As filed with the Securities and Exchange Commission on December 23, 1998
Registration No. 333-52893
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 5 TO
FORM S-3
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 Identification No.)
incorporation or organization)
--------------------------
1180 AVENUE OF THE AMERICAS, 14TH FLOOR
NEW YORK, NEW YORK 10019
212-899-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
PATRICK L. DONNELLY
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
CD RADIO INC.
1180 AVENUE OF THE AMERICAS, 14TH FLOOR
NEW YORK, NEW YORK 10019
212-899-5000
(Name, address, including zip code, and telephone number,
including area code,of agent for service)
--------------------------
Copies 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 TO PUBLIC:
At such time or from time to time after the effective date of this
Registration Statement as the respective Selling Stockholders shall determine.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
TITLE OF EACH CLASS AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE REGISTRATION FEE (3)
(2)
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share........................ 3,934,322 (1) $30.69 $120,744,343 $33,014 (4)
====================================================================================================================================
Preferred Stock Purchase Rights
(5) 3,934,322 N/A N/A (6)
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</TABLE>
(1) Includes 950,000 shares of Common Stock which may be issued upon the
payment of dividends, at the option of the Company, on the 10 1/2% Series C
Convertible Preferred Stock in accordance with the terms thereof.
(2) Calculated pursuant to Rule 457(c) under the Securities Act of 1933 based
on the average of the high and the low prices reported by the Nasdaq
National Market on December 16, 1998.
(3) Calculated pursuant to Rule 457 (a) and (c) under the Securities Act of
1933 based on a total of 3,934,322 shares of Common Stock issuable (i) upon
conversion of 177,178 shares of 10 1/2% Series C Convertible Preferred
Stock, (ii) upon payment of dividends, at the option of the Company, on the
10 1/2% Series C Convertible Preferred Stock in accordance with the terms
thereof, (iii) pursuant to Common Stock Purchase Warrants and (iv) pursuant
to Batchelder Options.
<PAGE>
(4) $24,740 was paid on May 15, 1998, based on an estimated maximum aggregate
offering price of $83,863,778 for 2,784,322 shares of Common Stock. $6,463
was paid on August 11, 1998 based on an estimated maximum aggregate
offering price of $21,907,000 for an additional 950,000 shares of Common
Stock. $1,811 was paid on December 22, 1998 based on an estimated maximum
aggregate offering price of $6,138,000 for an additional 200,000 shares of
Common Stock.
(5) Each Preferred Stock Purchase Right represents the right to purchase one
one-hundredth of a share of Series B Preferred Stock for each share of
Common Stock.
(6) As such securities are to be provided without additional cost to the
purchasers, no registration fee is required with respect thereto.
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.
PROSPECTUS Preliminary Prospectus Dated December 23, 1998
- ----------
3,934,322 Shares
CD Radio Inc.
COMMON STOCK
------------
This Prospectus pertains to the offer and sale from time to time of up
to 3,934,322 shares (the "Offered Shares") of the common stock, par value $0.001
per share (the "Common Stock"), of CD Radio Inc. ("CD Radio" or the "Company")
by or for the account of the holders of such Offered Shares (collectively, the
"Selling Stockholders"). See "Selling Stockholders." The Offered Shares consist
of shares of Common Stock issuable (i) upon exercise of warrants to purchase
177,178 shares (the "Warrant Shares") of the Company's 10 1/2% Series C
Convertible Preferred Stock (the "Series C Preferred Stock") issued pursuant to
the Preferred Stock Warrant Agreement (the "Warrant Agreement") entered into by
the Company and Libra Investments, Inc. ("Libra") as of April 9, 1997 and the
conversion of such Warrant Shares into shares of Common Stock, plus such
additional number of shares of Common Stock issuable upon conversion of such
Warrant Shares as may be issued pursuant to the anti-dilution provisions of the
Warrant Agreement, (ii) upon the payment of dividends on the Warrant Shares that
are paid, at the option of the Company, in shares of Common Stock, while such
Warrant Shares are issued and outstanding, (iii) upon the exercise of the right
to subscribe for and purchase up to 1,740,000 shares of Common Stock granted by
the Company to Everest Capital Master Fund, L.P. ("Everest") pursuant to the
Everest Common Stock Purchase Warrant, dated as of October 31, 1997, (iv) upon
the exercise of the right to subscribe for and purchase up to 60,000 shares of
Common Stock granted by the Company to The Ravich Revocable Trust of 1989
pursuant to the Common Stock Purchase Warrant, dated as of October 31, 1997, (v)
upon the exercise of the right to subscribe for and purchase up to 200,000
shares of Common Stock granted by the Company to certain employees of Batchelder
& Partners, Inc. (the "Batchelder Employees") pursuant to Option Agreements,
dated as of December 29, 1997, between the Company and the Batchelder Employees,
and (vi) upon the payment of dividends, at the option of the Company, on the 10
1/2% Series C Convertible Preferred Stock in accordance with the terms thereof.
A share of Series C Preferred Stock may be converted at the option of
the holder thereof into the number of fully paid and non-assessable shares of
Common Stock obtained by dividing $100 by the initial conversion price of
$18.00. The conversion price of the Series C Preferred Stock is subject to
certain adjustments, including adjustments for stock splits, stock combinations
and similar events. Assuming the absence of such events, the Company will be
obligated to issue a total of approximately 984,322 shares of Common Stock upon
conversion of all Warrant Shares. Dividends on shares of Series C Preferred
Stock accrue quarterly at the rate per share of 2.625% of the sum of (i) $100
and (ii) all accrued and unpaid dividends, if any, whether or not declared, from
the date of issuance of such shares to the applicable dividend payment date.
Dividends on shares of Series C Preferred Stock may be paid, at the option of
the Company, either (i) in cash, (ii) in shares of Common Stock or (iii) in any
combination of cash and shares of Common Stock. Accordingly, the number of
shares of Common Stock indicated to be issuable in connection with such
transactions and offered for resale hereby is an estimate, is subject to
adjustment and could be materially more or less than such estimated amount
depending upon factors which cannot be predicted by the Company at this time,
including the duration of the period during which any Warrant Shares are
outstanding and the extent to which the Company during such period elects to pay
dividends on such Warrant Shares in shares of Common Stock.
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<PAGE>
The Common Stock Purchase Warrants issued by the Company to Everest and
The Ravich Revocable Trust of 1989 (collectively, the "Common Stock Purchase
Warrants") are exercisable at a price of $50 per share at any time (x) following
the occurrence of a Change of Control (as defined in such warrants) or (y)
during the period from and including June 15, 1998 until June 15, 2005. During
the period within which these warrants may be exercised, the Company is
obligated at all times to have authorized and reserved a total of 1,800,000
shares of Common Stock to provide for the exercise of the rights represented by
such warrants. The options issued by the Company to the Batchelder Employees
(collectively, the "Batchelder Options") are exercisable at a price of $6.25 per
share at any time prior to April 9, 2000.
The Offered Shares offered hereby may be sold by the Selling
Stockholders directly or through agents, underwriters or dealers as designated
from time to time or through a combination of such methods. The Company will
receive none of the proceeds from any sale of Offered Shares by or for the
account of the Selling Stockholders. The Selling Stockholders and any
broker-dealers that participate with one or more of the Selling Stockholders in
the distribution of the Offered Shares may be deemed to be underwriters and any
commissions received or profit realized by them in connection with the resale of
the Offered Shares might be deemed to be underwriting discounts and commissions
under the Securities Act. See "Selling Stockholders" and "Plan of Distribution."
The Company has agreed to bear substantially all of the expenses relating to
this registration, other than underwriting discounts and commissions. In
addition, the Company has agreed to indemnify the Selling Stockholders against
certain liabilities, including liabilities under the Securities Act. See
"Selling Stockholders" and "Plan of Distribution." The Common Stock is quoted on
the Nasdaq National Market under the symbol "CDRD." On December 22, 1998, the
closing price of the Common Stock was $34, as reported by the Nasdaq
National Market.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
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 Offered Shares may be offered from time to time in negotiated
transactions or otherwise at market prices prevailing at the time of each sale,
subject to the right of the Selling Stockholders to reject any order in whole or
in part.
The date of this Prospectus is ________, 1998.
2
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ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at its regional offices located at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511; and 13th Floor, 7 World Trade Center, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such reports, proxy statements and other information
concerning the Company also can be inspected and copied at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006, which supervises the Nasdaq National Market on which the
Company's Common Stock is traded. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's Web site is http://www.sec.gov.
The Company has filed with the Commission a registration statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect of the securities covered by this Prospectus.
This Prospectus, which forms part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company and such
securities, reference is hereby made to such Registration Statement, including
the exhibits filed therewith. The Registration Statement and the exhibits
thereto can be obtained by mail from or inspected and copied at the public
reference facilities maintained by the Commission as provided in the prior
paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission, are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
2. The Company's Quarterly Reports on Form 10-Q for the fiscal
quarter ended March 31, 1998, for the fiscal quarter ended June
30, 1998, as amended on November 18, 1998, and for the fiscal
quarter ended September 30, 1998.
3. The Company's Current Reports on Form 8-K dated May 27, 1998,
October 8, 1998, November 17, 1998, and December 10, 1998.
4. 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).
3
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All documents subsequently filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the filing of a
post-effective amendment which indicates that all securities offered hereunder
have been sold or which registers all securities then remaining unsold shall be
deemed to be incorporated by reference in and to be a part of this Prospectus
from the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in the Registration Statement containing this
Prospectus or in any other subsequently filed document that also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the request of such person, a copy of any or all
of the documents incorporated herein by reference (other than exhibits, unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to: Secretary, CD Radio Inc., 1180
Avenue of the Americas, 14th Floor, New York, New York 10036.
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 that 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 for the Company's proposed service; unproven
applications of existing technology; and the Company's need for substantial
additional financing.
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. 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 may 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.
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
the following factors should be considered carefully in evaluating the Company
and its business before making an investment in the shares of Common Stock
offered hereby. This Prospectus contains certain forward-looking statements
within the meaning of the federal securities laws. Actual results and the timing
of certain events could differ materially from those projected in the
forward-looking statements due to a number of factors, including those set forth
below and elsewhere in this Prospectus. See "Special Note Regarding
Forward-Looking Statements."
EXPECTATION OF CONTINUING LOSSES; NEGATIVE CASH FLOW
The Company is a development stage company and its proposed service, CD
Radio, is in an early stage of development. Since its inception, the Company's
activities have been concentrated on raising capital, obtaining required
licenses, developing technology, strategic planning and market research. From
its inception on May 17, 1990 through September 30, 1998, the Company has had no
revenues and has incurred aggregate net losses of approximately $63 million
(including net losses of approximately $5 million during the year ended December
31, 1997 and $39 million during the nine months ended September 30, 1998) and
net losses applicable to common stock of approximately $137 million, including a
deemed dividend on the Company's former 5% Delayed Convertible Preferred Stock
(the "5% Preferred Stock") of $52 million. The deemed dividend related 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. In November 1997, the Company
exchanged 1,846,799 shares of Series C Preferred Stock for all of the issued and
outstanding shares of 5% Preferred Stock (the "Preferred Stock Exchange Offer").
The Company does not expect to generate any revenues from operations until the
second quarter of 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 regulatory
authorizations, the successful and timely construction and deployment of its
satellite system, the development and manufacture of plug and play adapter cards
("radio cards"), radios capable of receiving S-band as well as AM and FM signals
("S-band radios") and their associated miniature satellite dish antennas by
consumer electronics manufacturers, the timely establishment of its national
broadcast studio (the "National Broadcast Studio") to be located in Rockefeller
Center in New York City, and the successful marketing and consumer acceptance of
CD Radio. The Company believes that its working capital at September 30, 1998
plus the equity investment from Prime 66 Partners, L.P. ("Prime 66") that closed
on November 2, 1998 and the amounts which may be received from Apollo Investment
Fund IV, L.P. ("AIF IV") and Apollo Overseas Partners, L.P. ("AOP IV" and,
together with AIF IV, the "Apollo Investors") pursuant to an agreement that was
signed on November 13, 1998 is sufficient to fund planned operations and
construction of its satellite system through the fourth quarter of 1999. 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. See "--Need
for Additional Financing."
NEED FOR ADDITIONAL FINANCING
The Company estimates that it will require approximately $964 million
to develop and commence commercial operation of CD Radio by the second quarter
of 2000. Of this amount, the Company has raised approximately $592 million
through November 30, 1998 and has entered into an agreement with Bank of America
National Trust and Savings Association ("Bank of America") to attempt to arrange
an
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additional $106 million. Assuming these funds are successfully arranged, the
Company will have cash needs of approximately $266 million to fund its
operations through the first quarter of 2000. The Company also anticipates
additional cash requirements of approximately $140 million to fund its
operations through the first full year of commercial operations. The Company
expects to finance the remainder of its funding requirements through the
issuance of debt or equity securities (including convertible preferred stock to
be issued to the Apollo Investors, as described below) or a combination thereof.
Additional funds, however, would be required in the event of delays, cost
overruns, launch failure or other adverse developments. The Company currently
does not have sufficient financing commitments to fund all of its capital needs,
and there can be no assurance that the Company will be able to obtain additional
financing on favorable terms, if at all, or that it will be able to do so on a
timely basis. The indenture governing the Company's outstanding 15% Senior
Secured Discount Notes due 2007 (the "Senior Secured Notes") issued in November
1997 (the "Senior Notes Indenture") contains, and documents governing any other
future indebtedness are likely to contain, provisions that limit the ability of
the Company to incur additional indebtedness. The Company has substantial
near-term funding requirements related to the construction and launch of its
satellites. The Company is committed to make aggregate payments of approximately
$718 million under the contract between the Company and Space Systems/Loral,
Inc. ("Loral") (as amended and restated on July 28, 1998, the "Loral Satellite
Contract") relating to the construction, launch and in-orbit delivery of three
satellites. As of September 30, 1998, $201 million of such amount had been paid
to Loral, consisting of $115 million paid in cash by the Company, $58 million
drawn from the Tranche A Facility (as defined below) and $28 million drawn
through a deferred payment arrangement with Loral. Of the total amount, an
aggregate of $438 million is payable for the construction of satellites and an
aggregate of $280 million is payable for launch services. Payments for the
construction of the satellites commenced in April 1997 and further installments
are payable through December 2003. 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 Loral, its
creditors or others, could render the Company unable to commence CD Radio
service and could force the Company to discontinue operations or seek a
purchaser for its business.
On July 28, 1998, the Company entered into a credit agreement with Bank
of America pursuant to which Bank of America agreed to provide the Company a
term loan facility (the "Tranche A Facility") of up to $115 million maturing
September 30, 1999. Additionally, Bank of America agreed to attempt to arrange a
syndicate of lenders to provide a term loan facility (the "Tranche B Facility")
of $225 million, the proceeds of which would in part be used to repay the
Tranche A Facility and for other general corporate purposes. The terms,
conditions and covenants of the Tranche B Facility are subject to conditions
precedent, to negotiation, execution and delivery of definitive loan documents
and to the consent of the holders of certain outstanding indebtedness of the
Company.
On November 2, 1998, the Company issued 5 million shares of the
Company's Common Stock to Prime 66 for $100 million (the "Prime 66 Purchase").
On November 13, 1998, the Company entered into an agreement with the Apollo
Investors (the "Apollo Agreement") pursuant to which the Apollo Investors agreed
to purchase 1,350,000 shares of the Company's 9.2% Series A Junior Cumulative
Convertible Preferred Stock, par value $.001 per share (the "Series A Junior
Preferred Stock") for $135 million and to grant the Company an option,
exercisable at any time prior to the earlier of ten months from the closing of
the issuance and sale of the Series A Junior Preferred Stock and September 30,
1999, to sell an additional 650,000 shares of its 9.2% Series B Junior
Cumulative Convertible Preferred Stock, par value $.001 per share (the "Series B
Junior Preferred Stock" and, together with the Series A Junior Preferred Stock,
the "Junior Preferred Stock"), to the Apollo Investors for $65 million. The
issuance and sale of the Junior Preferred Stock (the "Apollo Purchase") is
subject to the expiration, or early termination, of the waiting
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period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, approval
of the stockholders of the Company and customary conditions.
POSSIBLE DELAYS AND ADVERSE EFFECT OF DELAY ON FINANCING REQUIREMENTS
The Company currently expects to begin offering CD Radio in the first
quarter of 2000. The Company's ability to meet that objective will depend on
several factors, including the launch of three satellites. For all three
satellites required for CD Radio service to be launched and in operation by the
first quarter of 2000, Loral will have to provide or obtain from third parties
launch services that will enable launch of the Company's satellites in a timely
manner and will be required to deliver, prior to such launch dates, completed
satellites, which cannot be assured. 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 additional
authorizations from the Federal Communications Commission (the "FCC"),
coordinating use of spectrum with Mexico, 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 those for capital expenditures,
administrative and overhead costs, contractual obligations and debt service,
that could materially increase the aggregate amount of funding required to
permit the Company to commence operations. 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. See
"--Unavailability of Radio Cards, S-band Radios or Miniature Satellite Dish
Antennas, --Continuing Regulation by the FCC" and "The Company--The CD Radio
Delivery System" and "The Company--Government Regulation."
RELIANCE ON UNPROVEN APPLICATIONS OF TECHNOLOGY
CD Radio is designed to be broadcast from three satellites, two of
which transmit the same signals at any given time, to radio cards or S-band
radios that will receive signals through miniature satellite dish antennas. This
design involves new applications of existing technology that have not been
deployed and there can be no assurance that the CD Radio system will work as
planned. In addition,
7
<PAGE>
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
all of the Company's satellites will be blocked and reception of CD Radio will
be adversely affected. In certain 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," "The Company--The CD Radio
Delivery System" and "The Company--Technology and Patents."
In support of the Company's application for its 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 characteristics of the
Company's planned system. 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. 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 "The Company--Demonstration of the CD Radio System."
DEPENDENCE UPON LORAL
The Company's business will depend upon the successful construction and
launch of the satellites that will be used to transmit CD Radio. The Company
will rely upon Loral for the construction and timely in-orbit 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. Risk of loss for the
first three satellites will 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 launch or, in the case of the fourth satellite, at
the time of delivery to ground storage. See "The Company--The CD Radio Delivery
System--The Satellites--Satellite Construction and Launch Services."
The Company is also dependent on Loral as its satellite launch service
provider for obtaining access to available slots on launch vehicles and
contracting with third-party launch service providers for the launch of the
Company's satellites. Under the Loral Satellite Contract, the Company's first
two satellites will be launched on a Proton launch vehicle and the third
satellite will be launched on either an Atlas IIIA launch vehicle or, if the
Atlas IIIA launch vehicle cannot be suitably optimized for launch of the
Company's third satellite, either a third Proton launch vehicle, a Sea-Launch
vehicle or an Atlas IIIB launch vehicle. Failure to launch the satellites in a
timely manner could materially and adversely affect the Company's business. It
is expected that launch service providers will reserve the right to postpone any
Company launch 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 or
postponed launch for another customer or a launch of a scientific satellite
whose mission may be degraded by delay. Although the Loral Satellite Contract
provides liquidated damages for delay, depending on the length of the delay,
there can be no assurance that these remedies will adequately mitigate any
damage to the
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Company's business caused by launch delays. Additionally, failure to deliver the
designated launch services due to causes beyond Loral's control will be
excusable delay. See "--Possible Delays and Adverse Effect of Delay on Financing
Requirements." Loral disclaims all liability for the risk of loss associated
with either a satellite or launch failure. However, in the event of the failure
of the first Proton launch vehicle used to launch one of the Company's
satellites, Loral will provide the Company with a free replacement launch. See
"The Company--The CD Radio Delivery System--The Satellites--Satellite
Construction and 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 vary depending on the particular
launch vehicle and contractor. Although past experience is not necessarily
indicative of future performance, the Proton family of Russian-built launch
vehicles has a 92% launch success rate based on its last 50 launches, and the
Atlas family of launch vehicles, built by Lockheed Martin Corporation, has a 94%
launch success rate based on its last 50 launches. No commercial satellite has
ever been launched from a Sea-Launch vehicle. The first commercial Sea-Launch
mission is expected to occur in 1999. There is no assurance that the 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 has
contracted for the construction of a fourth satellite as a ground spare and
plans to obtain insurance covering a replacement launch to the extent required
to cover risks not assumed by Loral. See "--Insurance Risks." The launch of a
replacement satellite would delay the commencement of the Company's commercial
operations for a period of up to six 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 "The Company--The CD Radio Delivery System--The
Satellites--Satellite Construction and 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 "The Company--The CD Radio
Service," "The Company--Marketing Strategy," "The Company--The CD Radio Delivery
System" and "The Company--Competition."
LIMITED LIFE OF SATELLITES; IN-ORBIT FAILURE
A number of factors will affect the useful lives of the Company's
satellites, including the quality of construction, the expected gradual
environmental degradation of solar panels, the amount of fuel on board and the
durability of component parts. Random failure of satellite components could
result in damage to or loss of a satellite. In rare cases, satellites could also
be damaged or destroyed by electrostatic storms or collisions with other objects
in space. If the Company is required to launch its spare satellite, due to
failure of the launch or in-orbit failure of one of the operational satellites,
its
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operational timetable would be delayed for up to six months. 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 up to three years. 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, the Company is the
beneficiary of certain limited warranties with respect to the services provided
under such agreement. However, these limited warranties do not cover the risks
inherent in satellite launches or in-orbit operations, including, without
limitation, launch vehicle failure, failure of the satellites to deploy
correctly and failure of the satellite to operate as planned. As a result, the
Company will have to obtain insurance to adequately protect against such risks.
The Loral Satellite Contract contains a provision entitling the Company
to a replacement launch in the event of a launch failure caused by the first
Proton launch vehicle used to launch one of the Company's satellites. In such
event, the Company would utilize the spare satellite that it is having
constructed. The Company intends to purchase insurance for launch failure of the
other launch vehicles. The Company also 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 any of the Company's three satellites is a full or
partial failure or if, following launch, one 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 any 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 "The Company--The CD Radio Delivery System--The Satellites--Risk
Management and Insurance."
RISK ASSOCIATED WITH CHANGING TECHNOLOGY
The industry in which the Company operates is characterized by rapid
technological advances and innovations. There is no assurance that one or more
of the technologies utilized or under development by the Company will not become
obsolete, or that its services will be in demand at the time they are offered.
The Company will be dependent upon technologies developed by third parties to
implement key aspects of its proposed system, and there can be no assurance that
more advanced technologies will be available to the Company on a timely basis or
on reasonable terms or that more advanced technologies will not 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
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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. The Company has entered
into a contract with Lucent Technologies, Inc. ("Lucent") to develop and
manufacture the chip sets that represent the essential element of the radio
cards, S-band radios and miniature satellite dish antennas. However, there is no
assurance that Lucent will be successful in such development effort. Neither the
radio cards, S-band radios nor miniature satellite dish antennas currently is
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 had
discussions with several manufacturers regarding the manufacture of radio cards,
S-band radios and miniature satellite dish antennas for retail sale in the
United States. There can be no assurance, however, that these discussions will
result in a binding commitment on the part of any manufacturer to develop,
produce, market and sell 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
sufficient retail distribution would have a material adverse effect on the
Company's business. In addition, the FCC, in its order granting the Company a
license to build, launch and operate a national satellite radio broadcast system
(the "FCC License"), conditioned such license on certification by the Company
that its final receiver design is interoperable with respect to the final
receiver design of the other licensee, which has proposed to use a significantly
different transmission technology from that of the Company. There can be no
assurance that the Company will be able to meet such interoperability
requirement. See "The Company--The CD Radio Delivery System," "The
Company--Marketing Strategy" and "The Company--Technology and Patents."
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. If the parties cannot
reach agreement with ASCAP or BMI, special judicial rate setting procedures are
available under antitrust consent decrees that govern these organizations. SESAC
is not subject to a consent decree or special judicial rate setting mechanism.
Broadcasters currently pay a combined total of 4% of their revenues to the music
performing rights societies. The Company also will be required to negotiate
similar arrangements with the owners of the copyrights in sound recordings
pursuant to the Digital Performance Right in Sound Recordings Act of 1995 (the
"Digital Recordings Act"). The determination of certain royalty arrangements
with the owners of sound recording copyrights under the Digital Recordings Act
currently are subject to arbitration proceedings. The Copyright Office recently
reviewed the results of the arbitration and set the royalty rate at 6.5% of the
licensee's "gross revenues resulting from residential services in the United
States" including, among other services, subscription fees, advertising and time
share revenues. The recording industry, which had sought a royalty of 41.5% of
gross revenues, has indicated that it will appeal the decision. The Company
believes that it will be able to negotiate royalty arrangements with the music
performing rights organizations and the owners of sound recording copyrights,
but there can be no assurance as to the terms of any such royalty arrangements
ultimately negotiated or established by arbitration or judicial rate setting.
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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. As of December 17, 1998, the Company
had 40 employees, but does not have sufficient staff to program its broadcast
service, manage operations, control the operation of its satellites or handle
sales and marketing efforts. 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.
CONTINUING REGULATION BY THE FCC
In order to offer CD Radio, the Company was required to obtain a
license from the FCC to launch and operate its satellites. The Company was a
winning bidder in the April 1997 FCC auction (the "FCC Auction") for an FCC
license to build, launch and operate a national satellite radio broadcast
service, and the FCC's International Bureau issued such a license to the Company
on October 10, 1997 (the "IB Order"). Although the FCC License was effective
immediately, for a period of 30 days following the grant of the FCC License
certain parties were entitled to petition either the International Bureau or the
full FCC to reconsider the decision to grant the FCC License to the Company. An
application for review by the full FCC was filed by one of the low-bidding
applicants in the auction. This petition requests, among other things, that the
FCC adopt restrictions on foreign ownership, which were not applied in the IB
Order, and, on the basis of the Company's ownership, overrule the IB Order. If
this petition is denied, the complaining party may file an appeal with the U.S.
Court of Appeals, which must find that the decision of the FCC was not supported
by substantial evidence or was arbitrary, capricious or unlawful in order to
overturn the grant of the Company's FCC License. Although the Company believes
the FCC will uphold the IB Order, the Company cannot predict the ultimate
outcome of any proceedings relating to this petition or any other proceedings
that may be filed. See "The Company--Government Regulation."
In May 1998, the Company decided to increase the number of satellites
in its system from two to three and to change the orbit of those satellites,
requiring modification of its FCC License. The Company has not yet filed an
application with the FCC for this modification and is in the process of
preparing such application. The Company intends to file this application during
the fourth quarter of 1998. Although the Company believes that the FCC will
approve the Company's application for this necessary change, there can be no
assurance that this will occur. Interested parties will have an opportunity to
object to the license modification. The Company cannot predict the nature or
extent of any such objections or the time it will take the FCC to act on its
application or any such objections.
In order to ensure compliance with the transfer of control rule
restrictions contained in the Communications Act of 1934, as amended (the
"Communications Act"), any future assignments or transfers of control of the
Company's FCC License must be approved by the FCC. There can be no assurance
that the FCC would approve any such transfer or assignment.
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The term of the FCC License with respect to each satellite is eight
years, commencing from the date each satellite is declared operational after
having been inserted into orbit. Upon the expiration of the term with respect to
each satellite, the Company will be required to apply for a renewal of the
relevant license. Although the Company believes that the FCC will grant such
renewals, absent significant misconduct on the part of the Company, there can be
no assurance that such renewals in fact will be obtained.
The CD Radio system is designed to permit CD Radio to be received by
motorists in all outdoor locations where the vehicle has an unobstructed
line-of-sight with one of the Company's satellites. However, in certain areas
with high concentrations of tall buildings, such as urban cores, and in tunnels,
signals from both transmitting 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 areas. The FCC has not
yet established rules governing the application procedure for obtaining
authorizations to construct and operate terrestrial repeating transmitters. A
rulemaking 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. 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 towers or the roofs of certain
structures where the repeating transmitters will be installed. There can be no
assurance that the Company can obtain such tower or roof rights on acceptable
terms or in appropriate locations for the operation of CD Radio.
XM Satellite Radio Inc. ("XM"), a subsidiary of American Mobile
Satellite Corporation ("AMSC"), which is the holder of the other FCC License,
has proposed to use a different transmission technology from that of the
Company. The IB Order conditions the Company's license on certification by the
Company that its system includes a receiver that will permit end users to access
the other licensee's system. The Company may also be required to comply with the
interoperability requirement with respect to any person licensed by the FCC to
provide a satellite-based digital audio radio service in the future. There can
be no assurance that the Company will be able to meet this interoperability
requirement. See "Competition."
The FCC has proposed to revise regulations for a new type of lighting
device that may generate radio energy in the part of the spectrum to be used by
the Company. The devices would be subject to FCC rules that prohibit such
devices from causing harmful interference to an authorized radio service such as
CD Radio. However, unless the FCC adopts adequate technical standards
specifically applicable to such devices, it may be difficult for the Company to
enforce its rights if the use of such devices were to become commonplace. The
Company believes that the currently proposed FCC rules must be strengthened to
assure protection of the Company's spectrum. The FCC's failure to adopt adequate
standards could have a material adverse effect on reception of the Company's
broadcasts. The Company believes that the FCC will set adequate standards to
prevent harmful interference, although there can be no assurance that it will do
so.
The rules adopted by the FCC on March 3, 1997 for the national
satellite radio broadcast service also require that the Company complete
frequency coordination with Canada and Mexico. The United States government and
Canada have completed frequency coordination. There can be no assurance that the
Company will be able to coordinate use of this spectrum with Mexico or will be
able to do so in a timely manner.
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Changes in law, FCC regulations or international agreements relating to
communications policy generally or to matters relating specifically to the
services to be offered by the Company could affect the Company's ability to
retain the FCC License and obtain or retain other approvals required to provide
CD Radio or the manner in which CD Radio would be offered or regulated. See "The
Company--Government Regulation."
The IB Order determined that as a private carrier, the Company is not
subject to the current provisions of the Communications Act restricting
ownership in the Company by non-U.S. private citizens or organizations. The
Executive Branch of the U.S. government has expressed interest in changing this
policy, which could lead to restrictions on foreign ownership of the Company's
shares in the future. The IB Order stated that its finding that the Company is
not subject to the foreign ownership restrictions of the Communications Act is
subject to being revisited in a future proceeding. The pending application for
review of the IB Order may bring the question of foreign ownership restrictions
before the full FCC.
The FCC has indicated that it may in the future impose public service
obligations, such as channel set-asides for educational programming, on
satellite radio licensees. The Company cannot predict whether the FCC will
impose public service obligations or the impact that any such obligations, if
imposed, would have on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the services of David Margolese,
Chairman and Chief Executive Officer, who is responsible for the Company's
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 "The
Company--Government Regulation."
APPLICATION OF EXPORT CONTROL REGULATIONS
Shipment of the Company's satellites to territory outside the United
States will be subject to U.S. export control regulation. Because certain of
Loral's satellite launch service providers intend to launch the Company's
satellites from a launch facility outside the United States, export licensing
authorizations from the U.S. government will be required. There can be no
assurance, however, that the required export licenses will be obtained. U.S.
export control laws and regulations are subject to modification, and any prior
export approvals for a given foreign launch service provider do not necessarily
assure the approval of any future authorization request.
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
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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 XM. XM is 20% owned
(with an option to increase such interest to 72%) by Worldspace, Inc. (a company
that plans to provide satellite radio service outside of the United States) and
80% by AMSC, the holder of the other FCC License, which is owned in part by the
Hughes Electronics Corporation subsidiary of General Motors Corporation, and
which has financial, management and technical resources that greatly exceed
those of the Company. In addition, on November 13, 1998, WCS Radio, Inc.
("WCS"), a company formed by certain of the winners in the FCC's April 1997
wireless communication service license auction, submitted an application to the
FCC for authorization to provide a digital audio radio service. WCS said in its
application that it desires to launch two satellites into geostationary
equatorial orbits beginning in the fourth quarter of 2001 and to broadcast "up
to 100 channels of high quality music and talk radio and innovative data
services throughout the contiguous United States" beginning in the third quarter
of 2002. The Company is unable to predict whether the FCC will grant this
application and, if so, whether WCS will be able to launch a competing service.
The WCS satellites are expected to be built by a subsidiary of TRW, Inc., which
has greater financial, management and technical resources than the Company. The
FCC could also grant new licenses that would enable further competition to
broadcast satellite radio.
Finally, there are many portions of the electromagnetic spectrum that
are currently licensed for other uses and certain other portions for which
licenses have been granted by the FCC without restriction as to use, and there
can be no assurance that these portions of the spectrum could not be utilized
for satellite radio broadcasting in the future. Although any such licensees
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 events could have a material adverse effect on the Company. See
"The Company--Competition."
UNCERTAIN PATENT PROTECTION
The Company has been granted certain U.S. patents covering various
features of satellite radio technology. There can be no certainty that all
aspects of the Company's system will be covered by the Company's patents. If the
Company's system is not covered by the Company's patents, others may duplicate
the Company's system without liability to the Company. In addition, there can be
no assurance that the Company'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 may occur to
determine the scope and validity of other parties' proprietary rights, and there
can be no assurance of success in any such litigation. There can be no assurance
that there are no patents, or pending patent applications which will later
mature into patents, or inventions developed earlier which will later mature
into patents, of others which may block the Company's ability to operate its
system. Should the Company desire to license its technology, there can be no
assurances that the Company can do so. Assuming the Company pays all necessary
fees in a timely manner, the earliest of the Company's patents is due to expire
on April 10, 2012. See "The Company--Technology and Patents."
INVESTMENT COMPANY ACT OF 1940
The Investment Company Act of 1940, as amended (the "Investment Company
Act")
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defines an investment company to include a company that owns or proposes to
acquire "investment securities" (as that term is defined in the Investment
Company Act) exceeding 40% of the value of such company's assets (exclusive of
U.S. government securities and cash items). Because the Company had temporarily
invested the proceeds from its public and private offerings in 1997 in
investment securities prior to their expenditure, the Company could have fallen
within the definition of an investment company. Investment companies must be
registered and are subject to extensive regulation by the Commission under the
Investment Company Act. On November 30, 1998, the Commission granted the Company
an exemption from registration under the Investment Company Act until the
earlier of November 30, 1999 and the date the Company ceases to be an investment
company.
The order of the Commission includes certain conditions with which the
Company is required to comply. If the Company is unable to do so, the Company
may be required to register as an investment company or, in the alternative, to
continue to invest a substantial portion of its assets in U.S. government
securities, pending expenditure of such proceeds by the Company for its
corporate purposes.
RISK OF INABILITY TO SATISFY A CHANGE IN CONTROL OFFER
Upon the occurrence of any Change of Control (as defined in the Senior
Notes Indenture and the certificate of designations for the Series C Preferred
Stock and the Junior Preferred Stock, respectively), the Company will be
required to make an offer to purchase the Senior Secured Notes, the Series C
Preferred Stock and the Junior Preferred Stock. If such an offer is made, there
can be no assurance that the Company will have available funds sufficient to pay
the purchase price for any or all of the Senior Secured Notes, the Series C
Preferred Stock or the Junior Preferred Stock that might be delivered by holders
of the Senior Secured Notes, the Series C Preferred Stock or the Junior
Preferred Stock seeking to accept the Change of Control offer. The Senior Notes
Indenture provides that the Company must purchase all Senior Secured Notes
delivered by holders thereof pursuant to a Change of Control offer prior to
purchasing any shares of the Series C Preferred Stock or Junior Preferred Stock.
The failure of the Company to make or consummate the Change of Control offer or
to pay the purchase price for the Senior Secured Notes when due will give the
trustee under the Senior Notes Indenture and the holders of the Senior Secured
Notes the right to require the Company to prepay all of its outstanding
indebtedness and other obligations under the Senior Secured Notes. The failure
of the Company to make or consummate the Change of Control offer or pay the
purchase price for the Series C Preferred Stock when due will give the holders
of a majority of the Series C 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 "The Company--Government Regulation."
CONTROL BY EXISTING STOCKHOLDERS
As of November 17, 1998, the executive officers and directors of the
Company beneficially owned, or had voting power with respect to, approximately
23% of the outstanding Common Stock and Prime 66 had beneficial ownership of
approximately 22% of the outstanding Common Stock. This concentration of
ownership will enable such stockholders, either acting alone or together with
other existing stockholders, to exert considerable influence over the management
and policies of the Company. Assuming issuance of all of the proposed Junior
Preferred Stock to the Apollo Investors, such investors
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would own beneficially approximately 22% of the outstanding Common Stock and
together, the executive officers and directors, Prime 66 and the Apollo
Investors would own beneficially, or have voting power with respect to, an
aggregate of approximately 56% of the outstanding Common Stock. Such
stockholders, acting together, could determine all matters requiring a vote of
holders of Common Stock, including the election of directors and approval of
mergers and similar transactions. Such a concentration of ownership also may
have the effect of delaying, deferring or preventing a change of control.
DILUTION UPON CONVERSION OF PREFERRED STOCK
Subject to the terms set forth in the certificate of designations
thereto, the Series C Preferred Stock may be converted into Common Stock by the
Company or the holders thereof under certain circumstances, and shares of Common
Stock may be issued as dividends upon the Series C Preferred Stock at the option
of the Company. Subject to the terms set forth in the certificates of
designations thereto, the Junior Preferred Stock may be converted into Common
Stock by the holders thereof at any time. In either case, or if the Company
issues additional equity securities, the share of the equity of the Company of
the current holders of the Common Stock may be diluted.
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THE COMPANY
The Company is building a digital quality, 100 channel radio service to
be broadcast directly from satellites to vehicles. The Company holds one of only
two FCC Licenses to build, launch and operate a national satellite radio
broadcast system. The Company's service, which will be marketed under the brand
name "CD Radio," will offer 50 channels of commercial-free, digital quality
music programming and 50 channels of news, sports, talk and ethnic programming.
CD Radio will be broadcast throughout the continental United States, over a
frequency band, the "S-band," that will augment traditional AM and FM radio
bands. Under its FCC License, the Company has the exclusive use of a 12.5
megahertz portion of the S-band for this purpose. The Company has entered into a
contract with Loral for the construction, launch and in-orbit delivery of three
satellites beginning in November 1999. See "--Recent Developments." The Company
currently expects to commence CD Radio broadcasts in the first quarter of the
year 2000, at a subscription price of $9.95 per month.
The Company was incorporated in the state of Delaware as Satellite CD
Radio, Inc. on May 17, 1990. On December 7, 1992, the Company's name was changed
to CD Radio Inc., and the Company formed a wholly owned subsidiary, Satellite CD
Radio, Inc., that is the holder of record of the Company's FCC License. The
Company's executive offices are located at 1180 Avenue of the Americas, New
York, New York 10036, its telephone number is (212) 899-5000 and the address of
its Web site is www.cdradio.com.
As an entertainment company, the Company intends to design and
originate programming on each of its 50 music channels. Each channel will be
operated as a separate radio station, with a distinct format. Certain music
channels will offer continuous music while others will have program hosts,
depending on the type of music programming. CD Radio will offer a wide range of
music categories, such as:
Symphonic NAC Jazz Today's Country
Chamber Music New Age Country Gold
Opera Soul Ballads Traditional Country
Top of the Charts Classic Soul Hits Folk Rock
50's Hits R&B Oldies Alternative Rock I
60's Hits Urban Contemporary Alternative Rock II
70's Hits Rap/Hip Hop Classic Rock I
80's Hits Dance Classic Rock II
90's Hits Tropical Album Rock
Soft Rock Latin Contemporary Hard Rock/Metal
Love Songs Merengue Blues
Singers & Songs Boleros Reggae
Beautiful Instruments Mexicana World Beat
Broadway's Best Rock en Espanol Gospel
Big Band/Swing TexMex Contemporary
Classic Jazz Cumbia Children's Entertainment
Contemporary Jazz Latin Jazz
Programming on the Company's additional 50 non-music channels will be
provided by third parties, and to date the Company has entered into programming
agreements with content providers for 15 of these channels. Non-music channels
will contain advertising, which will provide the Company with additional
revenue. These channels will include news and talk shows and programming
directed to a diverse range of groups, including Hispanic listeners, and will
allow subscribers throughout the country to listen to sports programming
occurring outside their locale.
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The Company's 50 music and non-music channels will be housed at its
National Broadcast Studio in Rockefeller Center in New York City. 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 transmit programming to the satellites, to activate or deactivate
service to subscribers and to perform the tracking, telemetry and control of the
orbiting satellites.
In May 1998, the Company expanded its planned broadcast capacity from
50 channels to 100 channels, following a market study conducted by The Yankee
Group, a market research organization, which found that 100 channels of
programming would increase and accelerate potential subscriber penetration.
Expansion of the system to 100 channels will allow the Company to provide
subscribers with a greater range of choice of content within their preferred
format and to expand the Company's service to the Hispanic and other underserved
markets, fully utilizing the radio spectrum allocated to the Company.
In connection with the expansion of the system to 100 channels, on July
28, 1998, the Company and Loral executed the Loral Satellite Contract. Pursuant
to the Loral Satellite Contract, Loral has agreed to construct, launch and
deliver three satellites in-orbit and checked-out, to construct for the Company
a fourth satellite for use as a ground spare and to become the Company's launch
services provider. Launches of the Company's three satellites are scheduled for
November 1999, December 1999 and January 2000 with in-orbit checked out delivery
occurring within two months after each launch. "--The CD Radio Delivery
System--The Satellites--Satellite Construction and Launch Services." In
connection with the Loral Satellite Contract, on May 28, 1998, the Company also
terminated its prior agreement with Arianespace S.A. ("Arianespace") to provide
launch services and terminated the related vendor financing with Arianespace
Finance S.A. As a result, the Company incurred a liability of approximately $18
million. The Company expensed this item, together with approximately $5 million
of related capitalized costs, in the second quarter of 1998.
As part of the expansion of the Company's system from 50 planned
broadcast channels to 100 channels, the Company will change the orbital location
of its satellites from geostationary orbits over the equator to inclined
elliptical orbits. This modification will allow the Company's satellites to
optimize the time spent over the continental United States, which will permit
the Company to fully utilize the bandwidth allocated to it by the FCC.
In April 1998, the Company entered into an agreement with Lucent for
the development and manufacture of a chip set that represents the essential
element of S-band radios and of a radio card that will enable consumers to
receive CD Radio in their cars by inserting the radio card into existing
cassette and CD players. The Company expects that the initial delivery of
commercial quantities of chip sets to consumer electronics manufacturers will
begin in December 1999.
THE CD RADIO OPPORTUNITY
The Company believes that there is a significant market for music and
other radio programming such as news, talk and sports 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 continental United States and
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commercial-free, digital quality music 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
estimates that there will be approximately 198 million registered private motor
vehicles in the United States by the end of 1999. 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 over one hour
commuting daily, millions of sports fans, three million truck drivers, three
million owners of recreational vehicles and 32 million persons of Hispanic
origin.
According to The Arbitron Company ("Arbitron"), in 1996, despite the
fact that almost all vehicles contained 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 1997, 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 continental 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% of all commercial
radio stations. Although niche music categories such as classical, jazz, rap,
gospel, oldies, soundtracks, new age music, children's programming and others
accounted for approximately 30% of sales of recorded music in 1997, 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, and many others. CD Radio's wide choice of formats is expected to appeal
to the large number of currently underserved listeners. Furthermore, CD Radio's
ability to offer a number of channels devoted to each genre will enable
subscribers to listen to a wider range of music within their preferred format.
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 system is designed to
cover the entire continental United States, enabling listeners almost 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 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.
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
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service announcements and miscellaneous information. The Company believes that
consumers dislike frequent 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 be able
to meet any of its projections for the balance of 1998, 1999 or 2000, including
completion of construction of its National Broadcast Studio, completion of its
satellite launches or commencement of its commercial operations in first quarter
2000 as planned. See "Risk Factors--Possible Delays and Adverse Effect of Delay
on Financing Requirements."
1990: CD Radio Inc. incorporated
Proposed FCC create satellite radio service and filed license
application
1991: Conducted stationary service simulation Conducted nationwide
focus groups
1992: Satellite radio spectrum allocated Conducted radio manufacturer
discussions
1993: Contracted with Loral for satellite construction Conducted
additional nationwide focus groups
1994: Completed initial public offering of its Common Stock
1995: Completed Loral satellite design
Completed development of proprietary miniature satellite dish
antenna Obtained patents for portions of its broadcast system
1996: Designed the radio card
1997: Obtained one of only two national satellite radio broadcasting
licenses from the FCC Commenced construction of three satellites
Recruited its key programming, marketing and financial management
team
Completed a strategic sale of $25 million of Common Stock to Loral
Completed additional debt and equity financings raising $315 million
1998: Expanded from 50 planned broadcast channels to 100 broadcast channels
Ordered fourth satellite and expanded Loral's role to provide in-orbit
system delivery
Obtained $50 million of vendor financing from Loral
Obtained $115 million of financing from Bank of America and other
lenders
Signed agreement with Lucent to design, develop and manufacture chip
sets
Obtained additional patents for portions of its broadcast system
Signed programming agreements with content providers for 15 non-music
channels
Commenced terrestrial repeater network rollout
Completed a sale of $100 million of Common Stock to Prime 66
Agreed to buy sell up to $200 million of Junior Preferred Stock to the
Apollo Investors
Began construction of National Broadcast Studio
Select additional non-music channel content providers
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Complete significant satellite construction milestones
1999: Nationwide rollout of terrestrial repeater network Complete
construction of National Broadcast Studio Commence production of
radio cards Commence satellite launches
2000: Test markets
Begin commercial operations
THE CD RADIO SERVICE
CD Radio will offer motorists: (i) a wide choice of finely focused
music and non-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. CD Radio will offer subscribers a broad
range of programming formats and significant depth within each format. Each of
CD Radio's 50 music channels will have a distinctive format, such as opera,
reggae, classic jazz, cumbia 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. Additionally, the Company will
provide news, sports and talk programming that is generally not available on
conventional radio.
"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 commercial AM and FM
stations, will be a subscription 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 have a visual display that will indicate the channels and
format selected, as well as the title, recording artist and album title of the
song being played. 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.
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PROGRAMMING
The Company intends to offer 50 channels of commercial-free, all-music
programming and 50 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 believes that 50 music channels
will enable it to "superserve" subscribers with a greater range of choice of
content within their preferred format. The Company expects that the initial
subscription fee for CD Radio, which will entitle subscribers to receive all CD
Radio channels, will be $9.95 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 music channel. In order to be accessible to these
industries, the Company is building its National Broadcast Studio in Rockefeller
Center in New York City. Program managers also will coordinate the Company's
continuing market research to measure audience satisfaction, refine channel
definitions and themes and select program hosts for those channels that have
hosts.
Music programming will be selected from the Company's music library.
The Company intends to create an extensive music library which will consist of a
deep range of recorded music in each genre broadcast. In addition to updating
its music library with new recordings as they are released, the Company will
seek to acquire recordings that in certain cases are no longer commercially
available.
In addition to its music channels, the Company expects to offer 50
channels of news, sports and talk programming, most of which will include
commercial advertising. The Company generally does not intend to produce
programming for its non-music channels, and will obtain such programming from
various third party content providers. To date the Company has entered into
agreements for a total of 15 channels with content providers including Bloomberg
News Radio, C-SPAN, Sports Byline USA, Classic Radio, Hispanic Radio Network and
World Radio Network.
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 advertising
and/or subscription revenues. If the parties cannot reach agreement with ASCAP
or BMI, special judicial rate setting procedures are available under antitrust
consent decrees that govern these organizations. SESAC is not subject to a
consent decree or special judicial rate setting mechanism. Broadcasters
currently pay a combined total of 4% of their revenues to the music performing
rights societies. The Company also will be required to negotiate similar
arrangements with the owners of the copyrights in sound recordings pursuant to
the Digital Recordings Act. The determination of certain royalty arrangements
with the owners of sound recording copyrights under the Digital Recordings Act
are currently subject to arbitration proceedings. The Copyright Office recently
reviewed the results of the arbitration and set the royalty rate at 6.5% of the
licensee's "gross revenues resulting from residential services in the United
States" including, among other services, subscription fees, advertising and time
share revenues. The recording industry, which had sought a royalty of 41.5% of
gross revenues, has indicated that it will appeal the decision. The Company
believes that it will be able to negotiate royalty arrangements with the music
performing rights organizations and the owners of sound recording copyrights,
but there can be no assurance as to the terms of any such royalty arrangements
ultimately negotiated or established by arbitration or judicial rate setting.
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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 digital quality
fidelity. The Company's marketing strategy for CD Radio has three interrelated
components: (i) creating consumer awareness of CD Radio, (ii) generating
subscriptions to CD Radio and (iii) generating purchases of radio cards, S-band
radios and their associated miniature satellite dish antennas.
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 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.
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, Hispanic listeners, sports
enthusiasts, truck drivers, recreational vehicle owners and consumers in areas
with sparse radio coverage. 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 over
one hour 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 30% 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.
Hispanic Market. Currently there are approximately 28 million
Spanish-speaking Americans, many of whom have limited access to Spanish language
radio, and this population group is growing rapidly and is expected to reach 36
million by 2005. The Company intends to broadcast a number of music and
non-music channels that will cater to the Hispanic market. The Company plans to
purchase local television spots on Spanish speaking channels and place
advertising in national Spanish language magazines and local Spanish language
newspapers.
Sports Enthusiasts. Many fans of various sports are unable to receive
broadcasts of interest to them because events are broadcast only within limited
regional areas. The Company intends to broadcast a number of channels containing
such sports programming. The Company plans to purchase advertising on national
and regional cable television sports channels, in sports magazines and in the
sports sections of newspapers.
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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.
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 antenna 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 optional equipment in automobiles 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 a
number of years.
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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
credit or debit card.
THE CD RADIO DELIVERY SYSTEM
The CD Radio satellite system is designed to provide seamless signal
coverage throughout the continental United States. This means that listeners
will almost 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 2320.0-2332.5 MHz frequency band.
As part of the expansion of the Company's system from 50 planned
broadcast channels to 100 channels, the Company will change its satellite system
from two satellites in geostationary orbits over the equator to three satellites
in inclined elliptical geosynchronous orbits. The satellites will each travel in
a figure eight pattern extending above and below the equator. A satellite in the
top half of the pattern will serve the United States at a better elevation angle
than a geostationary satellite over the equator. At any given time, two of the
three satellites will operate from the upper portion, while the third satellite
will be shut off as it traverses the lower portion. This modification will allow
the Company's satellites to optimize the time spent over the continental United
States, which will permit the Company to fully utilize the bandwidth allocated
to it by the FCC.
CD Radio is designed to be broadcast from three satellites in
geosynchronous orbit, two of which transmit the same signals at any given time
to radio cards or S-band radios that are received through miniature satellite
dish antennas. This design involves new applications of existing technology that
have not been deployed and there can be no assurance that the CD Radio system
will work as planned.
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The CD Radio delivery system will consist of three principal
components: (i) the satellites; (ii) the receivers; and (iii) the National
Broadcast Studio.
THE SATELLITES
Satellite Design. The Company's satellites are of the Loral FS-1300
model series. This family of satellites has a total in-orbit operation time of
220 years, and to date more than 52 such satellites have been built or ordered,
including 21 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 approximately 81 feet long, 7 feet wide and 31 feet tall.
The Company's satellites will incorporate a design which will act
essentially as a "bent pipe," relaying received signals directly to the ground.
The Company's satellites will not contain on-board processors or switches. All
of the Company's processing operations will be on the ground where they are
accessible for maintenance and continuing technological upgrade without the need
to launch replacement satellites.
High Elevation Angles. The Company plans to phase its satellites in
orbits that extend for a period of time over North America to provide very high
signal elevation angles and thereby mitigate service interruptions which can
result from signal blockage and fading. Each of the Company's two satellites in
operation at any given time will broadcast the same signal.
Memory Buffer. The Company's transmission design incorporates the use
of a memory buffer chip contained within radio cards and S-band radios, designed
to store signal and to mitigate service interruptions which can result from
signal blockage and fading. The Company has been granted patents on its
satellite broadcasting system, which incorporates a memory buffer. As with any
wireless broadcast service, the Company expects to experience occasional "dead
zones" where the service from its satellites 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 the radio card's memory
buffer.
Terrestrial Repeaters. In certain areas with high concentrations of
tall buildings, such as urban cores, and in tunnels, signals from the Company's
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, increasing the availability of service. The
FCC has not yet established rules governing such terrestrial repeaters, and the
Company cannot predict the outcome of the FCC's current rulemaking on this
subject. The Company also will need to obtain the rights to use towers or the
roofs of certain structures where the repeaters will be installed. There can be
no assurance that the Company can obtain such tower or roof rights on acceptable
terms or in appropriate locations for the operation of CD Radio.
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Satellite Construction and Launch Services. In March 2, 1993, the
Company entered into a contract with Loral, pursuant to which Loral agreed to
build three satellites, two of which the Company intended to launch and one of
which it intended to keep in reserve as a spare. Under the contract, the Company
had an option to order a fourth satellite on preset price and delivery terms. In
July 1997, the Company entered into a contract with Arianespace for the launch
of its satellites. On May 27, 1998, as a result of an evaluation of the
advantages of a three-satellite orbital configuration, the Company and Loral
entered into the Loral Satellite Contract. Pursuant to the Loral Satellite
Contract, Loral has agreed to construct, launch and deliver three satellites,
in-orbit and checked-out, to construct for the Company a fourth satellite for
use as a ground spare and to modify the scope of work to be performed under the
contract as a result of the expansion of the Company's system to 100 channels.
Under the Loral Satellite Contract, Loral also has agreed to arrange
for the launch of the first satellite by November 1999, to arrange for the
launch of the second satellite by December 1999, to arrange for the launch of
the third satellite by January 2000 and to deliver the fourth satellite to a
Company designated storage site by May 2000. There can be no assurance, however
that Loral will be able to meet this schedule. Loral has also agreed to deliver
all three satellites in-orbit and checked-out prior to March 31, 2000. The Loral
Satellite Contract provides that events of default by the Company will include:
(i) the failure to maintain a minimum net worth, (ii) the failure to have
sufficient funds or committed financing to pay its obligations on a timely basis
and (iii) the occurrence of an event of default under the Tranche A Facility.
Title to the first, second and third satellites will pass to the
Company at the time such satellites are delivered to the Company in-orbit and
checked out. Risk of loss for the first, second and third satellites will pass
to the Company at the time of launch. Title and risk of loss for the Company's
fourth satellite will pass to the Company at the time such satellite is shipped
to the ground storage site designated by the Company. Each satellite is
warranted to be in accordance with the performance specifications of the Loral
Satellite Contract and free from defects in materials and workmanship. Loral's
warranties will expire at the time of launch or, in the case of the Company's
fourth satellite, two years from the date of delivery to the ground storage
site. In the event of a 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.
The Loral Satellite Contract also requires Loral to provide launch
services for the Company's satellites. Loral maintains an inventory of launch
slots with a number of launch service providers, which have been approved by the
Company. Under the Loral Satellite Contract, the Company's first two satellites
will be launched on Proton launch vehicles and the third satellite will be
launched on an Atlas IIIA launch vehicle. In the event that such Atlas IIIA
launch vehicle cannot be suitably optimized for the launch of the Company's
third satellite, then the Company has the right to instruct Loral to substitute
either a third Proton launch vehicle (to the extent that a Proton launch vehicle
is available), a Sea-Launch vehicle or an Atlas IIIB launch vehicle.
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.
Satellite launches are subject to significant risks, including
destruction or damage of the satellite during launch or failure to achieve
proper orbital placement. Launch failure rates vary depending on the particular
launch vehicle and contractor. Although past experience is not necessarily
indicative of future performance, the Proton family of Russian-built launch
vehicles has a 92% launch success rate based on
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its last 50 launches, and the Atlas family of launch vehicles, built by Lockheed
Martin Corporation, has a 94% launch success rate based on its last 42 launches.
No commercial satellite has ever been launched from a Sea-Launch vehicle. The
first commercial Sea-Launch mission is expected to occur in 1999. There is no
assurance that the launches of the Company's satellites will be successful.
Satellites also may fail to achieve a proper orbit in some instances or be
damaged in space. Loral will have no risk of loss for either a satellite or
launch vehicle failure. However, Loral will provide a free launch in the event
of a failure of the first Proton launch vehicle which is used to launch one of
the Company's satellites. See "Risk Factors--Dependence upon Loral" and "Risk
Factors--Satellite Launch Risks."
The Company will rely upon Loral to arrange for the timely launch of
the satellites. Failure of Loral to arrange to launch the satellites in a timely
manner could materially adversely affect the Company's business. Loral will not
be liable for indirect or consequential damages or lost revenues or profits
resulting from late delivery or other defaults. If Loral fails to deliver the
three satellites in-orbit and checked out by July 31, 2000, it will be required
to pay certain late delivery penalties. If Loral fails to deliver the fourth
satellite to its storage site by September 30, 2000, it will also be liable for
certain late delivery penalties. There can be no assurance that these remedies
will adequately mitigate any damage to the Company's business caused by launch
delays.
After reaching agreement with Loral to provide launch services, the
Company terminated its prior launch services agreement with Arianespace,
incurring a termination liability amount of approximately $18 million. Loral has
agreed to use its reasonable best efforts to modify its existing Multiple Launch
Service Agreement with Arianespace to add the two Ariane launches, which were
previously under contract between the Company and Arianespace, and to secure
Arianespace's agreement to reimburse the Company for all or a portion of the
termination liability amount. There can be no assurance that Loral will be
successful in obtaining any reimbursement for the Company.
Risk Management and Insurance. Three custom-designed, fully dedicated
satellites are required to broadcast all 100 planned channels of CD Radio. The
Company's agreement with Loral includes a free relaunch in the event of the
failure of the first Proton launch vehicle used to launch one of the Company's
satellites. The Company intends to insure against other contingencies, including
a failure during launch caused by factors other than the launch vehicle and
failure of launch vehicles other than the first Proton. If the Company is
required to launch the spare satellite due to a launch failure, its operational
timetable would be delayed for up to six months. 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 up to three years. See "Risk Factors--Dependence upon Loral" and
"Risk Factors--Satellite Launch Risks."
Once properly deployed and operational, the historical risk of
premature total satellite failure has been less than 1% 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
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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.
On April 24, 1998, the Company entered into an agreement with Lucent
for the development and manufacture of a chip set which represents the essential
element of low cost, addressable radio cards and S-band radios. The radio cards
and S-band radios will be manufactured by one or more consumer electronics
manufacturers. Lucent has agreed to work to complete such development so that
prototype chip sets will be delivered to the consumer electronics manufacturers
beginning December 1, 1999. However, Lucent has not guaranteed that this
schedule will be met and it is possible that delivery of chip sets could be
delayed. See "Risk Factors--Unavailability of Radio Cards, S-band Radios or
Miniature Satellite Dish Antennas."
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 will be designed so that it can be
removed by pushing the radio's "eject" button. Radio cards will be portable and
will be able to be moved from car to car, if desired. S-band radios will be
capable of receiving AM, FM and S-band radio transmissions. The Company
anticipates that S-band radios will be similar to conventional AM/FM radios in
size and appearance. Like existing conventional radios, a number of these radios
may also incorporate cassette or compact disc players.
In addition to a radio card or S-band radio, a vehicle must be equipped
with a miniature satellite antenna in order to receive CD Radio. To satisfy this
requirement, the Company has designed a miniature satellite dish antenna. The
satellite dish antenna is battery powered and 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. 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, and in tunnels, signals
from all three satellites will be blocked and reception will be adversely
affected. In these areas, the Company plans to install
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terrestrial repeating transmitters to broadcast CD Radio. The Company has
deployed its terrestrial repeater network in San Francisco, and expects that
system testing will be completed shortly. The Company also initiated the design
and build-out of its terrestrial repeating network in Houston and will initiate
construction on additional urban core areas over the course of the next year.
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 help the Company to
protect against piracy of the CD Radio signal. Through this feature, the Company
can directly via satellite 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 and department 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.
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, will be 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 commenced discussions with
several manufacturers regarding the manufacture of radio cards, S-band radios
and miniature satellite dish antennas for retail sale in the United States.
There can be no assurance that these discussions will result in a binding
commitment on the part of any manufacturer to produce radio cards, S-band radios
and miniature satellite dish antennas in a timely manner so as to permit the
widespread introduction of CD Radio in accordance with the Company's business
plan or that sufficient quantities of these will be available to meet
anticipated consumer demand. Failure to have at least one manufacturer develop
and widely market radio cards and the associated miniature satellite dish
antennas, and to a lesser extent S-band radios, at affordable prices, or to
develop and widely market such products upon the launch of CD Radio, would have
a material adverse effect on the Company's business. In addition, the IB Order
conditions the Company's license on certification by the Company that its system
include a receiver that will permit end users to access the system of the other
licensee, which has proposed to use a significantly different transmission
technology from that of the Company. See "Risk Factors--Unavailability of Radio
Cards, S-band Radios or Miniature Satellite Dish Antennas."
THE NATIONAL BROADCAST STUDIO
The Company plans to originate its 100 channels of programming from its
National Broadcast Studio to be located in Rockefeller Center in New York City.
The National Broadcast Studio will house the Company's music library, facilities
for programming origination, programming personnel and
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program hosts, as well as facilities to transmit 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 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.
Programming will be originated at the National Broadcast Studio and
transmitted to the Company's satellites for broadcast to CD Radio subscribers.
The Company expects that its broadcast transmissions will be uplinked to its
satellites at frequencies in the 7025.0-7075.0 MHz band. The satellites will
receive and convert the signal to the 2320.0-2332.5 MHz band. The satellites
then will broadcast the signal to the United States, at a power sufficient to
enable its receipt directly by the miniature satellite dish antennas to be used
by subscribers. Service-related commands also will be relayed from the National
Broadcast Studio to the Company's satellites for retransmission to subscribers'
radio cards and S-band radios. These service-related commands include those
required to (i) initiate and suspend subscriber service, (ii) change the
encryption parameters in radio cards and S-band radios to reduce piracy of CD
Radio and (iii) activate radio card and S-band radio displays to show
program-related information.
Tracking, telemetry and control operations for the Company's orbiting
satellites also will be performed from the National Broadcast Studio. These
activities include controlling the routine station keeping, which involves
satellite orbital adjustments and monitoring of the satellites.
On March 31, 1998, the Company signed a lease for the 36th and 37th
floors and certain portions of the roof and basement at 1221 Avenue of the
Americas, New York, New York, to house the Company's headquarters and National
Broadcast Studio and in October 1998, the Company began construction of the
National Broadcast Studio. The Company will use portions of the roof to install
and maintain satellite transmission equipment and will use a portion of the 8th
floor setback to install an emergency electric power generator. The term of the
lease is 15 years and 10 months, with an option to renew for an additional five
years at fair market value. The Company also has a right of first refusal, from
and after the third anniversary of the commencement date, to lease any full
floor which becomes available on floors 27 through 37 of the building at fair
market value. The initial annual rental is approximately $4.3 million, with
specified increases and escalations based on operating expenses.
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 characteristics of the
Company's planned system. 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 an
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,
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there can be no assurance that the CD Radio system will function as intended.
See "Risk Factors--Reliance on Unproven Applications of 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) XM, the other holder of an FCC License. The
Company may also face competition from WCS, a company formed by certain of the
license winners in the FCC's April 1997 wireless communication service license
auction, which recently applied for a license to provide a satellite-based
digital audio radio service beginning in the year 2002.
The AM/FM radio broadcasting industry is very competitive. Radio
stations compete for listeners and advertising revenues directly with other
radio stations within their markets on the basis of a variety of factors,
including program content, on-air talent, transmitter power, assigned frequency,
audience characteristics, local program acceptance and the number and
characteristics of other radio stations in the market. Many of the Company's
radio broadcasting competitors have substantially greater financial, management
and technical resources than the Company.
Unlike the Company, the radio industry has a well established market
for its services and generally offers "free" broadcast reception paid for by
commercial advertising rather than by a subscription fee. In addition, certain
AM and FM stations, such as National Public Radio, offer programming without
commercial interruption. Many radio stations also offer information programming
of a local nature, such as local news or traffic reports, which the Company will
be unable to offer. CD Radio will compete with conventional radio stations on
the basis of its targeted programming formats, nearly seamless signal coverage,
freedom from advertising and compact disc quality sound, features which are
largely unavailable on conventional broadcast radio.
Currently, radio stations broadcast by means of analog signals, as
opposed to digital transmission. The Company believes, however, that within
several years, 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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XM, an 80%-owned subsidiary of AMSC, is the other holder of an FCC
License. WorldSpace, Inc. (a company that plans to provide satellite radio
service outside of the United States) has a 20% interest (with an option to
increase such interest to 72%) in XM. AMSC, which is owned in part by the Hughes
Electronics Corporation subsidiary of General Motors Corporation, has financial,
management and technical resources that exceed those of the Company. In
addition, the FCC could grant new licenses which would enable further
competition to broadcast satellite radio. Finally, there are many portions of
the electromagnetic spectrum that are currently licensed for other uses and
certain other portions for which licenses have been granted by the FCC without
restriction as to use, and there can be no assurance that these portions of the
spectrum could not be utilized for satellite radio broadcasting in the future.
Although any such licensees 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."
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.
TECHNOLOGY AND PATENTS
The Company has been granted certain U.S. patents (U.S. Patent Nos.
5,278,863; 5,319,673; 5,485,485; 5,592,471) on various features of satellite
radio technology, including signal diversity and memory reception. There can be
no assurance, however, that any U.S. patent issued to the Company will cover the
actual commercialized technology of the Company or will not be circumvented 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 and belongs to the Company.
The Company believes that it is the sole owner of the technology covered by the
Company's issued patents. There can be no assurance, however,
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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 patents, trade secrets or
know-how, litigation might be necessary to enforce the Company's patents, to
protect the Company's trade secrets or know-how or litigation may occur to
determine the scope of the proprietary rights of others. Any such litigation
could result in substantial cost to, and diversion of effort by, the Company,
and adverse findings in any proceeding could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties or otherwise adversely affect the Company's ability to successfully
develop and market CD Radio.
GOVERNMENT REGULATION
As an operator of a privately owned satellite system, the Company is
subject to the regulatory authority of the FCC under the Communications Act. The
FCC is the government agency with primary authority in the United States over
satellite radio communications. The Company is currently subject to regulation
by the FCC principally with respect to (i) the licensing of its satellite
system; (ii) preventing interference with or to other users of radio
frequencies; and (iii) compliance with rules that the FCC has established
specifically for United States satellites and rules that the FCC has established
for providing satellite radio service.
On May 18, 1990, the Company proposed that the FCC establish a
satellite radio service and applied for an FCC License. On March 3, 1997, the
FCC adopted rules for the national satellite radio broadcast service (the "FCC
Licensing Rules"). Pursuant to the FCC Licensing Rules, an auction was held
among the applicants on April 1 and 2, 1997. The Company was a winning bidder
for one of the two FCC Licenses with a bid of $83 million. XM was the other
winning bidder for an FCC License with a bid of $89 million. After payment of
the full amount by the Company, the FCC's International Bureau issued the FCC
License to the Company on October 10, 1997. The FCC License was effective
immediately; however, for a period of 30 days following the grant of the FCC
License, those parties that had filed comments or petitions to deny in
connection with the Company's application for an FCC License were entitled to
petition the International Bureau to reconsider its decision to grant the FCC
License to the Company or request review of the decision by the full FCC. An
application for review by the FCC was filed by one of the low-bidding applicants
in the auction. This petition requests, among other things, that the FCC adopt
restrictions on foreign ownership, which were not applied in the license issued
to the Company by the FCC's International Bureau on October 10, 1997 (the "IB
Order"), and, on the basis of the Company's ownership, overrule the IB Order.
Although the Company believes the FCC will uphold the IB Order, the Company
cannot predict the ultimate outcome of any proceedings relating to this petition
or any other proceeding that may be filed. If this petition is denied, the
complaining party may file an appeal with the U.S. Court of Appeals which must
find that the decision of the FCC was not supported by substantial evidence, or
was arbitrary, capricious or unlawful in order to overturn the grant of the
Company's FCC License.
Pursuant to the FCC Licensing Rules, the Company is required to meet
certain progress milestones. Licensees are required to begin satellite
construction within one year of the grant of the FCC License; to launch and
begin operating their first satellites within four years; and to begin operating
their entire system within six years. The IB Order states that failure to meet
those milestones will render the FCC License null and void. On May 6, 1997, the
Company notified the FCC that it had begun construction on the first of its
satellites. On March 27, 1997, a third party requested reconsideration of the
FCC Licensing Rules, seeking, among other things, that the time period allotted
for these milestones
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be shortened. To date the FCC has not responded to the petition for
reconsideration. The Company cannot predict the outcome of this petition.
In May 1998, the Company decided to increase the number of satellites
in its system from two to three and modify its orbits from geostationary to
inclined, elliptical geosynchronous, requiring modification of its FCC License.
The Company has not yet filed an application with the FCC for this modification
and is in the process of preparing such application. The Company intends to file
this application during the fourth quarter of 1998. Although the Company
believes that the FCC will approve the Company's application for this change,
there can be no assurance that this will occur. Interested parties will have an
opportunity to object to the license modification. The Company cannot predict
the nature or extent of any such objections or the time it will take the FCC to
act on its application or any such objections.
The term of the FCC License for each satellite is eight years,
commencing from the time each satellite is declared operational after having
been inserted into orbit. Upon the expiration of the term with respect to each
satellite, the Company will be required to apply for a renewal of the relevant
FCC License. Although the Company anticipates that, absent significant
misconduct on the part of the Company, the FCC Licenses will be renewed in due
course to permit operation of the satellites for their useful lives, and that a
license would be granted for any replacement satellites, there can be no
assurance of such renewal or grant.
The spectrum allocated for satellite radio is used in Canada and Mexico
for terrestrial microwave links, mobile telemetry and other purposes. In
September 1998, the United States Government and Canada reached an agreement to
coordinate the use of this spectrum. The United States government must
coordinate the United States' use of this spectrum with the Mexican government
before any United States satellite may become operational. The FCC Licensing
Rules require that the licensees successfully complete detailed frequency
coordination with existing operations in Mexico, and the IB Order conditions the
FCC License on such coordination. This obligation could be complicated by
Mexico's plan to license a similar satellite radio service on the same
frequencies as licensed for use by the Company in the United States. There can
be no assurance that the licensees will be able to coordinate the use of this
spectrum with 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, the Company does not expect
difficulties in obtaining a feeder link frequency and ground station approval in
the ordinary course.
In the future any assignments or transfers of control of the FCC
License must be approved by the FCC. There can be no assurance that the FCC
would approve any such transfer or assignment.
The CD Radio system is designed to permit CD Radio to be received by
motorists in all outdoor locations where the vehicle has an unobstructed
line-of-sight with one of the Company's satellites. In certain areas with high
concentrations of tall buildings, such as urban cores, or in tunnels, signals
from both satellites will be blocked and reception will be adversely affected.
In such cases, the Company plans to install terrestrial repeating transmitters
to broadcast CD Radio. The FCC has not yet established rules governing the
application procedure for obtaining authorizations to construct and operate
terrestrial repeating transmitters. A rulemaking 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. The
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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 towers or the roofs of certain
structures where the repeating transmitters will be installed. There can be no
assurance that the Company can obtain such tower or roof rights on acceptable
terms or in appropriate locations for the operation of CD Radio.
XM has proposed to use a different transmission technology from that of
the Company. The IB Order conditions the Company's license on certification by
the Company that its system include a receiver that will permit end users to
access the other licensee's system. In November 1998, WCS submitted an
application to the FCC to provide a satellite-based digital audio radio service.
The Company may also have to comply with the interoperability requirement for
any system launched by WCS. There can be no assurance that the Company will be
able to meet such interoperability requirement.
The FCC has proposed to update regulations for a new type of lighting
device that may generate radio energy in the part of the spectrum to be used by
the Company. The devices would be subject to FCC rules that prohibit such
devices from causing harmful interference to an authorized radio service such as
CD Radio. However, unless the FCC adopts adequate technical standards
specifically applicable to such devices, it may be difficult for the Company to
enforce its rights if the use of such devices were to become commonplace. The
Company believes that the currently proposed FCC rules must be strengthened to
assure protection of the Company's spectrum. The FCC's failure to adopt adequate
standards could have a material adverse effect on reception of the Company's
broadcasts. The Company believes that the FCC will set adequate standards to
prevent harmful interference, although there can be no assurance that it will do
so.
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.
The Communication Act prohibits the issuance of a license to a foreign
government or a representative thereof, and contains limitations on the
ownership of common carrier, broadcast and certain other radio licenses by
non-U.S. citizens. Pursuant to the FCC Licensing Rules, the Company is regulated
as a private carrier. The IB Order determined that, as a private carrier, the
Company is not subject to the current provisions of the Communications Act
restricting ownership in the Company by non-U.S. private citizens or
organizations. The Executive Branch of the U.S. government has expressed
interest in changing this policy, which could lead to restrictions of foreign
ownership of the Company's shares in the future. The IB Order stated that its
finding that the Company is not subject to the foreign ownership restrictions of
the Communications Act is subject to being revisited in a future proceeding. The
pending application for review of the IB Order brings the question of foreign
ownership restrictions before the full FCC. As a private carrier, the Company is
free to set its own prices and serve customers according to its own business
judgment, without economic regulation.
The 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 retain the FCC License and obtain or
retain other approvals required to provide CD Radio or the manner in which the
Company's proposed service would be regulated. Further, actions of the FCC are
subject to judicial review and there can be no assurance that if challenged,
such actions would be upheld.
37
<PAGE>
PERSONNEL
As of December 17, 1998, the Company had 40 employees, of whom 15 were
involved in business development, 17 in technology development and 8 in
administration. In addition, the Company relies upon a number of consultants and
other advisors. By commencement of operations, the Company expects to have
approximately 150 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.
LEGAL PROCEEDINGS
The Company is not a party to any litigation.
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<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares
of Common Stock offered hereby. All of such proceeds will be received by the
Selling Stockholders.
SELLING STOCKHOLDERS
The Offered Shares are issuable by the Company upon the exercise of
warrants granted to the Selling Stockholders in transactions exempt from the
registration requirements of the Securities Act and, in the case of the Warrant
Shares, the conversion of such Warrant Shares into shares of Common Stock.
The following table sets forth the names of the Selling Stockholders,
the number of shares of Common Stock beneficially owned by such Selling
Stockholders as of November 17, 1998 and the number of Offered Shares which may
be offered for sale pursuant to this Prospectus by each such Selling
Stockholder. With the exception of Libra, which served as the Company's
placement agent and financial adviser until August 6, 1997, none of the Selling
Stockholders has held any position, office or other material relationship with
the Company or any of its affiliates within the past three years other than as a
result of his, her or its ownership of shares of Common Stock (or securities
convertible into or exercisable for shares of Common Stock). The Offered Shares
may be offered from time to time by the Selling Stockholders named below. See
"Plan of Distribution." However, such Selling Stockholders are under no
obligation to sell all or any portion of such Offered Shares, nor are the
Selling Stockholders obligated to sell any such Offered Shares immediately under
this Prospectus. Because the Selling Stockholders may sell all or part of their
Offered Shares, no estimate can be given as to the number of shares of Common
Stock that will be held by any Selling Stockholder upon termination of any
offering made hereby.
39
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned After
Offering (1)
---------------------------
Shares of Common
Name of Selling Stock Beneficially Shares of Common Percent of
Stockholder (2) Owned Prior to Stock Offered Hereby Number Outstanding
Offering
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Everest Capital 4,956,922 1,740,000 3,216,922 14.2%
Master Fund,
L.P. (3)
Jess M. Ravich 562,255 562,255 -- *
(4)
Windigo 146,111 146,111 -- *
Progressive
Fund, LLC
David Young 16,333 16,333 -- *
and Lynn Young
Steve Smith 50,633 50,633 -- *
Upchurch Living 40,506 40,506 -- *
Trust U/A/D
12/14/90
Ravich Children 27,778 27,778 -- *
Permanent Trust
DTD 5-11-95
Robert G
Morrish 20,256 20,256 -- *
Russell Riopelle 10,128 10,128 -- *
Eugene Fattore 10,594 10,594 -- *
W. Jeffrey 5,572 5,572 -- *
Baxter
Charles 2,283 2,283 -- *
Thurnher
Steven F. Mayer 4,050 4,050 -- *
Forbes Burtt 1,828 1,828 -- *
Lakeshore 404,388 94,444 274,039 1.4%
International,
Ltd.(5)
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Global Bermuda, 245,995 47,678 128,428 *
L.P. (6)
Richard 1,094 1,094 -- *
Coppersmith
Michael F 2,778 2,778 -- *
Burke
David H. Batchelder 78,755 78,755 -- *
Joel L. Reed 52,502 52,502 -- *
James J. Zehentbauer 24,475 24,475 -- *
Brad C. Shoup 22,000 22,000 -- *
Ralph V. Whitworth 17,800 17,800 -- *
Dyann Brown Folkner 4,468 4,468 -- *
</TABLE>
* Less than 1%
(1) Assumes sales of all Offered Shares owned by the applicable Selling
Stockholder.
(2) Each Selling Stockholder holding rights to acquire Warrant Shares pursuant
to the Warrant Agreement has agreed that it will not exercise the warrants
pursuant to the Warrant Agreement to the extent that Warrant Shares
received upon such exercise are convertible into shares of Common Stock
that, when taken together with all other securities of the Company
beneficially owned by Libra and its affiliates will represent "beneficial
ownership" within the meaning of Rule 13d-3 and 13d-5 under the Exchange
Act of more than 4.99% of the outstanding shares of Common Stock.
(3) Includes 579,046 shares of Series C Preferred Stock owned by Everest
Capital International Ltd. and Everest Capital Fund L.P. These shares are
issuable pursuant to the Common Stock Purchase Warrants granted to Everest
Capital Master 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 at any
time (x) following the occurrence of a Change of Control (as defined in
such Warrants) or (y) during the period from and including June 15, 1998
until June 15, 2005. Everest has agreed with the Company that it will not,
following conversion of its shares of Series C Preferred Stock, 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.
(4) Offered Shares are comprised of (i) 502,255 shares of Common Stock issuable
upon conversion of 90,406 Warrant Shares and (ii) 60,000 shares of Common
Stock issuable upon exercise of the Common Stock Purchase Warrants to
purchase Common Stock at an exercise price of $50.00 per share, which
Warrants are exercisable at any time (x) following the occurrence of a
Change of Control (as defined in such Common Stock Purchase Warrants) or
(y) during the period from and including June 15, 1998 until June 15, 2005.
All securities described herein are owned of record by The Ravich Revocable
Trust of 1989, a revocable trust of which Mr. Ravich is a trustee. Mr.
Ravich is also the Chairman, Chief Executive Officer and the controlling
shareholder of Libra.
(5) In addition to the shares of Common Stock offered hereby, Lakeshore
International, Ltd. owns 49,327 shares of Series C Preferred Stock
(convertible into 274,039 shares of Common Stock).
(6) In addition to the shares of Common Stock offered hereby, Global Bermuda,
L.P. owns 23,117 shares of Series C Preferred Stock (convertible into
128,428 shares of Common Stock).
41
<PAGE>
DESCRIPTION OF SECURITIES
The Company's Amended and Restated Certificate of Incorporation
provides for authorized capital of 250,000,000 shares, consisting of 200,000,000
shares of Common Stock, par value $0.001 per share, and 50,000,000 shares of
Preferred Stock, par value $0.001 per share.
COMMON STOCK
As of November 17, 1998, the Company had 23,178,464 shares of Common
Stock outstanding held of record by 202 persons, and had reserved for issuance
13,252,221 shares of Common Stock with respect to outstanding options, warrants
and conversion of the Series C Preferred Stock, including 1,800,000 shares of
Common Stock offered hereby that may be issued pursuant to the Common Stock
Purchase Warrants.
Holders of the Common Stock are entitled to cast one vote for each
share held of record on all matters acted upon at any stockholder's meeting and
to receive 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 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 Common Stock have no preemptive or
conversion rights. All outstanding shares of Common Stock are, and the shares of
Common Stock hereby will be when issued, fully paid and non-assessable.
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "CDRD."
PREFERRED STOCK PURCHASE RIGHTS
On October 22, 1997, the Board of Directors adopted a stockholders
rights plan and, in connection with the adoption of such plan, declared a
dividend distribution of one "Right" for each outstanding share of Common Stock
to stockholders of record at the close of business on November 3, 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 purchase price of $115.00 (the 'Purchase Price'), subject to
adjustment. The Purchase Price shall be paid in cash. The description and terms
of the Rights is set forth in a Rights Agreement, dated October 22, 1997 (the
"Rights Agreement"), by and among the Company and Continental Stock Transfer &
Trust Company, as Rights Agent, and in amendments to the Rights Agreement dated
October 13, 1998 and November 13, 1998.
On October 13, 1998, the Company amended the Rights Agreement to render
it inapplicable to the Prime 66 Purchase and to allow Prime 66 to purchase and
own up to an additional 1% of the outstanding shares of Common Stock without
Prime 66 becoming an "Acquiring Person" within the meaning of the Rights
Agreement. On November 13, 1998, the Company amended the Rights Agreement to
render it inapplicable to the Apollo Purchase and to permit the Apollo Investors
to (i) acquire additional shares of Junior Preferred Stock pursuant to dividends
declared on the Junior Preferred Stock, (ii) acquire additional shares of Common
Stock upon the conversion of shares of Junior Preferred Stock into shares of
Common Stock, or (iii) acquire up to an additional 1% of the outstanding shares
of Common Stock, without the Apollo Investors becoming "Acquiring Persons"
within the meaning of the Rights Agreement.
42
<PAGE>
Initially, no separate Right Certificates will be distributed and the
Rights will be evidenced, with respect to any shares of Common Stock outstanding
on the Rights Record Date, by the certificates representing such shares of
Common Stock. Until the Separation Date (as defined below), the Rights will be
transferred with, and only with, certificates for share of Common Stock. Until
the earlier of the Separation Date and the redemption or expiration of the
Rights, new certificates for shares of Common Stock issued after the Rights
Record Date will contain a notation incorporating the Rights Agreement by
reference. The Rights are not exercisable 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 shares of Common Stock (except by reason of (I) exercise by such
person of stock options granted to such person by the Company pursuant to any
stock option or similar plan of the Company (ii) the exercise of conversion
rights contained in specified classes of Preferred Stock, or (iii) the exercise
of Warrants owned on the date of the Rights Agreement, which include warrants to
acquire 1,740,000 Shares of Common Stock issued to an affiliate of Everest
Capital Fund, Ltd) or (b) 15 business days following the commencement of a
tender offer or exchange offer by any person (other than the Company, any
subsidiary of the Company or any employee benefit plan thereof) if, upon
consummation hereof, such person or group would be the beneficial owner of 15%
or more of such outstanding shares of Common Stock (the earlier of such dates
being called the "Separation Date"), and will expire on October 22, 2002, unless
earlier redeemed by the Company as described below. As soon as practicable
following the Separation Date, separate certificates evidencing the Rights
("Right Certificates") will be mailed to holders of record of the shares of
Common Stock as of the close of business on the Separation Date and, thereafter,
such separate Right Certificates alone will evidence the Rights. A holder of 15%
or more of the Common Stock as of the date of the Rights Agreement will be
excluded from the definition of "Acquiring Person" unless such holder increases
the aggregate percentage of its and its affiliates' beneficial ownership
interest in the Company by an additional 1%.
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 shares of Common Stock are not changed or exchanged, (b) a person
(other than the Company, any subsidiary of the Company or any employee benefit
plan thereof), together with its Affiliates and Associates (as defined in the
Rights Agreement), becomes an Acquiring Person (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, (iii) the exercise of
certain warrants specified in the Rights Agreement and (iv) a tender offer for
any and all outstanding shares of Common Stock 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 shares of Common Stock
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 (e.g., a reverse
stock split), that results in such Acquiring Person's ownership interest being
increased by more than one percent, the Rights Agreement provides that proper
provision shall be made so that each holder of a Right will thereafter be
entitled to receive, upon the exercise thereof at the then current exercise
price of the Right, shares of Common Stock (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
43
<PAGE>
Date"), (a) the Company consolidates or merges with another person and the
Company is not the surviving corporation, (b) the Company consolidates or merges
with another person and is the surviving corporation, but in such transaction
its shares of Common Stock 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, shares of Common Stock 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 shares of Common Stock at a ratio of one share of Common
Stock 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 beneficiary owner of 50% or more of the shares of Common Stock then
outstanding. 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 or Affiliate or
Associate thereof shall immediately become null and void. The Rights Agreement
contains provisions intended to prevent the utilization of voting trusts or
similar arrangements (except for the voting arrangement between two of the
Company's principal stockholders and the Company) that could have the effect of
rendering ineffective or circumventing the beneficial ownership rules set forth
in the Rights Agreement.
The Purchase Price payable, and the number of Series B Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (a) in the event of a dividend
of Series B Shares on, or a subdivision, combination or reclassification of, the
Series B Shares, (b) upon the grant to holders of the Series B Shares of certain
rights or warrants to subscribe for Series B Shares or securities convertible
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).
At any time after the date of the Rights Agreement until ten Business
Days (as defined in the Rights Agreement) (a period that can be extended)
following the Shares Acquisition Date, the Board of Directors, with the
concurrence of a majority of the Independent Directors (those members of the
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
44
<PAGE>
redemption may be reinstated if (a) an Acquiring Person reduces its beneficial
ownership to 10% or less of the outstanding shares of Common Stock 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.
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 shares of Common Stock (or other consideration) of the Company
or for shares of Common Stock 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).
5% DELAYED CONVERTIBLE PREFERRED STOCK
On March 19, 1997, the Board of Directors authorized the issuance of up
to 8,000,000 shares of the 5% Preferred Stock. In the Preferred Stock Exchange
Offer, all of the issued and outstanding shares of 5% Preferred Stock were
tendered for 1,846,799 shares of Series C Preferred Stock and no shares of 5%
Preferred Stock remain outstanding.
10 1/2% SERIES C CONVERTIBLE PREFERRED STOCK
The Board of Directors has authorized the issuance of up to 2,025,000
shares of the Series C Preferred Stock.
Dividends. The annual dividend rate per share of the Series C Preferred
Stock will be an amount equal to 10.5% of the sum of (x) the Liquidation
Preference (as defined herein) of the Series C Preferred Stock and (y) all
accrued and unpaid dividends, if any, whether or not declared, from the date of
issuance of the shares of Series C Preferred Stock to the applicable dividend
payment date. Dividends on the shares of Series C Preferred Stock will be
cumulative, accruing quarterly and, when and as declared by the Board of
Directors of the Company, will be payable quarterly initially on November 15,
2002 (the "First Scheduled Dividend Payment Date") and on February 15, May 15,
August 15 and November 15 of each year (each, a "Dividend Payment Date") in each
year thereafter. In addition, accrued dividends on the shares of Series C
Preferred Stock will be paid on the redemption date of any share of Series C
45
<PAGE>
Preferred Stock redeemed by the Company, on the purchase date of any share of
Series C Preferred Stock purchased by the Company pursuant to an Offer to
Purchase (as defined herein) or on the conversion date of any share of Series C
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 Series C Preferred Stock that are converted by the holders thereof prior to
the First Scheduled Dividend Payment Date, unless such shares of Series C
Preferred Stock are converted on or prior to a redemption date by holders
thereof electing to convert such shares after having received a notice of
redemption for such shares. Dividends may be paid in cash, shares of Common
Stock or any combination thereof, at the option of the Company. Common Stock
issued to pay dividends will be valued at the average closing price of the
Common Stock as reported in The Wall Street Journal for the 20 consecutive
trading days immediately preceding the date of such payment. Dividends with
respect to any share of Series C Preferred Stock will accumulate from November
15, 1997.
If and so long as any full cumulative dividends payable on the shares
of Series C 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 Series C Preferred Stock in payment of dividends.
Redemption. Except as described below, the shares of Series C Preferred
Stock may not be redeemed by the Company at its option prior to November 15,
2002. From and after November 15, 1999 and prior to November 15, 2002, the
Company may redeem shares of Series C Preferred Stock, in whole or in part, at
any time at a redemption price of 100% of the Liquidation Preference of the
shares of Series C Preferred Stock redeemed, plus accrued and unpaid dividends,
if any, whether or not declared, to the redemption date, if the average closing
price of the Common Stock as reported in The Wall Street Journal for the 20
consecutive trading days prior to the notice of redemption thereof equals or
exceeds $31.50 per share (subject to adjustments). From and after November 15,
2002, the Company may redeem shares of Series C Preferred Stock, in whole or in
part, at the following redemption prices per share, expressed as percentages of
the Liquidation Preference thereof, if redeemed during the 12-month period
beginning November 15 in the year indicated below:
Year Percentage
2002 ..................................................... 105.25%
2003 ..................................................... 103.50
2004 ..................................................... 101.75
2005 and thereafter ...................................... 100.00
plus, in each case, 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 Series C Preferred Stock at a
redemption price of 100% of the Liquidation Preference of the shares of Series C
Preferred Stock, plus accrued and unpaid dividends, if any, whether or not
declared, to the Mandatory Redemption Date.
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<PAGE>
The amount paid to the holders of shares of Series C Preferred Stock
upon redemption that is allocable to the Liquidation Preference of the shares of
Series C Preferred Stock shall be paid in cash and the amount of any accrued and
unpaid dividends to be paid on the shares of Series C Preferred Stock redeemed
shall be paid in cash, shares of Common Stock or any combination thereof at the
option of the Company.
Change in Control. Upon the occurrence of a Change in Control (as
hereinafter defined), the Company must make an offer to purchase (an "Offer to
Purchase") all then outstanding shares of Series C Preferred Stock at a purchase
price (the "Change in Control Purchase Price") in cash equal to 101% of their
Liquidation Preference, plus all accrued and unpaid dividends (paid in cash), if
any, whether or not declared, to the date such shares are purchased (the "Change
in Control Purchase Date"). A "Change in Control" is defined as the occurrence
of any of the following events: (a) any "person" or "group" (as such terms are
used in Sections 13(d) and 14(d) of the Exchange Act), other than Loral Space,
Arianespace or David Margolese is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 40% of the total
outstanding voting stock of the Company; (b) the Company consolidates with, or
merges with or into another person or conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any person, or any person
consolidates with or merges with or into the Company, in any such event,
pursuant to a transaction in which the outstanding voting stock of the Company
is converted into or exchanged for cash, securities or other property, other
than, at all times when the Notes are outstanding, those transactions that are
not deemed a "Change of Control" under the terms of the Indenture; (c) during
any consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors (together with any new directors whose
election to such Board of Directors, or whose nomination for election by the
stockholders of the Company, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of the Company
then in office; or (d) the Company is liquidated or dissolved or a special
resolution is passed by the shareholders of the Company approving the plan of
liquidation or dissolution, other than, at all times when the Notes are
outstanding, those transactions that are not deemed a "Change of Control" under
the terms of the Indenture.
Conversion. Each share of Series C Preferred Stock may be converted at
any time, at the option of the holder, unless previously redeemed, into a number
of shares of Common Stock calculated by dividing the Liquidation Preference of
the Series C Preferred Stock (without accrued and unpaid dividends) by $18.00
(as adjusted from time to time, the "Conversion Price"). The Conversion Price
will not be adjusted at any time for accrued and unpaid dividends on the shares
of Series C Preferred Stock, but will be subject to adjustment for the
occurrence of certain corporate events affecting the Common Stock. Upon
conversion, at any time after the First Scheduled Dividend Payment Date, holders
of the Series C Preferred Stock will be entitled to receive all accrued and
unpaid dividends upon the shares of Series C Preferred Stock converted payable
in cash, shares of Common Stock, or a combination thereof, at the option of the
Company. No accrued dividends will be paid on any shares of Series C Preferred
Stock that are converted by the holders thereof prior to the First Scheduled
Dividend Payment Date, unless such shares of Series C Preferred Stock are
converted prior to a redemption date by holders thereof
47
<PAGE>
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.
The Conversion Price for shares of Series C Preferred Stock is subject
to adjustment in certain events, including (i) dividends and other distributions
payable in Common Stock on any class of capital stock of the Company, (ii) the
issuance to all holders of Common Stock of rights or warrants entitling them to
subscribe for or purchase Common Stock at less than fair market value, (iii)
subdivisions, combinations and reclassifications of the Common Stock, (iv)
distributions to all holders of Common Stock of 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.
Voting Rights. Other than the consent rights described below with
respect to certain corporate actions, and except as otherwise provided by
applicable law, holders of shares of Series C Preferred Stock will have no
voting rights. Consent of the holders of a majority of the outstanding shares of
Series C 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 that
affects adversely the voting powers, rights or preferences of the holders of the
shares of Series C Preferred Stock, (ii) the authorization or creation of, or
the increase in authorized amount of, any shares of any class or series of
equity securities that ranks senior to or on a parity with the Series C
Preferred Stock with respect to dividend rights and rights upon liquidation,
winding up or dissolution and (iii) the merger or consolidation of the Company
with or into any other entity, unless the resulting corporation will thereafter
have no class or series of shares and no other securities either authorized or
outstanding ranking prior to, or on a parity with, the Series C Preferred Stock
in the payment of dividends or the distribution of its assets on liquidation,
dissolution or winding up. In addition, in the event that (i) after the First
Scheduled Dividend Payment Date, dividends payable on the shares of Series C
Preferred Stock shall be in arrears in an aggregate amount equal to at least six
quarterly dividend payments, (ii) the Company fails to redeem all of the
outstanding shares of Series C Preferred Stock on the Mandatory Redemption Date,
or (iii) the Company fails to make an Offer to Purchase upon a Change in
Control, the holders of a majority of the outstanding shares of Series C
Preferred Stock, voting as a class, will be entitled to elect (i) one director
in the event that there are seven or fewer 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 Series C Preferred
Stock will be entitled to one vote per share.
No consent of the holders of the Series C 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 Series C Preferred Stock in payment of dividends or upon
liquidation, dissolution or winding up of the Company.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, before any distribution of the assets
of the Company to the holders of shares of Common Stock or any other capital
stock of the Company ranking junior to the Series C Preferred Stock
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upon liquidation, dissolution or winding up of the Company, the holders of
shares of Series C 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 Series C Preferred Stock
equal to $100.00 (the "Liquidation Preference"), plus accrued and unpaid
dividends on such share of Series C Preferred Stock, if any, to the date of
final distribution.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, before any distribution of assets of the Company
to the holders of shares of Series C Preferred Stock or any capital stock of the
Company ranking on a par with the shares of Series C Preferred Stock, the
holders of any shares of capital stock of the Company ranking senior to the
Series C Preferred Stock and such parity stock shall be entitled to receive out
of the assets of the Company available for distribution to its stockholders,
whether from capital, surplus or earnings, an amount per share of such senior
stock equal to the liquidation preference thereof, plus accrued and unpaid
dividends thereon, if any, to the date of final distribution.
If, upon any liquidation, dissolution or winding up of the Company, the
amounts payable with respect to the shares of Series C Preferred Stock or any
capital stock ranking on a par with the shares of Series C 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.
9.2 % SERIES A JUNIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK AND
9.2 % SERIES B JUNIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Board of Directors has authorized the issuance of up to 4,300,000
shares of the Series A Junior Preferred Stock and up to 2,100,000 shares of the
Series B Junior Preferred Stock.
Dividends. The annual dividend rate per share of the Junior Preferred
Stock will be an amount equal to 9.2% of the sum of (x) the Junior Preferred
Liquidation Preference (as defined below) of the Junior Preferred Stock and (y)
all unpaid dividends, if any, whether or not declared, from the date of issuance
of such share of Junior Preferred Stock (for shares of Series A Junior Preferred
Stock, the "Closing Date" and, for shares of Series B Junior Preferred Stock,
the "Option Closing Date") to the applicable dividend payment date. Dividends on
the shares of Junior Preferred Stock will be cumulative, accruing annually and,
when and as declared by the Board of Directors of the Company, will be payable
annually initially on November 15, 1999 and on each November 15 thereafter
(each, a "Junior Preferred Dividend Payment Date"). If any dividend payable on
any Junior Preferred Dividend Payment Date is not declared or paid on such
Junior Preferred Dividend Payment Date in full, in cash or in additional shares
of Junior Preferred Stock of the same series, then the amount of such unpaid
dividend ("Default Dividends") will be accumulated and will accrue dividends,
until paid, compounded annually at a rate equal to 15% per annum. Dividends may
be paid in cash, shares of Junior Preferred Stock of the same series or any
combination thereof, at the option of the Company. Default Dividends may only be
paid in shares of Junior Preferred Stock of the same series.
With respect to the payment of dividends, the Series A Junior Preferred
Stock will rank on a parity with the Series B Junior Preferred Stock. If and so
long as full cumulative dividends payable on the shares of Junior Preferred
Stock in respect of all prior dividend periods have not been paid or set apart
for payment and proper provision has not been made such that holders of Junior
Preferred Stock are offered the opportunity to make a Payout Election (as
defined below) in lieu of a Conversion Price adjustment (as described below),
the Company will not pay any dividends, except for dividends payable in Common
Stock or capital stock of the Company ranking junior to the Junior Preferred
Stock in payment of dividends ("Junior Dividend Stock") or make any
distributions of assets on or redeem, purchase or otherwise acquire for
consideration shares of Common Stock or Junior Dividend Stock.
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If and so long as any accrued and unpaid dividends payable on any
shares of capital stock of the Company ranking senior to the Junior Preferred
Stock in payment of dividends have not been paid or set apart for payment, the
Company will not pay any dividends in cash on shares of Junior Preferred Stock.
No dividends paid in cash will be paid or declared and set apart for payment on
any shares of Junior Preferred Stock or of capital stock of the Company ranking
on a parity with the Junior Preferred Stock in the payment of dividends ("Parity
Dividend Stock") for any period unless the Company has paid or declared and set
apart for payment, or contemporaneously pays or declares and sets apart for
payment, on the Junior Preferred Stock all accrued and unpaid dividends for all
dividend payment periods terminating on or prior to the date of payment of such
dividends; provided, however, that all dividends accrued by the Company on
shares of Junior Preferred Stock or Parity Dividend Stock will be declared pro
rata with respect to all shares of Junior Preferred Stock and Parity Dividend
Stock then outstanding, based on the ratio of unpaid dividends on the Junior
Preferred Stock to unpaid dividends on the Parity Dividend Stock. No dividends
paid in cash will be paid or declared and set apart for payment on Junior
Preferred Stock for any period unless the Company has paid or declared and set
apart for payment, or contemporaneously pays or declares and sets apart for such
payment, on any shares of Parity Dividend Stock all accrued and unpaid dividends
for all dividend payment periods terminating on or prior to the date of payment
of such dividends.
Redemption. Except as described below, shares of Junior Preferred Stock
may not be redeemed by the Company at its option prior to November 15, 2003.
From and after November 15, 2001 and prior to November 15, 2003, the Company may
redeem shares of Junior Preferred Stock, in whole or in part, at any time at a
redemption price of 100% of the Junior Preferred Liquidation Preference (as
defined below) of the shares of Junior Preferred Stock redeemed, plus unpaid
dividends, if any, whether or not declared, to the redemption date, if the
average closing price of the Common Stock as reported on The Wall Street Journal
or, at the election of the Company, other reputable financial news source, for
the 20 consecutive trading days prior to the notice of redemption thereof (the
"Current Market Price") equals or exceeds $60.00 per share (subject to
adjustments).
From and after November 15, 2003, the Company may redeem shares of
Junior Preferred Stock, in whole or in part, at any time at a redemption price
of 100% of the Junior Preferred Liquidation Preference of the Junior Preferred
Stock redeemed, plus unpaid dividends, if any, whether or not declared, to the
redemption date.
On November 15, 2011, the Company will be required to redeem all
outstanding shares of Junior Preferred Stock at a redemption price of 100% of
the Junior Preferred Liquidation Preference of the Junior Preferred Stock
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redeemed, plus unpaid dividends, if any, whether or not declared, to the
redemption date.
The amount paid to the holders of shares of Junior Preferred Stock upon
redemption that is allocable to the Junior Preferred Liquidation Preference of
the shares of Junior Preferred Stock will be paid in cash and the amount of any
unpaid dividends to be paid on the shares of Junior Preferred Stock redeemed
will be paid in cash, shares of Junior Preferred Stock of the same series or any
combination thereof at the option of the Company.
Change of Control. Upon the occurrence of a Change of Control (as
defined below), the Company must make an offer (a "Junior Preferred Change of
Control Offer") to purchase all then outstanding shares of Junior Preferred
Stock at a purchase price in cash equal to 101% of their Junior Preferred
Liquidation Preference, plus any unpaid dividends (paid in cash), if any,
whether or not declared, to the date such shares are purchased; provided that if
the purchase of the Junior Preferred Stock would violate or constitute a default
under (i) the Senior Secured Notes or the Senior Notes Indenture or (ii) the
indenture or indentures or other agreement or agreements under which there may
be issued or outstanding from time to time other indebtedness of the Company
("Other Agreements") in an aggregate principal amount not exceeding $450 million
(less the amount, if any, of indebtedness issued to replace, refinance or refund
the Senior Secured Notes) because the Company has not satisfied all of its
obligations under the Senior Notes Indenture and such Other Agreements arising
from the Change of Control (collectively, the "Senior Obligations"), then the
Company will be required to use its best efforts to satisfy the Senior
Obligations as promptly as possible or to obtain the requisite consents
necessary to permit the repurchase of the Junior Preferred Stock, and until such
Senior Obligations are satisfied or such consents are obtained, the Company will
not be obligated to make a Junior Preferred Change of Control Offer.
With respect to the Junior Preferred Stock, a "Change of Control" is
defined as the occurrence of any of the following events: (i) any "person" or
"group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 40% of the total outstanding voting stock
of the Company; (ii) 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 Senior Secured Notes are outstanding, those transactions that are not deemed
a "Change of Control" under the terms of the Senior Notes Indenture; (iii)
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 662/3% 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 (iv) the Company is liquidated or
dissolved or a special resolution is passed by the stockholders of the Company
approving the plan of liquidation or dissolution, other than, at all times when
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the Senior Secured Notes are outstanding, those transactions that are not deemed
a "Change of Control" under the terms of the Senior Notes Indenture.
Notwithstanding the foregoing, no transaction or event will be deemed a
"Change of Control" if (i) all of the outstanding shares of Common Stock are to
be converted pursuant thereto solely into the right to receive, for each share
of Common Stock so converted, cash and/or shares of Qualifying Acquiror Common
Stock (as defined below) (valued at its Current Market Price) together having a
value in excess of $30.30, (ii) the Company has declared and paid all dividends
on the Junior Preferred Stock, whether or not theretofore declared or
undeclared, to the date of the Change of Control and the holders thereof have
been given reasonable opportunity to convert, prior to such Change of Control,
any shares of Junior Preferred Stock so issued as a dividend, and (iii)
immediately following such event the number of shares of Qualifying Acquiror
Common Stock into which shares of Junior Preferred Stock have been converted
(together with, if shares of Junior Preferred Stock are to remain outstanding,
any shares of Qualifying Acquiror Common Stock into which all outstanding shares
of Junior Preferred Stock would be convertible) represent both (A) less than 5%
of the total number of shares of Qualifying Acquiror Common Stock outstanding
immediately after such event and (B) less than one third of the number of shares
of Qualifying Acquiror Common Stock that would be Publicly Traded immediately
after such event. The term "Qualifying Acquiror Common Stock" means the common
stock of any corporation if listed on or admitted to trading on the New York
Stock Exchange, American Stock Exchange or Nasdaq, and the term "Publicly
Traded" means shares of such Qualifying Acquiror Common Stock that are both (a)
held by persons who are neither officers, directors or Affiliates of such
corporation nor the "beneficial owner" (as such term is defined in Rule 13d-3
under the Exchange Act) of 5% or more of the total number of shares then issued
and outstanding, and (b) not "restricted securities" (as such term is defined in
Rule 144 of the Securities Act of 1933, as amended).
Conversion. Each share of Junior Preferred Stock may be converted at
any time, at the option of the holder, unless previously redeemed, into a number
of shares of Common Stock calculated by dividing the Junior Preferred
Liquidation Preference of the Junior Preferred Stock (without unpaid dividends)
by $30.00 (as adjusted from time to time, the "Junior Preferred Conversion
Price"). The Junior Preferred Conversion Price will not be adjusted at any time
for unpaid dividends on the shares of Junior Preferred Stock, but will be
subject to adjustment for the occurrence of certain corporate events affecting
the Common Stock. Upon conversion, holders of the Junior Preferred Stock will be
entitled to receive any unpaid dividends upon the shares of Junior Preferred
Stock converted payable in cash, shares of Common Stock or a combination
thereof, at the option of the Company.
The Junior Preferred Conversion Price for shares of Junior Preferred
Stock will 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) subdivisions, combinations and reclassifications of the Common
Stock, (iii) 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, (iv) distributions to all holders of Common Stock of evidence of
indebtedness of the Company or assets, (v) repurchases, redemptions or other
acquisitions of the Common Stock by the Company at a price per share greater
than the Current Market Price per share of Common Stock on the date of such
event, (vi) issuance or sale of Common Stock by the Company at a price per share
more than 15% below (or, in the case of any issuance or sale to an affiliate of
the Company, any amount below) the Current Market Price per share of Common
Stock on the date of such event (except for issuances to or through a nationally
recognized investment banking firm in which affiliates of the Company purchase
less than 25% of the shares in such offering) and (vii) a consolidation or
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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 Junior Preferred Conversion Price for shares of Junior Preferred
Stock will not be adjusted in the event that (i) such adjustment would not
require an increase or decrease of at least 1% in the Junior Preferred
Conversion Price then in effect or (ii) with respect to each series of Junior
Preferred Stock and in connection with an adjustment that would be made in
respect of a dividend, purchase, redemption or other acquisition, holders of a
majority of the outstanding shares of such series of Junior Preferred Stock
elect to participate in such dividend, purchase, redemption or other acquisition
(a "Payout Election") pro rata with the holders of Common Stock or capital stock
ranking junior to the Junior Preferred Stock ("Junior Stock").
Voting Rights. So long as any shares of Junior Preferred Stock are
outstanding, each share of Junior Preferred Stock will entitle the holder
thereof to vote, in person or by proxy, at any special or annual meeting of
stockholders, on all matters entitled to be voted on by holders of Common Stock
voting together as a single class with all other shares entitled to vote
thereon. With respect to any such vote, each share of Junior Preferred Stock
will entitle the holder thereof to cast that number of votes per share as is
equal to the number of votes that such holder would be entitled to cast had such
holder converted its shares of Junior Preferred Stock into shares of Common
Stock on the record date for determining the stockholders of the Company
eligible to vote on any such matters.
In addition to any vote or consent of stockholders required by law or
by the Company's Amended and Restated Certificate of Incorporation, the consent
of the holders of at least a majority of the shares of a particular series of
Junior Preferred Stock at any time issued and outstanding, given in person or by
proxy by vote at any meeting called for such purpose, will be necessary for
effecting or validating any reclassification of such series of Junior Preferred
Stock or amendment, alteration or repeal of any of the provisions of the Amended
and Restated Certificate of Incorporation or Amended and Restated By-laws of the
Company which adversely affects the voting powers, rights or preferences of the
holders of the shares of such series of Junior Preferred Stock. The consent of
the holders of at least a majority of the shares of Junior Preferred Stock at
the time issued and outstanding, acting as a single class, given in person or by
proxy by vote at any meeting called for such purpose, will be necessary for
effecting or validating any amendment, alteration or repeal of any of the
provisions of the Amended and Restated Certificate of Incorporation or Amended
and Restated By-laws of the Company which affects adversely the voting powers,
rights or preferences of the holders of the shares of both series of Junior
Preferred Stock. Any amendment of the provisions of the Company's Amended and
Restated Certificate of Incorporation so as to authorize or create, or to
increase the authorized amount of, any Junior Stock will not be deemed to affect
adversely the voting powers, rights or preferences of the holders of shares of
Junior Preferred Stock. The consent of at least a majority of the shares of each
series of Junior Preferred Stock will also be necessary for effecting or
validating:
(i) the authorization or creation of, or the increase in the
authorized amount of, or the issuance of any shares of any class or
series of capital stock ranking senior to the Junior Preferred Stock
("Senior Stock") or any security convertible into shares of any class
or series of Senior Stock;
(ii) the authorization or creation of, or the increase in the
authorized amount of, or the issuance of any shares of any class or
series of capital stock ranking on a parity with the Junior Preferred
Stock ("Parity Stock") or any security convertible into shares of any
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class or series of Parity Stock such that the aggregate liquidation
preference of all outstanding shares of Parity Stock (other than (x)
shares of Junior Preferred Stock issued pursuant to the Apollo
Agreement and (y) shares of Junior Preferred Stock issued as a dividend
in respect of shares issued in respect of (x) or (y)) would exceed the
sum of (A) $135,000,000 and (B) the aggregate liquidation preference of
the shares of Series B Junior Preferred Stock issued at the Option
Closing, if any;
(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, shares of Junior
Preferred Stock; provided, however, that no such vote or consent of the
holders of Junior Preferred Stock will be required if prior to the time
when such merger or consolidation is to take effect, and regardless of
whether such merger or consolidation would constitute a Change of
Control, a Junior Preferred Change of Control Offer is made for all
shares of Junior Preferred Stock at the time outstanding; and
(iv) the application of any funds, property or assets of the
Company to the purchase, redemption, sinking fund or other retirement
of any shares of any class of Junior Stock, or the declaration, payment
or making of any dividend or distribution on any shares of any class of
Junior Stock, other than a dividend or dividends payable solely in
shares of Common Stock or Junior Stock of the same series, unless the
holders of Junior Preferred Stock have been offered the opportunity to
make a Payout Election with respect to such event.
In connection with the foregoing class rights to vote, each holder of
shares of Junior Preferred Stock shall have one vote for each share of Junior
Preferred Stock held. The above notwithstanding, and subject to their right to
vote on an as- converted-basis on matters on which holders of Common Stock are
entitled to vote, no consent of holders of Junior Preferred Stock will be
required for the creation of any indebtedness of any kind of the Company.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the Series A Junior Preferred Stock
will rank on a parity with the Series B Junior Preferred Stock and, before any
distribution of the assets of the Company to the holders of shares of Common
Stock or any other class or series of Junior Stock, but after payment of the
liquidation preference payable on the Company's 10 1/2% Series C Convertible
Preferred Stock, par value $.001 per share, or any other class or series of
Senior Stock, the holders of shares of Junior 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
Junior Preferred Stock equal to $100 (the "Junior Preferred Liquidation
Preference"), plus accrued and unpaid dividends on such share of Junior
Preferred Stock, if any, to the date of final distribution.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, before any distribution of assets of the Company
to the holders of shares of Junior Preferred Stock or Parity Stock, the holders
of any shares of Senior 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 such Senior Stock equal to
the liquidation preference thereof, plus accrued and unpaid dividends thereon,
if any, to the date of final distribution.
If, upon any liquidation, dissolution or winding up of the Company, the
amounts payable with respect to the shares of Junior Preferred Stock or any
Parity Stock are not paid in full, then such holders will share ratably in any
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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.
Exchange. Shares of Junior Preferred Stock may be exchanged at any time
and from time to time, at the Company's option, for the Company's 9.2%
Convertible Debentures (the "Convertible Debt"). The Convertible Debt will be
issued pursuant to an indenture to be agreed upon by the Company and the Apollo
Investors or, if no such indenture has been agreed upon as of the Closing Date,
an indenture acceptable, in form and substance, to a majority of the holders of
the Junior Preferred Stock immediately prior to the effectiveness of such
indenture.
The Convertible Debt will have a maturity date 13 years following the
Closing Date, a principal amount equal to the aggregate Junior Preferred
Liquidation Preference of the shares of Junior Preferred Stock exchanged and
will provide for the payment of interest at a rate of 9.2% per annum, payable
annually in cash or additional Convertible Debt, at the option of the Company.
The Convertible Debt will be convertible and redeemable on terms substantially
similar to those of the Junior Preferred Stock.
Registration Rights. Under the Apollo Agreement, at any time after the
date which is the second anniversary of the Closing Date, holders of shares of
Series A Junior Preferred Stock, or shares of Common Stock into which shares of
Series A Junior Preferred Stock have been converted, representing, in the
aggregate, at least 50% of the shares of Common Stock into which shares of
Series A Junior Preferred Stock have been or may be converted (assuming
conversion of the Series A Junior Preferred Stock) ("Series A Registrable
Securities") will be entitled, on two occasions, to require the Company to
register the Series A Registrable Securities for sale in an underwritten public
offering by a nationally recognized investment banking firm or firms reasonably
acceptable to the Company. At any time after the date which is the second
anniversary of the Closing Date, holders of shares of Series B Junior Preferred
Stock or shares of Common Stock into which shares of Series B Junior Preferred
Stock have been converted representing, in the aggregate, at least 50% of the
shares of Common Stock into which shares of Series B Junior Preferred Stock have
been or may be converted (assuming conversion of the Series B Junior Preferred
Stock) ("Series B Registrable Securities" and, together with the Series A
Registrable Securities, the "Registrable Securities") will be entitled, on one
occasion, to require the Company to register the Series B Registrable Securities
for sale in an underwritten public offering by a nationally recognized
investment banking firm or firms reasonably acceptable to the Company.
In the event that a demand registration would be seriously detrimental
to the Company and its stockholders, such demand registration may be deferred,
at the request of the Company, twice in any 12-month period for an aggregate
period of time of up to 90 days. In addition, holders of Junior Preferred Stock
will be subject to customary "lockup" agreements at the request of the managing
underwriter of any public offering on behalf of the Company. In the event the
Company plans to file a registration statement on behalf of one or more security
holders, holders of Junior Preferred Stock also have the right, subject to
customary limitations and the rights of such other security holders, to request
that such registration include their Registrable Securities. Holders of Junior
Preferred Stock or Registrable Securities are entitled to an unlimited number of
such "piggyback" registrations.
PLAN OF DISTRIBUTION
The distribution of the Offered shares by the Selling Stockholders may
be effected from time to time in one or more transactions (which may involve
block transactions), in special offerings, exchange distributions and/or
secondary distributions, in negotiated transactions, in settlement of short
sales of Common Stock, or a combination or such methods of sale, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Such transactions may be effected on a
stock exchange, on the over-the-counter market or privately. The Selling
Stockholders may effect such transactions by selling the Offered Shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of underwriting discounts, concessions or commissions from one or more of
the Selling Stockholders for whom they may act as agent (which compensation may
be in excess of customary commissions). Without limiting the foregoing, such
brokers may act as dealers by purchasing any and all of the Offered Shares
covered by this Prospectus either as agents for others or as principals for
their own accounts and reselling such securities pursuant to this Prospectus.
The Selling Stockholders and any broker-dealers or other persons acting on their
behalf that participate with such Selling Stockholders in the distribution of
the Offered Shares may be deemed to be underwriters and any commissions received
or profit realized by them on the resale of the Offered Shares may be deemed to
be underwriting discounts and commissions under the Securities Act. As of the
date of this Prospectus, the Company is not aware of any agreement, arrangement
or understanding between any broker or dealer and any of the Selling
Stockholders with respect to the offer or sale of the Offered Shares pursuant to
this Prospectus.
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At the time that any particular offering of Offered Shares is made, to
the extent required by the Securities Act, a prospectus supplement will be
distributed, setting forth the terms of the offering, including the aggregate
number of Offered Shares being offered, the names of any underwriters, dealers
or agents, any discounts, commissions and other items constituting compensation
from the Selling Stockholders and any discounts, commissions or concessions
allowed or reallowed or paid to dealers.
The Selling Stockholders may from time to time pledge the Offered
Shares owned by them to secure margin or other loans made to one or more of the
Selling Stockholders. Thus, the person or entity receiving the pledge of any of
the Offered Shares may sell them, in a foreclosure sale or otherwise, in the
same manner as described above for a Selling Stockholder.
The Company will not receive any of the proceeds from any sale of the
Offered Shares by the Selling Stockholders.
Pursuant to the Warrant Agreement and the Common Stock Purchase
Warrants, the Company has agreed to indemnify the Selling Stockholders against
certain liabilities, including liabilities under the Securities Act. The Company
will bear customary expenses incident to the registration of the Offered Shares
for the benefit of the Selling Stockholders in accordance with the terms of the
Warrant Agreement and the Common Stock Purchase Warrants, other than
underwriting discounts and commissions and their respective individual attorney
fees, which will be borne by the Selling Stockholders.
The Company has agreed to use its best efforts to ensure that the
Warrant Shares are registered for resale pursuant to a Registration Statement on
Form S-3 during the periods after February 15, 1998 in which the Warrant Shares
are convertible into shares of Common Stock. The Company is not obligated under
the terms of the Warrant Agreement to keep the Registration Statement of which
this Prospectus is a part effective beyond the date that is the earlier of (i)
one year after the date upon which all Series C Warrants have been exercised and
(ii) April 9, 2003.
The Company has agreed to use its best efforts to register the Offered
Shares issuable upon the exercise of the Common Stock Purchase Warrants for
resale pursuant to a Registration Statement on Form S-3 no later than May 15,
1998. This obligation of the Company will terminate on June 15, 2005.
LEGAL MATTERS
Certain legal matters relating to the securities offered hereby are
being passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison,
New York, New York.
INDEPENDENT ACCOUNTANTS
The consolidated balance sheets of the Company as of December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997, and for the period from May 17, 1990 (the date of inception) to
December 31, 1997, have been incorporated by reference herein in reliance
56
<PAGE>
on the report of PricewaterhouseCoopers L.L.P., independent accountants, given
on the authority of that firm as experts in accounting and auditing.
57
<PAGE>
================================================================================
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations other than those contained in
this Prospectus in connection with the offer made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriters. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstance,
create an implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus does not constitute an offer or
solicitation by anyone in any state in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation.
------------
TABLE OF CONTENTS
PAGE
----
Additional Information.......................................................3
Incorporation of Certain Documents
by Reference ...............................................................3
Special Note Regarding
Forward-Looking Statements...................................................4
Risk Factors.................................................................5
The Company.................................................................16
Use of Proceeds.............................................................37
Selling Stockholders........................................................37
Description of Securities...................................................40
Plan of Distribution........................................................55
Legal Matters...............................................................56
Independent Accountants.....................................................56
================================================================================
3,934,322 Shares
CD Radio Inc.
Common Stock
----------
PROSPECTUS
----------
_____, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Company in
connection with the shares of Common Stock being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission registration
fee:
Securities and Exchange Commission Registration Fee ......... $ 31,203
Nasdaq Listing Fees ......................................... 7,500
Fees of Transfer Agent and Registrar ........................ 2,500
Accounting Fees and Expenses ................................ 7,000
Legal Fees and Expenses ..................................... 60,000
Printing, Engraving and Delivery Expenses ................... 400
Miscellaneous ............................................... 2,945
========
Total $111,548
The Selling Stockholders will pay no portion of the foregoing expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a
corporation to indemnify its directors, officers, employees and agents against
certain liabilities they may incur in such capacities, including liabilities
under the Securities Act, 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.
Section 145 of the Delaware General Corporation Law authorizes a
corporation to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation against any
liability asserted against him and incurred by him or her in any such capacity,
or arising out of his or her status as such. The Company's Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws provide that the
Company may, to the full extent permitted by law, purchase and maintain
insurance on behalf of any director, officer, employee or agent of the Company
against any liability that may be asserted against him or her and the Company
currently maintains such insurance. The Company has acquired $10 million of
liability insurance covering its
II-1
<PAGE>
directors and officers for claims asserted against them or incurred by them in
such capacity, including claims brought under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
Exhibit Description
4.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 33-74782)).
4.2 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1
(File No. 33-74782)).
4.3 Form of Certificate for Shares of Common Stock (incorporated by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-1 (File No. 33-74782)).
4.4.1 Form of Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of 10 1/2%
Series C Convertible Stock ("Series C Certificate of
Designations") (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (File No.
333-34761)).
4.4.2 Certificate of Correction to Series C Certificate of
Designations (incorporated by reference to Exhibit 3.5.2 to the
Company's quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1998.)
4.4.3 Certificate of Increase of 10 1/2% Series C Convertible Stock
(incorporated by reference to Exhibit 3.5.3 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998.)
4.5.1 Rights Agreement, dated as of October 22, 1997, between the
Company and Continental Stock Transfer & Trust Company, as
rights agent (incorporated by reference to Exhibit 1 to the
Company's Registration Statement on Form 8-A (File No. 000-
24710)).
4.5.2 Amendment to the Rights Agreement, dated as of October 22,
1997, between the Company and Continental Stock Transfer &
Trust Company, as rights agent, dated as of October 13, 1998
(incorporated by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K dated October 13, 1998).
II-2
<PAGE>
Exhibit Description
4.5.3 Amendment to the Rights Agreement, dated as of October 22,
1997, between the Company and Continental Stock Transfer &
Trust Company, as rights agent, dated as of November 13, 1998
(incorporated by reference to Exhibit 99.7 to the Company's
Current Report on Form 8-K dated November 17, 1998).
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1+ Amended and Restated Contract, dated as of July 28, 1998,
between the Space Systems/Loral, Inc. and the Company
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998).
10.2 Credit Agreement, dated as of July 28, 1998, among the Company,
the banks from time to time parties thereto and Bank of America
National Trust and Savings Association, as administrative agent
(incorporated by reference to Exhibit 10.22 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998).
10.3+ Radio License Agreement, dated January 21, 1998 between the
Company and Bloomberg Communications Inc. (incorporated by
reference to Exhibit 10.28 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998).
10.4+ Agreement, dated April 24, 1998, between Lucent Technologies
Inc. and the Company (incorporated by reference to Exhibit
10.28 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998).
10.5 Stock Purchase Agreement, dated as of October 8, 1998, between
the Company and Prime 66 Partners, L.P. (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K dated October 8, 1998).
10.6 Stock Purchase Agreement, dated as of November 13, 1998, by and
among CD Radio Inc., Apollo Investment Fund IV, L.P. and Apollo
Overseas Partners IV, L.P. (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K dated
November 17, 1998).
10.7 Exhibit A to the Apollo Agreement (Form of Certificate of
Designation of the Series A Junior Preferred Stock)
(incorporated by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K dated November 17, 1998).
10.8 Exhibit B to the Apollo Agreement (Form of Certificate of
Designation of the Series B Junior Preferred Stock)
(incorporated by reference to Exhibit 99.3 to the Company's
Current Report on Form 8-K dated November 17, 1998).
II-3
<PAGE>
Exhibit Description
10.9 Exhibit C to the Apollo Agreement (Form of Opinion of Counsel
to the Company) (incorporated by reference to Exhibit 99.4 to
the Company's Current Report on Form 8-K dated November 17,
1998).
10.10 Voting Agreement, dated as of November 13, 1998, by and among
Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV,
L.P. and David Margolese (incorporated by reference to Exhibit
99.5 to the Company's Current Report on Form 8-K dated November
17, 1998).
10.11 Tag-Along Agreement, dated as of November 13, 1998, by and
among Apollo Investment Fund IV, L.P., Apollo Overseas Partners
IV, L.P., the Company and David Margolese (incorporated by
reference to Exhibit 99.6 to the Company's Current Report on
Form 8-K dated November 17, 1998).
15.1 Report of PricewaterhouseCoopers L.L.P. (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K dated December 10, 1998).
23.1* Consent of PricewaterhouseCoopers L.L.P.
23.2* Consent of Paul, Weiss, Rifkind, Wharton & Garrison.
24.1 Power of Attorney (included on signature page).
- -------------------
* Previously filed.
+ Portions of these exhibits, which are incorporated by reference, have been
omitted pursuant to an Application for Confidential treatment filed by the
Company with the Securities and Exchange Commission pursuant to Rule 24b-2 of
the Securities Exchange Act of 1934, as amended.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
II-4
<PAGE>
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) (1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of a prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment 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.
(3) Any securities being registered hereunder which remain unsold
at the termination of the offering shall be removed from registration by means
of a post-effective amendment.
(d) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement;
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent post-
effective amendment thereof), which, individually or in the aggregate, represent
a fundamental change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and the
of the estimated maximum offering range may be reflected in the form of
prospectus filed by the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective statement;
(3) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
Provided, however, that the undertakings set forth in paragraphs (d)(1)
and (d)(2) above do not apply if this Registration Statement is on Form S-3,
Form S-8 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the Company pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in this Registration Statement.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Amendment No. 5
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
December 23, 1998.
CD RADIO INC.
By: /s/ David Margolese
-------------------
David Margolese
Chairman and Chief Executive Officer
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<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 5 to the has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ David Margolese Chairman and Chief Executive Officer December 23, 1998
- -------------------- (Principal Executive Officer)
David Margolese
* Executive Vice President and Chief December 23, 1998
- -------------------- Financial Officer (Principal Financial
Andrew J. Greenebaum Officer)
/s/ John T. McClain Vice President and Controller December 23, 1998
- -------------------- (Principal Accounting Officer)
John T. McClain
* Director December 23, 1998
- --------------------
Robert D. Briskman
* Director December 23, 1998
- --------------------
Lawrence F. Gilberti
* Director December 23, 1998
- --------------------
Joseph Vittoria
* Director December 23, 1998
- --------------------
Ralph V. Whitworth
* By: /s/ David Margolese
-------------------
David Margolese
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
4.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 33-74782)).
4.2 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1
(File No. 33-74782)).
4.3 Form of Certificate for Shares of Common Stock (incorporated by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-1 (File No. 33-74782)).
4.4.1 Form of Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of 10 1/2%
Series C Convertible Stock ("Series C Certificate of
Designations") (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (File No.
333-34761)).
4.4.2 Certificate of Correction to Series C Certificate of
Designations (incorporated by reference to Exhibit 3.5.2 to the
Company's quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1998.)
4.4.3 Certificate of Increase of 10 1/2% Series C Convertible Stock
(incorporated by reference to Exhibit 3.5.3 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998.)
4.5.1 Rights Agreement, dated as of October 22, 1997, between the
Company and Continental Stock Transfer & Trust Company, as
rights agent (incorporated by reference to Exhibit 1 to the
Company's Registration Statement on Form 8-A (File No. 000-
24710)).
4.5.2 Amendment to the Rights Agreement, dated as of October 22,
1997, between the Company and Continental Stock Transfer &
Trust Company, as rights agent, dated as of October 13, 1998
(incorporated by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K dated October 13, 1998).
4.5.3 Amendment to the Rights Agreement, dated as of October 22,
1997, between the Company and Continental Stock Transfer &
Trust Company, as rights agent, dated as of November 13, 1998
(incorporated by reference to Exhibit 99.7 to the Company's
Current Report on Form 8-K dated November 17, 1998).
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
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<PAGE>
10.1+ Amended and Restated Contract, dated as of July 28, 1998,
between the Space Systems/Loral, Inc. and the Company
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998).
10.2 Credit Agreement, dated as of July 28, 1998, among the Company,
the banks from time to time parties thereto and Bank of America
National Trust and Savings Association, as administrative agent
(incorporated by reference to Exhibit 10.22 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998).
10.3+ Radio License Agreement, dated January 21, 1998 between the
Company and Bloomberg Communications Inc. (incorporated by
reference to Exhibit 10.28 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998).
10.4+ Agreement, dated April 24, 1998, between Lucent Technologies
Inc. and the Company (incorporated by reference to Exhibit
10.28 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998).
10.5 Stock Purchase Agreement, dated as of October 8, 1998, between
the Company and Prime 66 Partners, L.P. (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K dated October 8, 1998).
10.6 Stock Purchase Agreement, dated as of November 13, 1998, by and
among CD Radio Inc., Apollo Investment Fund IV, L.P. and Apollo
Overseas Partners IV, L.P. (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K dated
November 17, 1998).
10.7 Exhibit A to the Apollo Agreement (Form of Certificate of
Designation of the Series A Junior Preferred Stock)
(incorporated by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K dated November 17, 1998).
10.8 Exhibit B to the Apollo Agreement (Form of Certificate of
Designation of the Series B Junior Preferred Stock)
(incorporated by reference to Exhibit 99.3 to the Company's
Current Report on Form 8-K dated November 17, 1998).
10.9 Exhibit C to the Apollo Agreement (Form of Opinion of Counsel
to the Company) (incorporated by reference to Exhibit 99.4 to
the Company's Current Report on Form 8-K dated November 17,
1998).
II-9
<PAGE>
10.10 Voting Agreement, dated as of November 13, 1998, by and among
Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV,
L.P. and David Margolese (incorporated by reference to Exhibit
99.5 to the Company's Current Report on Form 8-K dated November
17, 1998).
10.11 Tag-Along Agreement, dated as of November 13, 1998, by and
among Apollo Investment Fund IV, L.P., Apollo Overseas Partners
IV, L.P., the Company and David Margolese (incorporated by
reference to Exhibit 99.6 to the Company's Current Report on
Form 8-K dated November 17, 1998).
15.1 Report of PricewaterhouseCoopers L.L.P. (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K dated December 10, 1998).
23.1* Consent of PricewaterhouseCoopers L.L.P.
23.2* Consent of Paul, Weiss, Rifkind, Wharton & Garrison.
24.1 Power of Attorney (included on signature page).
- -------------------
* Previously filed.
+ Portions of these exhibits, which are incorporated by reference, have been
omitted pursuant to an Application for Confidential treatment filed by the
Company with the Securities and Exchange Commission pursuant to Rule 24b-2 of
the Securities Exchange Act of 1934, as amended.
II-10
