conversion, 5.0 to
1, (iv) thereafter, through and including the fifth anniversary of Conversion,
4.0 to 1, and (v) at any time thereafter, 3.0 to 1.
From and following the Conversion Commitment Date, the Company may not
make any advances or loans other than (i) extensions of credit for a period not
exceeding ninety days in the nature of accounts receivable or notes receivable
arising from the sale or lease of goods or services in the ordinary course of
business, and (ii) if no default exists or would result therefrom, (x) loans or
extensions of credit in the ordinary course of business to affiliates, not
exceeding $2.5 million in an aggregate principal amount outstanding at any one
time and (y) loans or extension of credit to the Company's key management
employees, not exceeding $1.25 million in an aggregate principal amount
outstanding at any one time.
Neither the Company nor any of its subsidiaries may make any payments in
respect of any indebtedness subordinated to the prior payment of all amounts
payable by the Company under any of the AEF Agreements, except for regularly
scheduled payments of principal and interest required by the instruments
evidencing such subordinated indebtedness.
A default under either of the AEF Agreements will constitute a default
under the other AEF Agreement. In addition, the AEF Agreements will be
cross-defaulted to a default by the Company under any other financing agreement
relating to the project or any other agreement or instrument relating to
indebtedness in an aggregate principal amount exceeding five million dollars. If
the Company is subject to more restrictive cross-default provisions under any
other agreement providing for long-term, asset-based financing, those more
restrictive cross-default provisions will be deemed to be set forth in the AEF
Agreements.
Pursuant to a Multiparty Agreement to be executed among the Company, AEF
and Arianespace in connection with the AEF Agreements, if the Company is unable
to obtain sufficient financing to complete the construction and launch of the
satellites, and if the Company terminates the Arianespace Launch Contract, the
Company will be required to pay Arianespace a termination fee ranging from 5% to
40% of the launch services price, based on the proximity of the date of
termination to the scheduled launch date. The termination fee will be payable
prior to the time the Company commences commercial operations and there can be
no assurance that the Company will have sufficient funds to pay this fee.
DESCRIPTION OF CAPITAL STOCK
The Company's Amended and Restated Certificate of Incorporation provides
for authorized capital of 250,000,000 shares, consisting of 200,000,000 shares
of Common Stock, par value $.001 per share, and 50,000,000 shares of Preferred
Stock, par value $.001 per share.
COMMON STOCK
As of September 30, 1997, the Company had 12,577,884 shares of Common
Stock outstanding held of record by 105 persons, and had reserved for issuance
3,533,000 shares of
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125
Common Stock with respect to outstanding options and warrants, including
1,800,000 shares pursuant to warrants exercisable at $50.00 per share and
expiring in 2005.
Holders of the Company's Common Stock are entitled to cast one vote for
each share held of record on all matters acted upon at any stockholders' meeting
and to dividends if, as and when declared by the Board of Directors out of funds
legally available therefor. There are no cumulative voting rights. In the event
of any liquidation, dissolution or winding up of the Company, each holder of the
Company's Common Stock will be entitled to participate, subject to the rights of
any outstanding Preferred Stock, ratably in all assets of the Company remaining
after payment of liabilities. Holders of the Company's Common Stock have no
preemptive or conversion rights. All outstanding shares of Common Stock are, and
the shares of Common Stock offered hereby will be when issued against the
consideration set forth in this prospectus, fully paid and non-assessable.
The Company's Common Stock currently is traded on the Nasdaq SmallCap
Market under the symbol "CDRD." The Company has applied for quotation of the
Common Stock on the Nasdaq National Market.
PREFERRED STOCK
The Board of Directors has the authority to issue shares of Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof including dividend rights, conversion rights, voting
rights, redemption rights, liquidation preferences and the number of shares
constituting any series, without any further vote or action by the stockholders.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock. In addition, because the
terms of such Preferred Stock may be fixed by the Board of Directors without
stockholder action, the Preferred Stock could be designated and issued quickly
in the event the Company determines to issue preferred stock to raise additional
equity capital. The Preferred Stock could also be designated and issued with
terms calculated to deter, delay or defeat a proposed take-over of the Company,
or with terms making the removal of management more difficult. Under certain
circumstances, this could have the effect of decreasing the market price of the
Common Stock. Otherwise, the Company currently has no plans to issue Preferred
Stock.
5% PREFERRED STOCK
On March 19, 1997, the Board of Directors authorized the issuance of up to
8,000,000 shares of the 5% Preferred Stock. As of September 30, 1997, there were
5,222,608 shares of the 5% Preferred Stock outstanding held of record by 37
entities. The Company has agreed to grant a warrant to purchase an additional
486,000 shares of 5% Preferred Stock at a price of $25.00 per share to Libra
Investments, Inc. ("Libra"), the original placement agent for the 5% Preferred
Stock. If the Exchange Offer is consummated, the Company will instead grant
Libra a warrant to purchase 121,500 shares of New Preferred Stock at a price of
$100.00 per share.
DIVIDENDS. Each share of the 5% Preferred Stock is entitled to receive
dividends at the rate of $1.25 per annum, payable semi-annually on April 15 and
October 15 of each year, in preference to any payment made on any other shares
of capital stock of the Company. Any dividend payable on the 5% Preferred Stock
may be paid, at the option of the Company, either
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(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%.
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
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(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 per share (subject to adjustments) and (ii) the shares of
Common Stock issuable upon conversion of the 5% Preferred Stock are registered
for resale by an effective registration statement under the Securities Act of
1933, as amended. The Company also may redeem the 5% Preferred Stock in whole
but not in part at the Maximum Price if the Company sells Common Stock for cash
in an amount not less than $100 million in a registered underwritten public
offering on or prior to October 15, 1997. The Company is soliciting the approval
of its stockholders, including the holders of the 5% Preferred Stock, on the
Record Date to an amendment to the Certificate of Designations of the 5%
Preferred Stock that would permit the Company to redeem the 5% Preferred Stock
in whole or in part upon the sale of equity or debt securities in one or more
offerings occurring after the date of the initial issuance of the 5% Preferred
Stock and on or prior to December 30, 1997 for gross proceeds in an aggregate
cash amount of not less than $100 million.
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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.
NEW CONVERTIBLE PREFERRED STOCK
Pursuant to a binding Summary Term Sheet/Commitment (the "Commitment")
dated June 15, 1997 among Everest Capital International, Ltd., Everest Capital
Fund, L.P., The Ravich Revocable Trust of 1989 (together "Everest") and the
Company, Everest committed to purchase from the Company, and the Company
committed to sell to Everest in a private placement, up to $52 million of a new
series of convertible preferred stock (the "New Convertible Preferred Stock") in
conjunction with a financing by the Company to yield gross proceeds of $150
million or more in "new money," subject to certain conditions. Everest can
satisfy its obligation to purchase the New Convertible Preferred Stock by either
exchanging some or all of the 5% Preferred Stock it currently holds or by paying
cash. The terms of the New Convertible Preferred Stock differ substantially from
the terms of the New Preferred Stock. If Everest pursues its right to purchase
the New Convertible Preferred Stock pursuant to the Commitment and seeks to
enforce the Company's obligations thereunder, the Company may be required to
issue the New Convertible Preferred Stock. Everest has not made known to the
Company its intentions with respect to the Commitment and its current holding of
5% Preferred Stock.
PREFERRED STOCK PURCHASE RIGHTS
The Board of Directors intends to adopt a stockholders rights plan and, in
connection with the adoption of such plan, to declare a dividend distribution of
one "Right" for each outstanding share of Common Stock (a "Common Share") of the
Company to stockholders of record at the
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close of business on October __, 1997 (the "Rights Record Date"). Except as set
forth below, each Right entitles the registered holder thereof to purchase from
the Company one one-hundredth of a share of Series B Preferred Stock, par value
$0.001 per share (the "Series B Shares"), at a price of $____ (the "Purchase
Price"), subject to adjustment. The Purchase Price shall be paid in cash. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and Continental Stock Transfer & Trust
Company, as Rights Agent.
Initially, no separate Right Certificates will be distributed. Until the
earlier to occur of (a) 10 business days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Common Shares or (b) 15 business days following the
commencement of a tender offer or exchange offer if, upon consummation hereof,
such person or group would be the beneficial owner of 15% or more of such
outstanding Common Shares (the earlier of such dates being called the
"Separation Date"), the Rights will be evidenced, with respect to any Common
Shares outstanding as of the Rights Record Date, by the certificates
representing such Common Shares. The Rights Agreement provides that, until the
Separation Date, the Rights will be transferred with, and only with, Common
Share certificates. From as soon as practicable after the Rights Record Date and
until the Separation Date (or earlier redemption or expiration of the Rights),
new Common Share certificates issued after the Rights Record Date upon transfer
or new issuance of Common Shares will contain a notation incorporating the
Rights Agreement by reference. Until the Separation Date (or earlier redemption
or expiration of the Rights), the surrender for transfer of any certificates for
Common Shares outstanding as of the Rights Record Date will also constitute the
transfer of the Rights associated with the Common Shares represented by such
certificates. As soon as practicable following the Separation Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Shares as of the close of business on the
Separation Date and, thereafter, such separate Right Certificates alone will
evidence the Rights. Holders of 15% or more of Common Stock as of the date of
the Rights Agreement will be excluded from the definition of "Acquiring Person"
under the Rights Agreement unless each such holder increases the aggregate
percentage of its and its affiliates' beneficial ownership interest in the
Company by an additional 1%.
The Rights are not exercisable until the Separation Date and will expire
on October __, 2002, unless earlier redeemed by the Company as described below.
In the event that, at any time following the Separation Date, (a) the
Company is the surviving corporation in a merger with an Acquiring Person and
the Company's Common Shares are not changed or exchanged, (b) a person (other
than the Company and its affiliates) becomes the beneficial owner of 15% or more
of the then outstanding Common Shares (in any manner, except pursuant to (i) the
exercise of stock options granted pursuant to the Company's existing and future
stock option plans, (ii) the exercise of conversion rights contained in
specified Preferred Stock issues of the Company and (iii) a tender offer for any
and all outstanding Common Shares made in accordance with applicable laws, which
remains open for at least 40 Business Days and into which holders of 80% or more
of the Company's outstanding Common Shares tender their shares), (c) an
Acquiring Person engages in one or more "self-dealing" transactions as set forth
in the Rights Agreement or (d) during such time as there is an Acquiring Person,
an event occurs that results in such Acquiring Person's ownership interest being
increased
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by more than one percent (e.g., a reverse stock split), the Rights Agreement
provides that proper provision shall be made so that each holder of a Right will
thereafter be entitled to receive, upon exercise, Common Shares (or, in certain
circumstances, cash, property or other securities of the Company) having a value
equal to two times the exercise price of the Right.
In the event that, at any time following the first date of public
announcement by the Company or an Acquiring Person indicating that an Acquiring
Person has become such (the "Shares Acquisition Date"), (a) the Company engages
in a merger or other business combination transaction in which the Company is
not the surviving corporation, (b) the Company engages in a merger or other
business combination transaction with another person in which the Company is the
surviving corporation, but in which its Common Shares are changed or exchanged
or (c) 50% or more of the Company's assets or earning power is sold or
transferred, the Rights Agreement provides that proper provision shall be made
so that each holder of a Right shall thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the Right, common
shares of the acquiring company having a value equal to two times the exercise
price of the Right.
The Board may, at its option, at any time after the right of the Board to
redeem the Rights has expired or terminated (with certain exceptions), exchange
all or part of the then outstanding and exercisable Rights (other than those
held by the Acquiring Person and Affiliates and Associates of the Acquiring
Person) for Common Shares at a ratio of one Common Share per Right, as adjusted;
provided, however, that such Right cannot be exercised once a Person, together
with such Person's Affiliates and Associates, becomes the owner of 50% or more
of the Outstanding Common Shares. If the Board authorizes such an exchange, the
Rights will immediately cease to be exercisable.
Notwithstanding any of the foregoing, following the occurrence of any of
the events set forth in the fourth and fifth paragraphs of this section, any
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person shall immediately
become null and void.
The Purchase Price payable, and the number of Series B Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (a) in the event of a dividend
of Series B Shares on, or a subdivision, combination or reclassification of, the
Series B Shares, (b) upon the grant to holders of the Series B Shares of certain
rights or warrants to subscribe for Series B Shares or securities con vertible
into Series B Shares at less than the current market price of the Series B
Shares or (c) upon the distribution to holders of the Series B Shares of debt
securities or assets (excluding regular quarterly cash dividends and dividends
payable in Series B Shares) or of subscription rights or warrants (other than
those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares that are not integral multiples of one
one-hundredth of a Series B Share will be issued and, in lieu thereof, an
adjustment in cash will be made based on the closing price of the Series B
Shares on the last trading date prior to the date of exercise.
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At any time after the date of the Rights Agreement until ten Business Days
(a period that can be extended) following the Shares Acquisition Date, the Board
of Directors, with the concurrence of a majority of the Independent Directors
(those members of the Board who are not officers or employees of the Company or
of any Subsidiary of the Company and who are not Acquiring Persons or their
Affiliates, Associates, nominees or representatives, and who either (a) were
members of the Board prior to the adoption of the Rights Plan or (b) were
subsequently elected to the Board and were recommended for election or approved
by a majority of the Independent Directors then on the Board), may redeem the
Rights in whole, but not in part, at a price of $0.01 per Right, subject to
adjustment (the "Redemption Price"). Thereafter, the Board may only redeem the
Rights in certain specified circumstances including in connection with certain
events not involving an Acquiring Person or an Affiliate or Associate of an
Acquiring Person. In addition, the Company's right of redemption may be
reinstated if (a) an Acquiring Person reduces its beneficial ownership to 10% or
less of the outstanding Common Shares in a transaction or series of transactions
not involving the Company and (b) there is at such time no other Acquiring
Person. The Rights Agreement may also be amended, as described below, to extend
the period of redemption. Immediately upon the action of the Board ordering
redemption of the Rights, the Rights will no longer be exercisable, except upon
the occurrence of certain events that have the effect of deferring the effective
time of the redemption. In general, thereafter the only right of the holders of
Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Shares (or other consideration) of the Company or for
common shares of the Acquiring Person as set forth above.
Other than those provisions relating to the principal economic terms of
the Rights or imposing limitations on the right to amend the Agreement, any of
the provisions of the Rights Agreement may be amended by the Board with the
concurrence of a majority of the Independent Directors or by special approval of
the stockholders of the Company prior to the Separation Date. Thereafter, the
period during which the Rights may be redeemed may be extended (by action of the
Board, with the concurrence of a majority of the Independent Directors or by
special approval of the stockholders of the Company), and other provisions of
the Rights Agreement may be amended by action of the Board with the concurrence
of a majority of the Independent Directors or by special approval of the
shareholders of the Company; provided, however, that (a) such amendment will not
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person) and (b) no amendment shall be made at such time as the
Rights are no longer redeemable (except for the possibility of the right of
redemption being reinstated as described above).
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Section 203 of the Delaware General Corporation Law ("Section 203")
generally provides that a stockholder acquiring more than 15% of the outstanding
voting stock of a corporation subject to the statute (an "Interested
Stockholder") but less than 85% of such stock may not engage in certain Business
Combinations (as defined in Section 203) with the corporation for a period of
three years after the time the stockholder became an Interested Stockholder
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unless (i) prior to such time, the corporation's board of directors approved
either the Business Combination or the transaction in which the stockholder
became an Interested Stockholder or (ii) the Business Combination is approved by
the corporation's board of directors and authorized at a stockholders' meeting
by a vote of at least two-thirds of the corporation's outstanding voting stock
not owned by the Interested Stockholder. Under Section 203, these restrictions
will not apply to certain Business Combinations proposed by an Interested
Stockholder following the earlier of the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
was not an Interested Stockholder during the previous three years, who became an
Interested Stockholder with the approval of the corporation's board of directors
or who became an Interested Stockholder at a time when the restrictions
contained in Section 203 did not apply for reasons specified in Section 203, if
such extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to such person becoming an Interested
Stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder, including
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, transactions
with the corporation which increase the proportionate interest in the
corporation directly or indirectly owned by the Interested Stockholder or
transactions in which the Interested Stockholder receives certain other
benefits.
The provisions of Section 203, coupled with the Board's authority to issue
preferred stock without further stockholder action, could delay or frustrate the
removal of incumbent directors or a change in control of the Company. The
provisions also could discourage, impede or prevent a merger, tender offer or
proxy contest, even if such event would be favorable to the interests of
stockholders. The Company's stockholders, by adopting an amendment to the
Certificate, may elect not to be governed by Section 203 effective 12 months
after such adoption. Neither the Certificate nor the Bylaws exclude the Company
from the restrictions imposed by Section 203.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Stock Offering, the Company will have
16,077,884 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, 9,795,896 shares will be freely tradeable without restriction
under the Securities Act unless such shares are purchased in the Stock Offering
by "affiliates" of the Company, as such term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining 6,281,988 shares of Common
Stock are "restricted securities" as that term is defined in Rule 144 under the
Securities Act (the "Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. As a result of contractual restrictions
described below and the provisions of Rules 144 and 701, 3,547,488 Restricted
Shares will be eligible for sale upon expiration of the lock-up agreements 180
days after the Effective Date. In addition, Darlene Friedland has made a lock-up
agreement relating to her 2,734,500 shares lasting for a period ending, on a
cumulative basis, as to 25% of the shares of Common Stock she owns, on the
expiration of the 15th, 18th, 21st and 24th month following August 26, 1997.
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, 1,705,000 are subject
to the agreements described above restricting the sale of such shares for a
period of 180 days after the date of this Prospectus. Following the Stock
Offering, the Company intends to file a registration statement under the
Securities Act to register shares of Common Stock issuable upon the exercise of
stock options granted under the Company's stock option plans. Except as limited
by the agreements described above and by Rule 144 volume limitations applicable
to affiliates, shares issued upon the exercise of stock options after the
effective date of such registration statement generally will be available for
sale in the open market.
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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.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain United States federal income tax
consequences applicable under current law to holders of 5% Preferred Stock who
exchange such stock for New Preferred Stock and Common Stock pursuant to the
Exchange Offer is for general information only and is not intended as a
substitute for careful tax planning. The discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), regulations promulgated by the
U.S. Department of the Treasury ("Treasury Regulations"), and Internal Revenue
Service ("Service") rulings and judicial decisions now in effect, all of which
are subject to change at any time by legislative, judicial or administrative
action. Any such changes could be retroactively applied in a manner that could
adversely affect a holder of the New Preferred Stock and Common Stock received
pursuant to the Exchange Offer. The discussion does not cover all aspects of
Federal taxation that may be relevant to, or the actual tax effect that any of
the matters described herein will have on, particular persons, and it does not
deal with state, local or foreign income or other tax laws. Certain holders
(including financial institutions, tax-exempt organizations, broker-dealers,
insurance companies, and foreign individuals and entities) may be subject to
special rules not discussed below. The discussion assumes that recipients of New
Preferred Stock and Common Stock will hold the New Preferred Stock and Common
Stock as capital assets within the meaning of Section 1221 of the Code. Persons
considering exchanging 5% Preferred Stock for New Preferred Stock and Common
Stock should consult their own tax advisors with respect to their particular
situations as well as any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.
EXCHANGE OF 5% PREFERRED STOCK FOR NEW PREFERRED STOCK
THE 1997 TAX ACT
The tax consequences of the Exchange Offer may be significantly affected
by the Taxpayer Relief Act of 1997 ("1997 Tax Act"), which was enacted on August
5, 1997 and has not yet been subject to any administrative or judicial
interpretation. Under the 1997 Tax Act, gain (but not loss) will be recognized
upon the receipt of Nonqualified Preferred Stock (as defined below) and common
stock of a corporation in exchange for property other than Nonqualified
Preferred Stock of that corporation. Accordingly, if the New Preferred Stock is
Nonqualified Preferred Stock and the 5% Preferred Stock is not Nonqualified
Preferred Stock, then an exchange of 5% Preferred Stock for New Preferred Stock
and Common Stock will require the recognition of any gain realized on the
exchange, but not in excess of the fair market value of the New Preferred Stock.
Any such gain likely would be treated as short-term capital gain. If, under the
1997 Tax Act either (i) both the 5% Preferred Stock and the New Preferred Stock
are Nonqualified Preferred Stock, or (ii) the New Preferred Stock is not
Nonqualified Preferred Stock, then the Exchange Offer should be tax free (except
to the extent that any New Preferred Stock or Common Stock received is treated
as payment for the holder's Consent to amend the Certificate of Designations of
the 5% Preferred Stock ("Consent Payment"). In such event, the aggregate tax
basis of the New Preferred Stock and Common Stock will be equal to the tax basis
of the 5% Preferred Stock for which it is exchanged, and such aggregate tax
basis will be allocated between the Common Stock and the New Preferred Stock in
proportion to their relative fair market values.
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Nonqualified Preferred Stock is defined as stock which is limited and
preferred as to dividends and does not participate in corporate growth to any
significant extent if, in addition, any of the following requirements are met:
(i) the holder of such stock has the right to require the issuer or a related
person to redeem or purchase the stock, (ii) the issuer or a related person is
required to redeem or purchase such stock, (iii) the issuer or a related person
has the right to redeem or purchase the stock and, as of the issue date, it is
more likely than not that such right will be exercised, or (iv) the dividend
rate on such stock varies in whole or in part (directly or indirectly) with
reference to interest rates, commodity prices, or other similar indices. The
Committee Report accompanying the 1997 Tax Act provides that in no event will a
conversion privilege into stock of the issuer automatically be considered to
constitute participation in corporate growth to any significant extent.
TREATMENT OF NEW PREFERRED STOCK UNDER THE 1997 TAX ACT
The New Preferred Stock is limited and preferred as to dividends and does
not participate in corporate growth to any significant extent. In addition, New
Preferred Stock is not mandatorily redeemable. Therefore, New Preferred Stock
will be considered Nonqualified Preferred Stock only if it is determined that
(i) as of the issue date, it is more likely than not that the Company will
redeem the New Preferred Stock, (ii) the holders have a right to require the
Company to repurchase the New Preferred Stock and such right is not subject to a
contingency which, as of the issue date, makes remote the likelihood of such
repurchase or (iii) the dividend rate on such stock varies in whole or in part
(directly or indirectly) with reference to interest rates, commodity prices or
other similar indices.
The Company has the right to redeem the New Preferred Stock in accordance
with its terms; however, there currently exists no authority interpreting the
meaning of whether a corporation will be viewed as "more likely than not" to
exercise a redemption right for this purpose. It is possible, however, that the
meaning of this provision will be interpreted consistently with Treasury
Regulations under Section 305 of the Code. Those Treasury Regulations include a
"safe harbor" providing that a redemption pursuant to an issuer's right to
redeem is not treated as more likely than not to occur if (i) the issuer and the
holder are not related by more than 20% common ownership, (ii) there are no
plans, arrangements or agreements that effectively require or are intended to
compel the issuer to redeem and (iii) exercise of the right to redeem would not
reduce the yield of the stock, as determined under principles similar to those
applicable to original issue discount on debt instruments. It is not clear
whether or not this safe harbor would apply. However, the Company believes that
the New Preferred Stock should not be viewed as of its issue date as being more
likely than not to be redeemed under the standards of the Section 305 Treasury
Regulations; accordingly, if the provisions of the Section 305 Treasury
Regulations apply in this context, the New Preferred Stock might well not be
Nonqualified Preferred Stock. Currently, however, it is not clear whether the
principles of the Section 305 Treasury Regulations will be applied in
determining whether a redemption is more likely than not to occur under the
provisions of the 1997 Tax Act.
The Company is required to make an offer to repurchase the New Preferred
Stock upon a Change in Control (as defined herein) of the Company. Therefore, a
Change in Control will give holders of New Preferred Stock the right to require
the Company to repurchase such stock. Under the 1997 Tax Act, this right will
cause the New Preferred Stock to be treated as Nonqualified Preferred Stock only
if a Change in Control is not a contingency which, as of the
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issue date, makes remote the likelihood of such a repurchase. There currently
exists no authority interpreting the meaning of a remote likelihood of
repurchase as used in this provision. Because it is not clear under the 1997 Tax
Act whether it is more likely than not that the Company will exercise its right
to redeem the New Preferred Stock, or whether a Change in Control is a
contingency that makes remote the likelihood that the holders of New Preferred
Stock will exercise their right to have the stock repurchased, it is not clear
whether the New Preferred Stock will be treated as Nonqualified Preferred Stock.
The dividend rate of the New Preferred Stock may be set one time at a rate
based on the interest rate of the Company's Notes. Although there is no
authority interpreting the relevant provision of the 1997 Tax Act, the Company
believes that this feature of the New Preferred Stock should not cause such
stock to be considered to have a "dividend rate that varies in whole or in part
(directly or indirectly) with reference to interest rates, commodity prices, or
other similar indices." Therefore, this feature should not cause the New
Preferred Stock to be considered Nonqualified Preferred Stock.
TREATMENT OF 5% PREFERRED STOCK UNDER THE 1997 TAX ACT
Because the 5% Preferred Stock is convertible at all times into Common
Stock of a value in excess of the Liquidation Preference of the 5% Preferred
Stock plus any other Cash Payments due to the holder of such 5% Preferred Stock
(with the amount of such excess increasing over time), it is possible that the
5% Preferred Stock may be viewed as participating in corporate growth to a
significant extent. If so, then the 5% Preferred Stock would not be treated as
Nonqualified Preferred Stock under the 1997 Tax Act. The 5% Preferred Stock is
not mandatorily redeemable, nor does the dividend rate on such stock vary with
reference to interest rates, commodity prices, or other similar indices.
Therefore the 5% Preferred Stock will be treated as Nonqualified Preferred Stock
if it is determined that it falls within either of the two tests from the 1997
Tax Act discussed above with respect to the New Preferred Stock. It is not clear
whether the 5% Preferred Stock would meet the "more likely than not" test
whether or not the principles of the Section 305 Treasury Regulations apply. In
addition, it is not clear whether the contingencies to which the holder's right
to require redemption of the 5% Preferred Stock is subject will be considered to
make remote the likelihood of such a redemption.
If the 5% Preferred Stock is not Nonqualified Preferred Stock, and the New
Preferred Stock is Nonqualified Preferred Stock, then an exchange of 5%
Preferred Stock for New Preferred Stock and Common Stock will be a taxable
transaction in which gain (but not loss) is recognized in the amount equal to
the lesser of (i) the difference between the fair market value of the New
Preferred Stock and Common Stock received, and the basis in the 5% Preferred
Stock surrendered or (ii) the fair market value of the New Preferred Stock
received (plus, in either case, the tax on any amount treated as a Consent
Payment (see below)). In such event the tax basis of the New Preferred Stock
would be equal to its fair market value, and the tax basis of the Common Stock
would be equal to the tax basis of the 5% Preferred Stock exchanged for both
Common Stock and New Preferred Stock, decreased by the fair market value of the
New Preferred Stock received and increased by the amount of gain the holder was
required to recognize on the exchange.
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POSSIBLE TREATMENT OF NEW PREFERRED STOCK AS SECTION 306 STOCK
If the Exchange Offer is not a taxable event (aside from a tax on a
possible Consent Payment (see below)), the New Preferred Stock received pursuant
to the Exchange Offer could, under certain circumstances, be treated as "Section
306 Stock," thereby subjecting holders to ordinary income or dividend treatment
on certain dispositions of the stock, if the Company has earnings or profits.
The Company does not have accumulated earnings and profits and does not expect
to have earnings and profits for the year 1997. If the Company does not have
earnings and profits for the year 1997, then the New Preferred Stock will not be
treated as Section 306 Stock.
POSSIBLE CONSTRUCTIVE SECTION 305 STOCK DISTRIBUTION
It is possible that, to the extent of any dividend arrearages of the 5%
Preferred Stock, there may be a constructive Section 305 stock distribution with
respect to an exchange of such stock for New Preferred Stock and Common Stock.
However, because any unpaid dividends are added to the liquidation preference of
the 5% Preferred Stock causing a change in the conversion ratio of such stock,
the Company believes there should be considered no dividend arrearages with
respect to the 5% Preferred Stock.
POSSIBLE TREATMENT OF A PORTION OF STOCK RECEIVED AS A CONSENT PAYMENT
It is possible that a portion of New Preferred Stock received pursuant to
the Exchange Offer will be treated as a Consent Payment. See "The Exchange Offer
- -- The Consent Solicitation." If a portion of New Preferred Stock is treated as
such a payment, the value of such stock treated as a payment will be ordinary
income to the recipient, and the basis of such stock will be its fair market
value. The Company believes and intends to take the position that no portion of
the New Preferred Stock or Common Stock is a payment for the holder's Consent.
POSSIBLE DIVIDEND TREATMENT UPON EXCHANGE OF 5% PREFERRED STOCK FOR NEW
PREFERRED STOCK AND COMMON STOCK
If gain is recognized on the exchange of 5% Preferred Stock for New
Preferred Stock and Common Stock, it is possible under certain circumstances
that a portion of that gain would be treated as a dividend if the Company has
accumulated earnings and profits. However, the Company does not have accumulated
earnings and profits through 1996, and does not expect to have earnings and
profits for the year 1997. Therefore, no gain on an exchange pursuant to the
Exchange Offer should be treated as a dividend.
DIVIDENDS ON NEW PREFERRED STOCK
Distributions with respect to the New Preferred Stock and Common Stock
paid by the Company in cash will be treated as dividends and taxable as ordinary
income to the extent that the distributions are made out of either the Company's
current or accumulated earnings and profits. To the extent that such a
distribution is not made out of the Company's current or accumulated earnings
and profits, the distribution will first constitute a non-taxable return of
capital, reducing the holder's adjusted tax basis in the shares of New Preferred
Stock or Common
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139
Stock held, and then, to the extent the distribution exceeds such basis, will
result in a gain from the sale or exchange of such stock.
In calculating their taxable income, corporate stockholders will generally
be eligible to claim a dividends-received deduction (currently 70% of the amount
of the dividend for most corporate stockholders) with respect to distributions
that are treated as dividends on the New Preferred Stock and Common Stock (i.e.,
distributions out of earnings and profits, which the Company does not believe
that it currently has and does not expect to have until after it commences
commercial operations). However, complex rules apply which may cause
disallowance or limitation of the dividends-received deduction under
circumstances described in the Code. For instance, Section 246A of the Code
reduces the dividends-received deduction allowed to a corporate holder that has
incurred indebtedness "directly attributable" to its investment in portfolio
stock. In addition, Section 246(c) of the Code, as recently amended by the 1997
Tax Act, requires that in order to be eligible for the dividends-received
deduction, a corporation must generally hold the shares of stock for at least 46
days during the 90-day period beginning on the date which is 45 days before the
date on which such share becomes ex-dividend with respect to such dividend.
(With respect to the New Preferred Stock, if a dividend is attributable to a
period or periods aggregating in excess of 366 days, then the stock must be held
for at least 91 days during the 180-day period beginning on the date which is 90
days before the date on which such share becomes ex-dividend with respect to
such dividend.) For this purpose, the corporation's holding period is reduced by
periods during which its position in the stock is hedged in the manner described
in Section 246(c)(4) of the Code. In addition, in computing the alternative
minimum tax, corporate stockholders may be required to make certain adjustments
in calculating their alternative minimum taxable income. Corporate stockholders
should consult their own tax advisors as to the possible application of these
provisions.
The basis of stock that has been held by a corporate stockholder for not
more than two years is reduced (but not below zero) by the non-taxed portion of
any "extraordinary dividend" received with respect to such stock. Moreover, if
the non-taxed portion of such dividends exceeds such basis, such excess shall be
treated as gain from the sale or exchange of such stock for the taxable year in
which the extraordinary dividend is received. In determining whether a holder
satisfies the holding period requirement, the length of the holding period is
determined as of the date that the issuer declares, announces or agrees to the
payment or the amount of a dividend, whichever is the earliest.
Generally, an extraordinary dividend is a dividend that (i) equals or
exceeds 5% of the holder's basis in stock preferred as to dividends, or 10% of
the holder's basis in any other stock (treating all dividends having ex-dividend
dates within an 85-day period as a single dividend) or (ii) exceeds 20% of the
holder's basis in the stock (treating all dividends having ex-dividend dates
within a 365-day period as a single dividend.) If the holder is able to
establish, to the satisfaction of the Service, the fair market value of the
stock as of the day before the ex-dividend date, the holder may elect to
substitute such fair market value for the holder's basis in applying these
tests.
ADJUSTMENT OF CONVERSION PRICE
Section 305 of the Code and applicable Treasury Regulations also provide
that under certain circumstances, adjustments in the conversion price of
convertible stock and other similar transactions (including the failure to
adjust the conversion rate) may be treated as constructive
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140
distributions of stock taxable as a dividend if (i) as a result, the
proportionate interest of the holder of such convertible preferred stock in the
assets or earnings and profits of the issuer is increased and (ii) the
adjustment is not made pursuant to a bona fide, reasonable anti-dilution
formula. The operation of certain aspects of the conversion price adjustment
provisions of the New Preferred Stock may fit within these parameters, and
accordingly the holder thereof would be deemed to have received a constructive
distribution that may be taxable as a dividend, notwithstanding the fact that
the holders of the New Preferred Stock do not actually receive cash or property.
REDEMPTION PREMIUM
Under Section 305 of the Code and the Treasury Regulations thereunder, if
the redemption price of shares of preferred stock exceeds the issue price (which
is generally the price paid in cash or property for the shares at original
issuance) by more than a DE MINIMIS amount, the excess may be taxable as a
constructive distribution of additional stock to the holder taken into account
under principles similar to those applicable to original issue discount on debt
instruments. If such a constructive distribution were to occur, a holder could
be required to recognize ordinary income for tax purposes (if the Company has
current or accumulated earnings and profits) without receiving a corresponding
distribution of cash. An issuer's right to redeem stock results in constructive
distribution treatment only if, based on all the facts and circumstances as of
the issue date, redemption pursuant to the right is more likely than not to
occur. As discussed above, the Company does not believe that redemption should
be viewed as more likely than not to occur for this purpose. Moreover, even if
redemption is more likely than not to occur, constructive distribution treatment
does not apply if the redemption premium is solely in the nature of a penalty
for premature redemption. The Company believes that the redemption premium
should be viewed as in the nature of a penalty for premature redemption.
CONVERSION
Conversion of the New Preferred Stock into Common Stock and cash could
possibly result in the recognition of gain (but not loss) in an amount equal to
the lesser of (i) the difference between (a) the sum of the cash and the fair
market value of the Common Stock received, and (b) the basis of the New
Preferred Stock surrendered, and (ii) the amount of cash received in exchange.
(It is possible under certain circumstances that a portion of that gain would be
treated as a dividend to the extent of the Company's accumulated earnings and
profits at the time of the conversion.) In such event the tax basis of the
Common Stock would be equal to the tax basis of the New Preferred Stock
exchanged for such Common Stock, decreased by the amount of cash received and
increased by the amount of gain the holder was required to recognize on the
exchange. The holding period of the Common Stock received upon conversion would
include the holding period of the New Preferred Stock converted. (If the
exchange of 5% Preferred Stock for New Preferred Stock and Common Stock is
treated as a tax-free exchange (aside from a tax on a possible Consent Payment,
as discussed above), then the holding period of such New Preferred Stock will
also include the time during which the 5% Preferred Stock was held, excluding
New Preferred Stock received as a Consent Payment.)
Alternatively, in a conversion of New Preferred Stock into Common Stock
and cash, the amount of cash received with respect to accumulated dividends
could possibly be treated as a dividend to the extent of the Company's
accumulated and current earnings and profits at the time
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141
of the conversion. To the extent that the amount of such cash exceeds the
Company's current or accumulated earnings and profits, such amount will first
constitute a non-taxable return of capital, reducing the holder's adjusted tax
basis in the shares of New Preferred Stock or Common Stock held, and then, to
the extent such amount exceeds such basis, will result in a gain from the sale
or exchange of stock. In such case, the tax basis of the Common Stock would be
equal to the tax basis of the New Preferred Stock exchanged for such Common
Stock, and the holding period of the Common Stock would include the holding
period of the New Preferred Stock converted.
SALE OR REDEMPTION
COMMON STOCK RECEIVED PURSUANT TO THE EXCHANGE OFFER
Upon the sale or exchange of Common Stock received pursuant to the
Exchange Offer, the holder will recognize gain or loss equal to the difference
between the amount realized and his or her tax basis in the Common Stock. The
resulting gain or loss will be a capital gain or loss and will be a long-term
capital gain or loss if the holding period of the Common Stock was longer than
one year. For individuals, gain from such a transaction will be taxed at rates
that vary depending upon whether the holding period of the stock exchanged was
one year or less, more than one year but not more than 18 months, or more than
18 months. For this purpose, the holding period of the Common Stock will include
the holding period of the 5% Preferred Stock in exchange for which it was
received unless such Common Stock was treated as a Consent Payment.
NEW PREFERRED STOCK OR THE COMMON STOCK INTO WHICH IT IS CONVERTED
In the event that the New Preferred Stock is not treated as Section 306
Stock (see "-- Exchange of 5% Preferred Stock for New Preferred Stock and Common
Stock"), upon the sale or exchange of the New Preferred Stock or the Common
Stock into which it is converted, the holder will recognize gain or loss equal
to the difference between the amount realized and his or her tax basis in the
New Preferred Stock or the Common Stock into which it is converted. The
resulting gain or loss will be a capital gain or loss and will be a long-term
capital gain or loss if the New Preferred Stock or the Common Stock into which
it is converted was held for more than one year. (If the exchange of 5%
Preferred Stock for New Preferred Stock and Common Stock is treated as a
tax-free exchange, then the holding period of the New Preferred Stock will also
include the time during which the 5% Preferred Stock was held, excluding New
Preferred Stock received as a Consent Payment, which will have a holding period
beginning on the date of its issuance.) For individuals, gain from such a
transaction will be taxed at rates that vary depending upon whether the stock
exchanged was held for one year or less, more than one year but not more than 18
months, or more than 18 months.
If the Company redeems shares of New Preferred Stock solely for cash, such
redemption will be taxable as a sale or exchange if the redemption (i) results
in a "complete termination" of the holder's stock interest in the Company under
Section 302(b)(3) of the Code, (ii) is "substantially disproportionate" with
respect to the holder under Section 302(b) of the Code, (iii) is "not
essentially equivalent to a dividend" with respect to the holder under Section
302(b)(1) of the Code, or (iv) is from a non-corporate holder in partial
liquidation of the Company under Section 302(b)(4) of the Code. In determining
whether any of these tests has been met, shares
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142
considered to be owned by the holder by reason of the constructive ownership
rules set forth in Section 318 of the Code (pursuant to which a holder will be
deemed to own shares owned by certain related individuals and entities or shares
subject to an option), as well as the shares actually owned, would generally be
taken into account. If a redemption of shares of New Preferred Stock solely for
cash satisfies any of the above Section 302 tests with respect to a holder, such
holder will recognize gain or loss based on the difference between the amount of
cash received and the holder's tax basis in the redeemed shares. If such a
redemption does not satisfy any of the Section 302 tests, the gross proceeds
will be treated as a distribution taxable as a dividend to the extent of the
Company's current and accumulated earnings and profits and any excess will be
treated first as a return of capital and then as a gain upon a sale or exchange
of the New Preferred Stock. A holder whose proceeds of a redemption are taxed as
a dividend would transfer the tax basis in the New Preferred Stock redeemed
(reduced for any amounts treated as a non-taxed portion of extraordinary
dividends or a return of capital) to any stock interest retained in the Company.
If the Company redeems shares of New Preferred Stock in whole or in part
for Common Stock, such exchange could possibly be treated as a taxable exchange
in which gain (but not loss) is recognized in an amount equal to the lesser of
(i) the difference between (a) the sum of the cash received and the fair market
value of the Common Stock received and (b) the basis in the New Preferred Stock
surrendered or (ii) the amount of cash received. (It is possible under certain
circumstances that a portion of that gain would be treated as a dividend to the
extent of the Company's accumulated earnings and profits at the time of
redemption.) In such event the tax basis of the Common Stock would be equal to
the tax basis of the New Preferred Stock exchanged for the Common Stock and
cash, decreased by the amount of cash received by the holder, increased by the
amount of gain the holder was required to recognize on the exchange. The holding
period of the Common Stock received upon the exchange would include the holding
period of the New Preferred Stock surrendered. (If the exchange of 5% Preferred
Stock for New Preferred Stock and Common Stock is treated as a tax-free exchange
(aside from a tax on a possible Consent Payment, as discussed above), then the
holding period of such New Preferred Stock will also include the time during
which the 5% Preferred Stock was held, excluding New Preferred Stock received as
a Consent Payment.
Alternatively, in a redemption of New Preferred Stock in whole or in part
for Common Stock, the amount of cash received with respect to accumulated
dividends could possibly be treated as a dividend to the extent of the Company's
accumulated and current earnings and profits at the time of redemption. To the
extent that such cash received exceeds the Company's current or accumulated
earnings and profits, such amount will first constitute a non-taxable return of
capital, reducing the holder's adjusted tax basis in the shares of New Preferred
Stock or Common Stock held, and then, to the extent such amount exceeds such
basis, will result in a gain from the sale or exchange of stock. In such cash,
the exchange of New Preferred Stock for Common Stock and cash (excluding the
amount of cash received with respect to accumulated dividends) will be treated
as described in the paragraph above.
BACK-UP WITHHOLDING
Under Section 3406 of the Code and applicable Treasury Regulations, a
holder of New Preferred Stock or Common Stock may be subject to back-up
withholding tax at the rate of 31% with respect to dividends paid or on the
proceeds of a sale, exchange or redemption of the New
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143
Preferred Stock or Common Stock (whether acquired through the Exchange Offer or
through the exercise of the conversion privilege). The Company will be required
to deduct and withhold the tax if (i) the holder fails to furnish a taxpayer
identification number ("TIN") to the Company, (ii) the IRS notifies the Company
that the TIN furnished by the holder is incorrect, (iii) there has been a
notified holder under-reporting with respect to interest, dividends or original
issue discount described in Section 3406(c) of the Code, or (iv) there has been
a failure of the holder to certify under the penalty of perjury that the holder
is not subject to withholding under Section 3406(a)(1)(C) of the Code. The
Company will be required to withhold a tax equal to 31% from any dividend or
redemption payment made with respect to the New Preferred Stock or Common Stock
if any one of the events discussed above occurs. Holders should consult their
tax advisors regarding their qualification for exemption from back-up
withholding and the procedure for obtaining any applicable exemption.
The foregoing summary is included herein for general information only.
Accordingly, prospective participants in the Exchange Offer should consult with
their own tax advisors as to the specific tax consequences to them, including
the application and effect of state, local and foreign income and other tax
laws.
LEGAL OPINIONS
The validity of the shares of New Preferred Stock to be issued in the
Exchange Offer will be passed upon for the Company by Paul, Weiss, Rifkind,
Wharton & Garrison, New York, New York. Certain regulatory matters arising under
the Communications Act are being passed upon by Wiley, Rein & Fielding,
Washington, D.C. Certain legal matters will be passed upon for the Dealer
Manager by Shearman & Sterling, New York, New York.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for each of the three years in the period ended December 31,
1996, and for the period from May 17, 1990 (date of inception) to December 31,
1996 incorporated herein by reference, have been included herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of said firm as experts in accounting and auditing.
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144
Facsimile copies of the Letter of Transmittal will be accepted. Letters of
Transmittal, certificates representing shares of 5% Preferred Stock and any
other required documents should be sent by each stockholder or his or her
broker, dealer, commercial bank, trust company or other nominee to the Exchange
Agent at one of the addresses as set forth below:
The Exchange Agent is:
MacKenzie Partners, Inc.
156 Fifth Avenue, 9th Floor
New York, New York 10010
(212) 929-5500
By Mail: By Hand or Overnight Courier:
MacKenzie Partners, Inc. MacKenzie Partners, Inc.
156 Fifth Avenue, 9th Floor 156 Fifth Avenue, 9th Floor
New York, New York 10010 New York, New York 10010
By Facsimile Transmission
(For Eligible Institutions Only):
Confirm Receipt of Notice of Guaranteed Delivery by Telephone:
Any questions or requests for assistance or additional copies of this
Prospectus or the Letter of Transmittal may be directed to the Dealer Manager or
the Exchange Agent at their telephone numbers and locations set forth on this
page. You may also contact your broker, dealer, commercial bank or trust company
or other nominee for assistance concerning the Exchange Offer.
The Dealer Manager for the Exchange Offer is:
Merrill Lynch & Co.
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281
Contact:
(212)
Stockholder Inquiries:
(800) (Toll Free)
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145
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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.
Any underwriting agreement or agency agreement with respect to an offering
of securities registered hereunder will provide for indemnification of the
registrant and its officers and directors by the underwriters or agents, as the
case may be, against certain liabilities including liabilities under the
Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The Exhibit Index beginning on page E-1 is hereby incorporated by
reference.
ITEM 22. UNDERTAKINGS
The undersigned hereby undertakes:
(a) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 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 of 1933 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 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against
II-1
<PAGE>
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 Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the 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 October 2, 1997.
CD RADIO INC.
By: /s/ David Margolese
------------------------------------
David Margolese
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the 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 October 2, 1997
- -------------------------- (Principal Executive Officer)
David Margolese
* Executive Vice President and October 2, 1997
- -------------------------- Chief Financial Officer
Andrew J. Greenebaum (Principal Financial and Accounting
Officer)
* Director October 2, 1997
- --------------------------
Robert D. Briskman
* Director October 2, 1997
- --------------------------
Lawrence F. Gilberti
* Director October 2, 1997
- --------------------------
Peter K. Pitsch
* Director October 2, 1997
- --------------------------
Jack Z. Rubinstein
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Director October 2, 1997
- --------------------------
Ralph V. Whitworth
*By: /s/ David Margolese
----------------------
David Margolese
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
1** Dealer Manager Agreement
4.1** Description of Capital Stock contained in the Amended and Restated
Certificate of Incorporation.
4.2** Description of Rights of Security Holders contained in the Amended
and Restated Bylaws.
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).
4.4** Form of Indenture for the Company's Notes.
5.1** Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
12.1** Statement Re Computation of Ratios.
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).
99.1** Letter of Transmittal.
- ------------------------
* Previously filed.
** To be filed by amendment.
E-1
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-4 (No. 333-34761) 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
"Independedent Accountants."
/s/ Coopers & Lybrand L.L.P.
-------------------------------
Coopers & Lybrand L.L.P.
Washington, D.C.
October 2, 1997
