As filed with the Securities and Exchange Commission on December 18, 1998
Registration No. 333-______________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CD RADIO INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 4899 52-1700207
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
---------------------------
1180 AVENUE OF THE AMERICAS
14TH FLOOR
NEW YORK, NEW YORK 10036
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 10036
212-899-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------------
Copies to:
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 PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.[ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
---------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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 (1)
- -------------------------------- ------------------ -------------------------- ----------------------------- ----------------------
<S> <C> <C> <C> <C>
Common Stock, par value o N/A N/A $24,367
$0.001 per share (2)
- -------------------------------- ------------------ -------------------------- ----------------------------- ----------------------
</TABLE>
(1) Calculated pursuant to Rule 457(f)(2) under the Securities Act of 1933
based on the $87,651,368 book value of the 10 1/2% Series C Convertible
Preferred Stock to be received by the Registrant in exchange for the
Common Stock offered hereby.
(2) Includes associated Preferred Stock Purchase Rights, which initially
are attached to and trade with the shares of the Common Stock being
registered hereby.
---------------------------
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>
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement relating to
this exchange and filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 18, 1998
PROSPECTUS
[CD Logo]
CD RADIO INC.
OFFER TO EXCHANGE COMMON STOCK
FOR 10 1/2% SERIES C CONVERTIBLE PREFERRED STOCK
---------------------------
MATERIAL TERMS OF THE EXCHANGE OFFER
o EXCHANGE RATIO. We are offering to exchange ___ shares of our
registered Common Stock for each share of our Series C
Preferred Stock that you hold. This exchange ratio represents
a premium of approximately __% over the existing conversion
ratio of 5.55556 shares of Common Stock for each share of the
Series C Preferred Stock. There will be no separate payment of
accrued dividends on shares of Series C Preferred Stock that
you tender into the Exchange Offer (equal to approximately
$10.92 per share of this stock at November 15, 1998).
o EXPIRATION DATE. The Exchange Offer expires at 11:59 p.m.,
New York City time, on ________, 1999, unless we extend it.
o TAX CONSEQUENCES. Generally, your exchange of Series C
Preferred Stock for Common Stock in the Exchange Offer will
not be a taxable exchange for U.S. federal income tax
purposes. However, you may be required to recognize income as
a result of accrued but unpaid dividends or cash received
instead of fractional shares.
o WITHDRAWAL RIGHTS. You may withdraw shares any time before the
Exchange Offer expires.
o CONDITIONS. Holders of Series C Preferred Stock must tender a
total of at least __% of the outstanding shares of this stock
or we will not purchase any shares tendered. Certain other
customary conditions also apply. We may waive any of these
conditions.
o USE OF PROCEEDS. We will not receive any cash proceeds from
the Exchange Offer.
OUR COMMON STOCK IS LISTED FOR TRADING ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "CDRD." ON DECEMBER 18, 1998, THE LAST REPORTED SALE PRICE OF OUR COMMON
STOCK WAS $33 5/8 PER SHARE.
FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER BEFORE YOU
PARTICIPATE IN THIS EXCHANGE OFFER, SEE "RISK FACTORS" COMMENCING ON PAGE 13.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------------
THE DEALER MANAGER FOR THE EXCHANGE OFFER IS:
MERRILL LYNCH & CO.
---------------------------
Prospectus dated __________, 199_.
<PAGE>
AVAILABLE INFORMATION
We have filed a Registration Statement on Form S-4 regarding the
Exchange Offer with the Securities and Exchange Commission (the "SEC"). This
prospectus, which is a part of the Registration Statement, does not contain all
of the information included in the Registration Statement. You should refer to
the Registration Statement and its exhibits for further information about us,
the Common Stock and the Exchange Offer. References in this prospectus to any of
our contracts or other documents are not necessarily complete and you should
refer to the exhibits attached to the Registration Statement for copies of the
actual contracts or documents. We have also filed an Issuer Tender Offer
Statement on Schedules 13E-4 with the SEC. You may read and copy the
Registration Statement, the Issuer Tender Offer Statement, the related exhibits
and the other materials we file with the SEC at the SEC's public reference room
in Washington, D.C., and at the SEC's regional offices in Chicago, Illinois and
New York, New York. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The SEC also
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file with the SEC,
including CD Radio. The site's address is http://www.sec.gov.
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any of these reports,
statements or other information at the SEC's Internet site or at the SEC's
public reference rooms. You can request copies of those documents, upon payment
of a duplicating fee, by writing to the SEC.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" in this prospectus
other information we file with them, which means that we can disclose important
information to you by referring you to those documents. This prospectus
incorporates important business and financial information about us that is not
included in or delivered with this prospectus. The information that we file
later with the SEC will automatically update and supersede the information
included in and incorporated by reference in this prospectus. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until the expiration of this Exchange Offer.
1. CD Radio's Annual Report on Form 10-K for the year ended
December 31, 1997.
2. CD Radio's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1998, June 30, 1998 (as amended) and
September 30, 1998.
3. CD Radio's Current Reports on Form 8-K filed on June 1, 1998,
October 13, 1998, November 17, 1998 and December 10, 1998.
4. The description of CD Radio's Common Stock contained in our
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).
We have filed each of these documents with the SEC and they are
available from the SEC's Internet site and public reference rooms described
under "Available Information" above. You may also request a copy of these
filings, at no cost, by writing or calling us at the following address or
telephone number:
2
<PAGE>
Patrick L. Donnelly
Executive Vice President, General Counsel and Secretary
CD Radio Inc.
1180 Avenue of the Americas, 14th Floor
New York, New York 10036
(212) 899-5000
YOU SHOULD REQUEST DOCUMENTS AT LEAST FIVE BUSINESS DAYS BEFORE
EXPIRATION OF THE EXCHANGE OFFER TO ENSURE TIMELY DELIVERY. You should rely only
on the information incorporated by reference or provided in this prospectus or
any prospectus supplement. We have not, and the Dealer Manager has not,
authorized anyone else to provide you with different information.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following cautionary statements identify important factors that
could cause our actual results to differ materially from those projected in the
forward-looking statements made in this prospectus. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking. These
statements are often, but not always, made 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."
Accordingly, these statements involve estimates, assumptions and uncertainties
which could cause actual results to differ materially from those expressed in
them. Any forward looking statements are qualified in their entirety by
reference to the factors discussed throughout this prospectus. Among the key
factors that have a direct bearing on our results of operations are the
financial risks of a development stage company; our need for additional
financing; possible delays and the increased costs of construction and launch of
necessary satellites; our reliance on unproven applications of technology; our
dependence upon satellite construction and launch contractors; satellite launch
risks; and uncertain market acceptance for our proposed service. These and other
factors are discussed in "Risk Factors" and elsewhere in this prospectus.
Because the risk factors referred to above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance on
any such forward-looking statements. Further, any forward- looking statement
speaks only as of the date on which it is made, and we undertake no obligation
to update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and it
is not possible for us to predict which will arise. In addition, we cannot
assess with any precision the impact of each factor on our 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.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT YOU SHOULD CONSIDER BEFORE YOU PARTICIPATE IN THIS EXCHANGE OFFER. YOU
SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS"
SECTION.
CD RADIO INC.
CD Radio Inc. is building a digital quality, 100 channel radio service
to be broadcast directly from satellites to vehicles. We hold one of only two
FCC licenses to build, launch and operate a national satellite radio broadcast
system. Our 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. We will broadcast CD
Radio throughout the continental United States, over a frequency band known as
the "S-band," that will augment traditional AM and FM radio bands. We have
exclusive use of a 12.5 megahertz portion of the S-band for this purpose under
our FCC license. We currently expect to commence broadcasting CD Radio in the
first quarter of the year 2000, at a subscription price of $9.95 per month.
As an entertainment company, we intend to design and originate
programming on each of our 50 music channels. We will operate each channel as a
separate radio station with a distinct format. On certain music channels we will
offer continuous music while on others we will include program hosts, depending
on the type of music programming. CD Radio will offer the following range of
music categories:
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
We will obtain programming for our additional 50 non-music channels
from third parties. To date we have entered into programming agreements with
content providers for 15 of these channels (including Bloomberg News Radio,
C-SPAN, Sports Byline USA, Classic Radio, Hispanic Radio Network and World Radio
Network). Non-music channels will contain advertising, which will provide us
with additional revenue. These channels will include news and talk shows and
programming directed to a diverse range of groups, including Hispanic listeners.
In addition, these channels will allow subscribers throughout the country to
listen to sports events occurring outside their geographic locale.
4
<PAGE>
We will house our 100 music and non-music channels at a National
Broadcast Studio which will be located in Rockefeller Center in New York City.
The National Broadcast Studio will contain our music library, facilities for
programming origination, programming personnel and program hosts. It will also
house facilities to transmit our programming to our satellites, to activate or
deactivate service to subscribers and to perform the tracking, telemetry and
control of our orbiting satellites.
In April 1998, we entered into an agreement with Lucent Technologies,
Inc. ("Lucent") for the development and manufacture of a chip set that
represents the essential element of S-band radios and radio cards. The radio
card will enable consumers to receive CD Radio in their cars by inserting the
radio card into existing cassette and CD players. We expect that the initial
delivery of commercial quantities of chip sets to consumer electronics
manufacturers will begin in December 1999 at the earliest.
In May 1998, we expanded our planned broadcast capacity from 50
channels to 100 channels. We decided to expand our broadcast capacity after a
market study by The Yankee Group (a market research organization) found that 100
channels of programming would increase and accelerate potential subscriber
penetration. By expanding to 100 channels, we will be able to provide
subscribers with a greater range of choice of content within their preferred
format. We will also be able to expand our service to the Hispanic market and
other underserved markets.
When we decided to expand our system to 100 channels, we amended our
agreement with Space Systems/Loral, Inc. ("Loral"). Loral has agreed to
construct, launch and deliver our three satellites in-orbit and checked-out, to
construct our fourth satellite for use as a ground spare and to become our
launch services provider. Our three satellites are scheduled to be launched in
November 1999, December 1999 and January 2000. Loral expects to perform the
in-orbit check-out of our satellites within two months after each launch. See
"The Company--The CD Radio Delivery System--The Satellites--Satellite
Construction and Launch Services."
As part of the expansion of our system from 50 planned broadcast
channels to 100 channels, we will change the orbital location of our satellites
from geostationary orbits over the equator to inclined elliptical orbits. This
modification will allow our satellites to optimize the time spent over the
continental United States, which will permit us to use fully the bandwidth the
FCC allocated to us.
RISK FACTORS
For a discussion of certain risks you should consider before
participating in the Exchange Offer, see "Risk Factors" beginning on page 13.
5
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer .... We are offering to exchange ________ shares of our
registered Common Stock for each share of Series C
Preferred Stock that you hold. This exchange ratio
represents a premium of approximately __% over the
existing conversion ratio of 5.55556 shares of Common
Stock for each share of the Series C Preferred Stock.
There will be no separate payment of accrued dividends
on shares of Series C Preferred Stock that you tender
into the Exchange Offer (equal to approximately $10.92
per share of this stock at November 15, 1998).
As of the date of this prospectus, there are ______
shares of Common Stock and ______ shares of Series C
Preferred Stock issued and outstanding. For a comparison
of certain terms of the Series C Preferred Stock and the
Common Stock, see "--Comparison of Series C Preferred
Stock and Common Stock."
We will accept all shares of Series C Preferred Stock
validly tendered and not validly withdrawn prior to the
Expiration Date. We will pay you cash instead of issuing
fractional shares of Common Stock.
Purposes of the
Exchange Offer ...... The principal purposes of the Exchange Offer are to
simplify our capital structure and to increase the
liquidity of our outstanding Common Stock.
We believe that completing the Exchange Offer will also
facilitate our ability to do future financings.
Expiration Date ....... The Exchange Offer will expire at 11:59 p.m., New York
City time, on _________, 1999, unless we extend it.
Exchange Date ......... We will accept the Series C Preferred Stock for exchange
on the Expiration Date. We will issue the Common Stock
promptly after this date.
Dividend Payments ..... There will be no separate payment of accrued dividends
on the Series C Preferred Stock tendered into the
Exchange Offer.
As of November 15, 1998, accrued but unpaid dividends on
the Series C Preferred Stock were approximately $10.92
per share.
Generally, if you convert your Series C Preferred Stock
into Common Stock before November 15, 2002, you will
forfeit your accrued dividends. If we notify you that we
intend to redeem your Series C Preferred Stock and you
then convert, you would be entitled to the accrued
dividends.
6
<PAGE>
Conditions of the
Exchange Offer ........ Holders of Series C Preferred Stock must tender a total
of at least __% of the outstanding shares of this stock.
Certain other customary conditions also apply. We may
waive any of these conditions.
Withdrawal Rights ..... You may withdraw shares of Series C Preferred Stock at
any time before 11:59 p.m., New York City time, on the
Expiration Date.
Procedures for
Tendering ............. See "The Exchange Offer--Tender Procedure."
Federal Income Tax
Consequences .......... Generally, your exchange of Series C Preferred Stock for
Common Stock in the Exchange Offer will not be a taxable
exchange for U.S. federal income tax purposes. However,
you may be required to recognize income as a result of
accrued but unpaid dividends on your Series C Preferred
Stock or cash received instead of fractional shares.
These accrued but unpaid dividends were equal to
approximately $10.92 per share of Series C Preferred
Stock at November 15, 1998. For a discussion of these
and other United States federal income tax
considerations relevant to the Exchange Offer, see
"Certain United States Federal Income Tax Consequences."
Use of Proceeds ....... We will not receive any cash proceeds from the issuance
of shares of Common Stock in the Exchange Offer.
No Dissenters' Rights . You do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law or the
Certificate of Designations of the Series C Preferred
Stock in connection with the Exchange Offer.
Dealer Manager ........ Merrill Lynch & Co. is the Dealer Manager for the
Exchange Offer.
Exchange and
Information Agents .... IBJ Schroder Bank & Trust Company is the Exchange Agent
for the Exchange Offer. D.F. King & Co., Inc. is the
Information Agent for the Exchange Offer. See "The
Exchange Offer--Exchange and Information Agents."
Consequence of Failure
to Exchange ........... To the extent we accept shares of Series C Preferred
Stock, the number of outstanding shares of Series C
Preferred Stock will decline. Consequently, any
liquidity in the market for Series C Preferred Stock
could be adversely affected.
7
<PAGE>
COMPARISON OF SERIES C PREFERRED STOCK AND COMMON STOCK
The following is a summary comparison of certain of the principal terms
of the Series C Preferred Stock and the Common Stock. In the Exchange Offer, we
are offering each holder of Series C Preferred Stock the opportunity to receive
_____ shares of Common Stock for each share of Series C Preferred Stock. Under
the terms of the Series C Preferred Stock, if you converted your Series C
Preferred Stock today, you would only receive 5.55556 shares of Common Stock and
you would forfeit any accrued and unpaid dividends.
<TABLE>
<CAPTION>
Series C Preferred Stock Common Stock
------------------------ ------------
<S> <C> <C>
Market............... None. Nasdaq National Market under
the symbol "CDRD."
Liquidation
Preference.......... The Liquidation Preference of each share of If we are liquidated, dissolved
Series C Preferred Stock is $100. or wound up, each holder of
Common Stock will be entitled
to a proportion of our remaining
assets after we pay our liabilities
and satisfy the rights of any
outstanding Preferred Stock.
Voting
Rights.............. No right to vote for election of directors Right to vote on any matter
generally. Rights to elect up to two directors requiring stockholder
under certain circumstances. These approval.
circumstances include our failure to do any of
the following with respect to the Series C
Preferred Stock:
o pay dividends on the stock for six
quarters after November 15, 2002;
o redeem the stock on November 15,
2012; or
o offer to purchase the stock if we
experience a "Change in Control."
Rights to vote before we take certain corporate actions
which affect the Series C Preferred Stock, including:
o changing our charter or by-laws in a
way which adversely affects the rights
of the stock;
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Series C Preferred Stock Common Stock
------------------------ ------------
<S> <C> <C>
o authorizing equity securities with
superior or equal rights to payments of
dividends or distributions of assets; and
o merging with a company having securities with
superior or equal rights to payments of
dividends or distributions of assets.
Dividends ........... o RATE
The annual dividend rate on each share of We will pay dividends when
the Series C Preferred Stock is equal to and as declared by our Board
10.5% of the sum of $100 and any accrued of Directors. The Board of
and unpaid dividends from November 17, Directors currently does not
1997. Dividends on your shares are intend to pay any dividends on
cumulative and accrue quarterly. the Common Stock.
o REGULAR PAYMENT DATES
When and as declared by our Board of Not applicable.
Directors, we will pay dividends on a
quarterly basis starting on November 15,
2002 and then on February 15, May 15,
August 15 and November 15 of each
following year.
o ADDITIONAL PAYMENT DATES
In addition, we will pay accrued dividends Not applicable.
on shares of Series C Preferred Stock
when:
o we redeem the shares;
o we purchase the shares under an Offer
to Purchase; or
o the shares are converted into Common
Stock after November 15, 2002.
o NO ACCRUAL UPON EARLY CONVERSION
We will not pay accrued dividends on any Not
applicable. shares of Series C Preferred Stock that
you convert into Common Stock before November 15,
2002, unless we send you a notice of redemption and
you convert on or before the redemption date.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Series C Preferred Stock Common Stock
------------------------ ------------
<S> <C> <C>
o PAYMENT IN KIND OPTION
We may pay dividends in cash, shares of Not applicable.
Common Stock or any combination of the
two. If we pay dividends in Common
Stock, we will determine the number of
shares to pay you based on the average
closing price of the Common Stock as
reported in THE WALL STREET JOURNAL for the
20 consecutive trading days before the
payment date.
o RECORD DATE
We will pay dividends to the holders of Not applicable.
record on a record date 10 to 40 days
before the payment date.
Redemption
Price.............. $100 plus any accrued and unpaid dividends. Not applicable.
Mandatory
Redemption......... On November 15, 2012, we must redeem all Not applicable.
outstanding shares of Series C Preferred Stock
at the Redemption Price. There is no
mandatory sinking fund.
Optional
Redemption......... We are entitled to redeem shares of Series C Not applicable.
Preferred Stock at our option as follows:
o BEFORE NOVEMBER 15, 1999
Not at all.
o NOVEMBER 15, 1999 TO NOVEMBER 14, 2002
At $100 per share, plus any accrued and unpaid
dividends, if the average closing price of the
Common Stock is at least $31.50 per share (subject
to adjustments). We will calculate this average
using the closing prices of the Common Stock as
reported in THE WALL STREET JOURNAL for the 20
consecutive trading days before we mail you the
redemption notice.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Series C Preferred Stock Common Stock
------------------------ ------------
<S> <C> <C>
o NOVEMBER 15, 2002 TO NOVEMBER 14, 2005
Initially for $105.25 per share and declining each
year to $102.63 per share from November 15, 2003 and
to $101.81 per share from November 15, 2004, plus,
in each case, any accrued and unpaid dividends.
o ON AND AFTER NOVEMBER 15, 2005
$100 per share plus any accrued and unpaid
dividends.
Change in
Control ............ If there is a "Change in Control" we must Not applicable.
make an offer to purchase all outstanding
shares of Series C Preferred Stock at a purchase
price in cash equal to $101, plus any accrued and
unpaid dividends. See "Description of Capital
Stock--10 1/2% Series C Convertible Preferred
Stock--Change in Control."
Conversion .......... You may convert your shares of Series C Not applicable.
Preferred Stock at any time into 5.55556
shares of Common Stock. We must adjust this
number if certain corporate events affecting the
Common Stock occur. You will not be entitled
to receive accrued dividends on shares of Series C
Preferred Stock that you convert before November 15,
2002, unless we send you a redemption notice and you
convert on or before the redemption date. We will pay
accrued dividends on any shares of Series C Preferred
Stock you convert on or after November 15, 2002.
-------------------------
</TABLE>
We incorporated in the state of Delaware as Satellite CD Radio, Inc. on
May 17, 1990. On December 7, 1992, we changed our name to CD Radio Inc. and
formed a wholly owned subsidiary, Satellite CD Radio, Inc. Our subsidiary holds
our FCC license. Our executive offices are located at 1180 Avenue of the
Americas, New York, New York 10036, our telephone number is (212) 899- 5000 and
the address of our web site is www.cdradio.com.
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL STATEMENTS
The summary consolidated financial data for CD Radio set forth below as
of and for the years ended December 31, 1993, 1994, 1995, 1996 and 1997, are
derived from CD Radio's respective audited consolidated financial statements.
The financial information as of and for the nine months ended September 30, 1997
and 1998, is derived from the respective unaudited consolidated financial
statements. In the opinion of management, the unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
that are necessary for a fair presentation of the financial position and results
of operations for these periods. The results of operations for the nine months
ended September 30, 1998 are not necessarily indicative of the results for the
full year. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
incorporated herein by reference and the information contained under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
For the Nine Months Ended
For the Year Ended December 31, September 30,
------------------------------------------------------------ --------------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss................... $ (6,568) $ (4,065) $ (2,107) $ (2,831) $ (4,737) $ (1,489) $ (39,259)
Net loss per share of Common
Stock.................... $ (0.79) $ (0.48) $ (0.23) $ (0.29) $ (5.08)(1) $ (4.97)(1)$ (3.51)
Weighted average common
shares outstanding (basic
and diluted)............. 8,284 8,398 9,224 9,642 11,626 10,761 16,859
Preferred stock dividend... $ -- $ -- $ -- $ -- $ (2,338) $ -- $ (13,563)
Preferred stock deemed
dividend ................ $ -- $ -- $ -- $ -- $ (51,975) $ (51,975) $ --
Accretion of dividends in
connection with the
issuance of warrants on
preferred stock.......... $ -- $ -- $ -- $ -- $ -- $ -- $ (6,434)
As of December 31, As of September 30,
------------------------------------------------------------ --------------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Cash and cash equivalents.. $ 777 $ 3,400 $ 1,800 $ 4,584 $ 170,381 $ 29,386 $ 72,375
Working capital (deficit).. (250) 2,908 1,741 4,442 170,894 29,871 13,424
Total assets............... 1,663 3,971 2,334 5,065 323,807 148,430 389,694
Deficit accumulated during
the development stage.... (9,533) (13,598) (15,705) (18,536) (23,273) (72,000) (62,532)
Stockholders' equity....... 505 3,431 1,991 4,898 79,430 32,265 47,396
Book value per share....... 0.07 0.37 0.21 0.48 4.95 2.57 2.66
- --------------------
</TABLE>
(1) Includes a deemed dividend on CD Radio's 5% Preferred Stock of $52
million, or $4.83 per share. The deemed dividend relates to the discount
feature associated with the 5% Preferred Stock, computed in accordance
with the SEC's position on accounting for preferred stock which is
convertible at a discount to the market price.
12
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND OTHER
INFORMATION IN THIS PROSPECTUS BEFORE YOU TENDER SHARES INTO THE EXCHANGE OFFER.
SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS."
DEVELOPMENT STAGE COMPANY FINANCIAL RISKS
FINANCIAL RESULTS THROUGH SEPTEMBER 30, 1998
We are a development stage company. The service we propose to offer, CD
Radio, is in an early stage of development. Since our inception, we have
concentrated on raising capital, obtaining required licenses, developing
technology, strategic planning and market research. Our financial results from
our inception on May 17, 1990 through September 30, 1998, are as follows:
o no revenues;
o 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
o net losses applicable to common stock of approximately $137
million, which includes a deemed dividend on our former 5%
Delayed Convertible Preferred Stock (the "5% Preferred Stock")
of $52 million. See Note (1) to "Selected Historical Financial
Information" below for a discussion of this deemed dividend.
(In November 1997, we exchanged 1,846,799 shares of our Series
C Preferred Stock for all of the issued and outstanding shares
of 5% Preferred Stock) .
EXPECTATION OF CONTINUING LOSSES AND NEGATIVE CASH FLOW
We do not expect to generate any revenues from operations before the
second quarter of 2000 or to generate positive cash flow from operations until
late 2000 at the earliest. Our ability to generate revenues, generate positive
cash flow and achieve profitability will depend upon a number of factors,
including:
o the timely receipt of all necessary regulatory authorizations;
o the successful and timely construction and deployment of our
satellite system;
o the development and manufacture by one or more consumer
electronics manufacturers 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;
o the timely establishment of our national broadcast studio (the
"National Broadcast Studio") in Rockefeller Center in New York
City; and
o the successful marketing and consumer acceptance of CD Radio.
13
<PAGE>
We cannot assure you that we will accomplish any of the above, that CD
Radio will ever commence operations, that we will attain any particular level of
revenues, that we will generate positive cash flow or that we will achieve
profitability. See "--Need for Additional Financing" for further discussion of
the risks we face in achieving successful operations.
NEAR-TERM FUNDING REQUIREMENTS
We require near-term funding to continue building our CD Radio system.
We intend to fund some of our near-term requirement through the sale of Junior
Preferred Stock (described below). To complete the sale of the Junior Preferred
Stock, we must satisfy certain customary conditions. We cannot assure you that
we will be able to satisfy these conditions and, if we cannot, we will need to
obtain near-term funding from other sources.
We believe we can fund our planned operations and the construction of
our satellite system through the fourth quarter of 1999 from the following
sources:
o working capital at September 30, 1998;
o our recent sale of 5,000,000 shares of Common Stock to Prime
66 Partners, L.P. ("Prime 66") for $100 million; and
o our proposed sale of a new class of Junior Preferred Stock to
Apollo Investment Fund IV, L.P. and Apollo Overseas Partners,
L.P. (collectively, the "Apollo Investors") for $135 million
(or up to $200 million if we exercise our option, as described
below).
On November 13, 1998, we agreed to sell 1,350,000 shares of our 9.2%
Series A Junior Cumulative Convertible Preferred Stock, par value $.001 per
share (the "Series A Junior Preferred Stock"), to the Apollo Investors for $135
million. In addition, the Apollo Investors granted us an option to sell them
650,000 shares of our 9.2% Series B Junior Cumulative Convertible Preferred
Stock, par value $.001 per share (the "Series B Junior Preferred Stock"), for
$65 million. Together these two series of preferred stock constitute the "Junior
Preferred Stock." We may exercise this option at any time during the ten months
after we complete the sale of Series A Junior Preferred Stock so long as we
exercise before September 30, 1999.
NEED FOR ADDITIONAL FINANCING
FINANCING REQUIREMENTS
We currently do not have sufficient financing commitments to fund all
of our capital needs.
We estimate that we will need the following amounts for the following
purposes:
o to develop and commence commercial operation of
CD Radio by the second quarter of 2000 $964 million
o to fund operations through the first full year of
operations ending with the second quarter of 2001 140 million
--------------
Total through the first year of operations $1,104 million
14
<PAGE>
We have or expect that we may have use of the following funds to
develop and operate CD Radio:
o net funds raised through November 30, 1998 (including
$115 million of debt which we must refinance or repay
by September 30, 1999) $592 million
o funds from the proposed sale of Series A Junior
Preferred Stock to the Apollo Investors, net of fees and
expenses 129 million
o funds from the possible sale of Series B Junior Preferred
Stock to the Apollo Investors, if we exercise our option,
net of fees and expenses 63 million
o funds which Bank of America National Trust and
Savings Association ("Bank of America") may (but is
not required to) arrange for us 106 million
--------------
Total funds we may access $890 million
After we give effect to the funds we have and the funds we expect to
raise, we estimate that we will need an additional $74 million to develop and
commence commercial operation of CD Radio by the second quarter of 2000.
Accordingly, we estimate that we will need total additional funds of $214
million to fund operations through the first full year of operations. We will
require additional funds in the event of delays, cost overruns, launch failure
or other adverse developments.
We expect to finance the remainder of our funding requirements through
the issuance of debt or equity securities or a combination of debt and equity
securities. We cannot assure you that we will obtain additional financing on
favorable terms or that we will do so on a timely basis.
FINANCING CHALLENGES AND CONSTRAINTS
We face many challenges and constraints in financing our development
and operations, including those listed below.
LIMITS ON INDEBTEDNESS
The indenture (the "Senior Notes Indenture") governing our outstanding
15% Senior Secured Discount Notes due 2007 (the "Senior Secured Notes") issued
in November 1997 limits our ability to incur additional indebtedness. In
addition, we expect any future indebtedness will contain similar limits on our
ability to incur additional indebtedness.
CONDITIONS TO SYNDICATED BANK BORROWINGS
We entered into a credit agreement with Bank of America in July 1998.
Under this agreement, Bank of America agreed to provide us a term loan facility
of up to $115 million maturing September 30, 1999. Additionally, Bank of America
has agreed to attempt to arrange a syndicate of lenders to provide us with a
second term loan facility of $225 million. We intend to use a portion of
15
<PAGE>
the proceeds from this second term loan facility to repay the existing term loan
facility and for other general corporate purposes. The second term loan facility
would provide us with approximately $106 million of net additional funds after
repayment of the existing term loan facility and the payment of fees and
expenses. To borrow under the second term loan facility, we must first satisfy
certain conditions, negotiate, execute and deliver definitive loan documents and
obtain consents from holders of certain of our outstanding indebtedness.
SUBSTANTIAL NEAR-TERM REQUIREMENTS
Over the near-term, we require substantial funds to construct and
launch the satellites that will be part of our broadcast system. We committed to
pay a total of approximately $718 million under our contract with Loral for the
construction, launch and in-orbit delivery of three satellites and construction
of our spare fourth satellite. Of this total, we must pay $438 million for the
construction of satellites and $280 million for launch services. As of September
30, 1998, we have paid $201 million of the amount due to Loral. We started
paying for the construction of the satellites in April 1997 and we must make
further installments through December 2003.
If we fail to secure the financing required to pay Loral on a timely
basis, we risk the following results:
o delays in launching our satellites and starting broadcasting
operations;
o increases in the cost of building or launching our satellites or
other activities necessary to put CD Radio into operation;
o a default on our commitments to Loral, our creditors or others;
o our inability to commence CD Radio service; and
o the forced discontinuance of our operations or the sale of our
business.
POSSIBLE DELAYS AND ADVERSE EFFECT OF DELAY ON FINANCING REQUIREMENTS
We expect to begin offering CD Radio service in the first quarter of
2000. Several factors will influence our ability to meet this objective,
including the launch of the three satellites required for CD Radio service. To
launch and start operating all three satellites by the first quarter of 2000,
Loral must deliver completed satellites prior to the launch dates and provide or
obtain launch services on a timely basis. We cannot assure you that Loral will
deliver the satellites or provide such launch services on a timely basis, if at
all. A significant delay in the development, construction, launch or
commencement of operation of our satellites would adversely affect our results
of operations in a material way. Other delays in the development or the
commencement of commercial operations of CD Radio may also materially adversely
affect our results of operations. Several factors could delay us, including the
following:
o obtaining additional authorizations from the Federal Communications
Commission (the "FCC");
o coordinating use of S-band radio frequency spectrum with Mexico;
16
<PAGE>
o delays in or modifications to the design, development, construction
or testing of our satellites, the National Broadcast Studio or other
aspects of the CD Radio system;
o changes of technical specifications;
o delay in commercial availability of radio cards, S-band radios or
miniature satellite dish antennas;
o failure of our vendors to perform as anticipated; and
o a delayed or unsuccessful satellite launch or deployment.
During any period of delay, we would continue to need significant amounts of
cash to fund capital expenditures, administrative and overhead costs,
contractual obligations and debt service. Accordingly, any delay could
materially increase the aggregate amount of funds we need to commence
operations. Additional financing may not be available on favorable terms or at
all during periods of delay. Delays also could place us at a competitive
disadvantage relative to any competitor that begins operations before us. For a
more detailed discussion of these matters, see "--Unavailability of Radio Cards,
S-band Radios or Miniature Satellite Dish Antennas," "--Continuing Regulation by
the FCC," "The Company--The CD Radio Delivery System" and "The
Company--Government Regulation."
RELIANCE ON UNPROVEN APPLICATIONS OF TECHNOLOGY
UNPROVEN SYSTEM AND POTENTIAL PROBLEMS
CD Radio is designed to be broadcast from three satellites orbiting the
Earth. Two of the three satellites will transmit the same signal at any given
time to radio cards or S-band radios that will receive signals through miniature
satellite dish antennas. This design applies existing technology in new and
unproven ways. Accordingly, we cannot assure you that the CD Radio system will
work as planned. In addition, radio cards, S-band radios and miniature satellite
dish antennas are not currently available.
Certain obstructions will adversely affect CD Radio reception. High
concentrations of tall buildings and other obstructions, such as those found in
large urban areas, and tunnels will block the signals from both transmitting
satellites. We plan to install terrestrial repeating transmitters to rebroadcast
CD Radio in certain urban areas to mitigate this problem. However, certain areas
with impediments to satellite line-of-sight may still experience "dead zones."
We cannot assure you that the CD Radio system will operate as planned with the
technology we have developed. For a more detailed discussion of these matters,
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."
TESTING LIMITED TO TERRESTRIAL SIMULATION WITH PROTOTYPES
In support of our application for our FCC license, we conducted a
demonstration of our proposed radio service from November 1993 through November
1994. For the demonstration, we transmitted S-band signals to a prototype S-band
radio and miniature satellite dish antenna installed in a car to simulate
certain transmission characteristics of our planned system. We constructed a
terrestrial simulation of our planned system because there currently are no
commercial satellites in
17
<PAGE>
orbit capable of transmitting radio signals on S-band frequencies to the United
States. As part of the demonstration, the prototype radio received 30 channels
of compact disc quality stereo music while the car was driven throughout the
range. We cannot assure you that the CD Radio system will function as intended
until we test it with orbiting satellites, miniature satellite dish antennas and
radio cards or S-band radios suitable for commercial production. See "The
Company--Demonstration of the CD Radio System."
DEPENDENCE UPON LORAL
Our business will depend upon successfully constructing and launching
the satellites to transmit CD Radio. We will rely upon Loral to construct and to
deliver these satellites into orbit on a timely basis. If Loral fails to deliver
functioning satellites in a timely manner, our business could be materially
adversely affected. Although our agreement with Loral requires Loral to pay us
penalties for late delivery, based on the length of the delay, these remedies
may not adequately mitigate the damage any launch delays cause to our business.
Additionally, if Loral fails to deliver the designated launch services due to
causes beyond its control, Loral will not be liable for the delay or the damages
caused by the delay. While the satellites are under construction, Loral is at
risk should anything happen to the satellites. In addition, Loral is responsible
for making sure the satellites meet certain performance specifications at the
time of launch (in the case of the first three satellites) or at the time of
delivery to our ground storage location (in the case of the fourth satellite).
However, we, and not Loral, will be at risk for anything that happens to the
satellites at the time of launch and thereafter (in the case of the first three
satellites) or at any time after delivery to our ground storage area (in the
case of the fourth satellite). This means that if any satellite is destroyed
during or after launch or if the fourth satellite is damaged or destroyed while
in storage, Loral will not be responsible to us for the cost of replacing it.
See "--Possible Delays and Adverse Effect of Delay on Financing Requirements"
and "The Company--The CD Radio Delivery System--The Satellites--Satellite
Construction and Launch Services" for a more detailed discussion of these
matters.
We will depend on Loral, our satellite launch service provider, to
obtain access to available slots on launch vehicles and to contract with
third-party launch service providers for the launch of our satellites. If Loral
fails to make arrangements for timely launch of the satellites, our business
could be materially adversely affected. A launch service provider may postpone
one or more of our launches for a variety of reasons, including:
o technical problems;
o a launch of a scientific satellite whose mission may be degraded by
delay;
o the need to conduct a replacement launch for another customer; or
o a launch of another customer's satellite whose launch was postponed.
Generally, Loral is not liable to us for a satellite or launch failure. However,
if the first Proton launch vehicle used to launch our satellites fails, Loral
will provide us with a free replacement launch. See "The Company--The CD Radio
Delivery System--The Satellites--Satellite Construction and Launch Services."
We will also depend on Loral to ensure that the software to test the
satellites prior to launch, to run the satellites and to track and control the
satellites will be capable of handling the potential
18
<PAGE>
problems that may arise on January 1, 2000. These potential problems are known
as "The Year 2000 Issue." The Year 2000 Issue is the result of computer programs
being written using two digits (rather than four) to define the year 2000, which
could result in miscalculations or system failures resulting from recognition of
a date using "00" as the year 1900 rather than the year 2000. While currently
the above mentioned systems are not fully prepared to handle The Year 2000
Issue, Loral is aware of this and has assured us that all Loral systems will be
year 2000 compliant before the critical date of January 1, 2000.
SATELLITE LAUNCH RISKS
We cannot assure you that the launches of our satellites will be
successful. Satellite launches are subject to significant risks, including
launch failure, damage or destruction of the satellite during launch and failure
to achieve a proper orbit. Launch failure rates vary depending on the particular
launch vehicle and contractor. Under our agreement with Loral, our first two
satellites will be launched on a Proton launch vehicle and the third satellite
will be launched on either a third Proton launch vehicle, an Atlas IIIA launch
vehicle or an Atlas IIIB launch vehicle. Recently, these launch vehicles have
performed as follows, although past experience is not necessarily indicative of
future performance:
o the Proton family of launch vehicles, built by Russian entities,
has a 92% launch success rate based on its last 50 launches; and
o the Atlas family of launch vehicles, built by Lockheed Martin
Corporation, has a 94% launch success rate based on its last 50
launches.
See "--Limited Life of Satellites; In-orbit Failure."
As part of our risk management program, we contracted with Loral for
the construction of a fourth satellite that we will use as a ground spare. We
also plan to obtain insurance covering a replacement launch to the extent
required to cover risks Loral does not assume. See "--Insurance Risks." If we
need to launch the replacement satellite, the start of our commercial operations
would be delayed for a period of up to six months, which could materially
adversely affect the demand for our services, our revenues and our results of
operations. See "The Company--The CD Radio Delivery System--The
Satellites--Satellite Construction and Launch Services."
UNCERTAIN MARKET ACCEPTANCE
Currently no one offers a commercial satellite radio service such as CD
Radio in the United States. As a result, we cannot reliably estimate the
potential demand for such a service or the degree to which our proposed service
will meet that demand. We cannot assure you that there will be sufficient demand
for CD Radio to enable us to achieve significant revenues or cash flow or
profitable operations. CD Radio will achieve or fail to gain market acceptance
depending upon factors beyond our control, including:
o the willingness of consumers to pay subscription fees to obtain
satellite radio broadcasts;
o the cost, availability and consumer acceptance of radio cards,
S-band radios and miniature satellite dish antennas;
19
<PAGE>
o the marketing and pricing strategies of our company and of
competitors;
o the development of alternative technologies or services; and
o general economic conditions.
See "The Company--The CD Radio Service," "--Marketing Strategy," "--The CD Radio
Delivery System" and "--Competition."
LIMITED LIFE OF SATELLITES; IN-ORBIT FAILURE
The useful lives of our satellites will vary and will depend on a
number of factors, including:
o quality of construction;
o amount of fuel on board;
o durability of component parts;
o expected gradual environmental degradation of solar panels;
o random failure of satellite components which could result in damage
to or loss of a satellite; and
o in rare cases, damage or destruction by electrostatic storms or
collisions with other objects in space.
If one of our satellites fails on launch or in orbit and if we are required to
launch our spare satellite, our operational timetable will be delayed for up to
six months. If two or more of our satellites fail on launch or in orbit, we will
need to contract to build additional satellites which could delay the
commencement or continuation of our operations for up to three years. We expect
that our satellites will last approximately 15 years, and that after this period
their performance in delivering CD Radio will deteriorate. We cannot assure you,
however, of the useful life of any particular satellite. Our operating results
would be adversely affected if the useful life of our initial satellites is
significantly shorter than 15 years.
INSURANCE RISKS
RISKS TO INSURE
Our agreement with Loral does not protect us against the risks inherent
in satellite launches or in-orbit operations. These risks include launch vehicle
failure, failure of the satellite to deploy correctly and failure of the
satellite to operate as planned. Accordingly, we must obtain insurance to
protect adequately against such risks.
Under our agreement with Loral, Loral must provide us with a
replacement launch if the first Proton launch vehicle used to launch one of our
satellites fails. In that event, we would attempt to launch the spare satellite
that we are having constructed. We intend to purchase insurance for launch
failure of the other launch vehicles. We also intend to insure against other
risks, including a failure
20
<PAGE>
during launch caused by factors other than the launch vehicle and/or a failure
involving the second or third satellite if we replace the first or second
satellite with the spare satellite.
The insurance premiums we pay may increase substantially upon any
adverse change in insurance market conditions. We cannot assure you that we will
be able to purchase launch insurance or that we will be able to purchase it at a
cost or on terms acceptable to us.
UNINSURED RISKS
Our insurance may not cover all of our losses, and may not fully
reimburse us for the following:
o expenditures for a satellite which fails, totally or in part, upon
launch;
o expenditures for a satellite which fails to perform to
specifications after launch;
o damages from business interruption, loss of business and similar
losses arising from satellite failures or launch delays; and
o losses subject to deductibles, exclusions and conditions.
See "The Company--The CD Radio Delivery System--The Satellites--Risk Management
and Insurance."
RISK ASSOCIATED WITH CHANGING TECHNOLOGY
We operate in an industry characterized by rapid technological advances
and innovations. One or more of the technologies which we use or develop could
become obsolete. In addition, we will depend on technologies being developed by
third parties to implement key aspects of our proposed system. We may be unable
to obtain more advanced technologies on a timely basis or on reasonable terms.
In addition, our competitors may obtain more advanced technologies and we may
not have access to such technologies. We may encounter unforeseen problems in
the development of our satellite radio broadcasting system. Such problems could
adversely affect the performance, cost or timely implementation of our system,
which could materially adversely affect our results of operations.
UNAVAILABILITY OF RADIO CARDS, S-BAND RADIOS OR MINIATURE SATELLITE DISH
ANTENNAS
To receive the CD Radio service, a subscriber to CD Radio must purchase
a radio card or S-band radio as well as the associated miniature satellite dish
antenna. We have entered into a contract with Lucent to develop and manufacture
the microelectronic circuits that represent the essential element of the radio
cards, S-band radios and miniature satellite dish antennas. We cannot assure you
that Lucent will succeed in this development effort.
No one currently manufactures radio cards, S-band radios and miniature
satellite dish antennas. We do not intend to manufacture or distribute radio
cards, S-band radios or miniature satellite dish antennas ourselves. We have
discussed the manufacture of radio cards, S-band radios and miniature satellite
dish antennas for retail sale in the United States with several manufacturers.
These discussions may not 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
21
<PAGE>
timely manner and at a price that would permit the widespread introduction of CD
Radio in accordance with our business plan. In addition, any manufacturers of
radio cards, S-band radios and miniature satellite dish antennas may not produce
them in sufficient quantities to meet anticipated consumer demand. Our business
would be materially adversely affected if we cannot arrange for the timely
development of these products for commercial sale at an affordable price and
with sufficient retail distribution.
The FCC granted us a license to build, launch and operate a national
satellite radio broadcast system and granted a similar license to a competitor,
XM Satellite Radio Inc. ("XM"). Our FCC license requires that we incorporate
into our system receivers that are compatible with our competitor's system, but
XM proposes to use a different transmission technology from ours. Although we
have made progress towards developing a receiver which is interoperable with the
system XM is constructing, we cannot predict whether we will be able to satisfy
this interoperability requirement because of the various technological
challenges involved. See "The Company--The CD Radio Delivery System,"
"--Marketing Strategy," and "--Technology and Patents." Complying with the
interoperability requirement also could make the radio cards, S-band radio and
the associated miniature satellite disk antenna more difficult and costly to
design and manufacture. Accordingly, this interoperability requirement could
delay the commercial introduction of these products or require that they be sold
at higher prices. We may also be required to comply with this interoperability
requirement for any person licensed by the FCC to provide a satellite-based
digital audio radio service in the future. See "Competition" below.
COMPETITION
We face the following competitive challenges:
o a new and untested market for our proposed service;
o competition with established conventional radio stations, which:
o do not charge subscription fees;
o do not require users to purchase radio cards or S-band radios and
associated miniature satellite dish antennas;
o often offer local information programming such as local news and
traffic reports; and
o in the case of some FM stations, may begin to broadcast digital,
compact disc quality signals before we start operations;
o direct competition with XM; and
o the possibility of additional satellite broadcast radio competition:
o if the FCC grants additional licenses for satellite-delivered
radio services;
o if holders of licenses for other portions of the electromagnetic
spectrum (currently licensed for other uses) obtain changes to
their licenses; or
22
<PAGE>
o if holders of licenses without FCC restrictions for other
portions of the spectrum devise a method of broadcasting
satellite radio.
Certain of the winners in the FCC's April 1997 wireless communication
service license auction have formed an additional potential competitor called
WCS Radio, Inc. ("WCS"). In November 1998, WCS submitted an application to the
FCC to provide a satellite-based digital audio radio service. WCS said in its
application that it wants 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.
We cannot predict whether the FCC will grant this application or whether WCS
will be able to launch a competing service. WCS expects that its satellites will
be built by a subsidiary of TRW, Inc.
Although any potential competitor would face cost and competition
barriers, the number of competitors in the satellite radio industry may
increase. One or more competitors may design a satellite radio broadcast system
that is superior to our system. The competitive factors listed above could
materially adversely affect our results of operations. See "The
Company--Competition."
NEED TO OBTAIN RIGHTS TO PROGRAMMING
To offer music programming, we must 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 a copyright user cannot reach agreement with ASCAP or BMI, the user can
resort to the special judicial rate setting procedures available under the
antitrust consent decrees that govern these organizations. SESAC, however, is
not subject to a consent decree or the special judicial rate setting mechanism.
Broadcasters currently pay a combined total of 4% of their revenues to the music
performing rights societies. We may, however, be required to pay a higher rate.
Similarly, we must negotiate arrangements with the owners of the
copyrights in sound recordings under the Digital Performance Right in Sound
Recordings Act of 1995 (the "Digital Recordings Act"). Representatives of the
sound recording copyright owners and users are arbitrating certain royalty
arrangements under the Digital Recordings Act. The U.S. Copyright Office
recently reviewed the results of the arbitration and set the royalty rate at
6.5% of certain types of the copyright user's gross revenues. The copyright
owners, which had sought a royalty of 41.5% of gross revenues, have indicated
that they will appeal the decision.
We believe that we will be able to negotiate royalty arrangements with
the music performing rights organizations and the owners of sound recording
copyrights, although we have not yet done so. We cannot assure you as to the
terms of any royalty arrangements ultimately negotiated or established by
arbitration or judicial rate setting.
NEED TO MANAGE RAPID GROWTH
We have not started broadcasting CD Radio. We expect to experience
significant and rapid growth in the scope and complexity of our business as we
proceed with the development of our satellite radio system. As of December 17,
1998, we employed 40 people. We do not employ sufficient staff to program our
broadcast service, manage operations, control the operation of our
23
<PAGE>
satellites, or handle sales and marketing efforts. Although we have recently
hired experienced executives in several of these areas, we must hire additional
employees before we begin commercial operations of our planned service. This
growth, including the creation of a management infrastructure and staffing, is
likely to place a substantial strain on our management and operational
resources. Our results of operations could be materially adversely affected if
we fail to do any of the following:
o develop and implement effective systems;
o hire and train sufficient personnel to perform all of the functions
necessary to effectively provide our service;
o manage our subscriber base and business; or
o manage our growth effectively.
CONTINUING REGULATION BY THE FCC
CHALLENGES TO OUR FCC LICENSE
On October 10, 1997, the FCC's International Bureau granted us an FCC
license after we submitted a winning bid in an FCC auction. One of the
low-bidders in the FCC auction applied to have the full FCC review the grant of
our FCC license. The application requests that the FCC adopt restrictions on
foreign ownership and overrule the granting of our FCC license on the basis of
our ownership. If the FCC denies this application, the complaining party may
appeal to the U.S. Court of Appeals. Although we believe the FCC will uphold the
grant of our FCC license, we cannot predict the ultimate outcome of any
proceedings relating to this application or any other proceedings that
interested parties may file. See "The Company--Government Regulation."
NEED FOR MODIFICATIONS TO OUR FCC LICENSES
In May 1998, we decided to increase the number of satellites in our
system from two to three and to change the orbit of those satellites. To
implement these changes, the FCC must first approve changes to our FCC license.
On December 11, 1998, we filed an application with the FCC for these changes.
Although we believe that the FCC will approve our application for this necessary
change, we cannot assure you that this will occur. Interested parties will have
an opportunity to object to this modification of our FCC license. We cannot
predict the nature or extent of any such objections or the time it will take the
FCC to act on our application or any such objections.
NEED FOR LICENSE RENEWALS
The term of our FCC license with respect to each satellite is eight
years. The term for a satellite starts on the date it is declared operational
after it is inserted into orbit. When the term of our FCC license for each
satellite expires, we must apply for a renewal of the relevant license. We
cannot assure you that we will obtain such renewals. If the FCC does not renew
our FCC license, we would be forced to cease broadcasting CD Radio.
24
<PAGE>
ASSIGNMENT OF OUR FCC LICENSE
The FCC must approve any future assignments or transfers of control of
our FCC license under the transfer of control rule restrictions in the
Communications Act of 1934, as amended (the "Communications Act"). We cannot
assure you that the FCC would approve any transfer or assignment of our FCC
license.
LICENSING AND INSTALLING TERRESTRIAL REPEATING TRANSMITTERS
The CD Radio system is designed to permit motorists to receive CD Radio
in all outdoor locations where the vehicle has an unobstructed line-of-sight
with one of our satellites. Certain obstructions will adversely affect CD Radio
reception. High concentrations of tall buildings and other obstructions, such as
those found in large urban areas, and tunnels will block the signals from both
transmitting satellites. Therefore, we plan to install terrestrial repeating
transmitters to rebroadcast CD Radio in certain urban areas to mitigate this
problem. The FCC has not yet established rules governing the application
procedure for obtaining authorizations to construct and operate terrestrial
repeating transmitters. The FCC initiated a rulemaking on the subject in March
1997 and received several comments urging the FCC to consider placing
restrictions on our ability to deploy our terrestrial repeating transmitters. We
cannot predict the outcome of this process. See "--Reliance on Unproven
Applications of Technology."
To install and operate our terrestrial repeating transmitters, we will
also need to obtain the rights to use towers or the roofs of certain structures.
We cannot assure you that we can obtain these tower or roof rights on acceptable
terms or in appropriate locations for the operation of CD Radio. Our inability
to install terrestrial repeaters in areas where we think we need them could
adversely affect the quality of reception of CD Radio service.
RISK OF INTERFERENCE
A new type of lighting device may generate radio energy in the part of
the spectrum we intend to use. The FCC proposes to revise its regulations to
prohibit such devices from causing harmful interference to an authorized radio
service such as CD Radio. If the FCC fails to adopt adequate technical standards
specifically applicable to such devices and if the use of such devices becomes
commonplace, we could experience difficulties enforcing our rights. We believe
that the FCC must strengthen the currently proposed regulations to assure
protection of our portion of the spectrum. If the FCC fails to adopt adequate
standards, the new devices could materially adversely affect reception of our
broadcasts. We believe that the FCC will set adequate standards to prevent
harmful interference, although we cannot assure you that it will do so.
FREQUENCY COORDINATION WITH MEXICO
In order to use our assigned spectrum, we must complete a process of
frequency coordination with Mexico. This is required under the rules adopted by
the FCC on March 3, 1997 for the national satellite radio broadcast service. We
cannot assure you that we will be able to coordinate use of this spectrum with
Mexico or do so in a timely manner. If the FCC were to authorize an additional
satellite digital audio service in spectrum adjacent to ours, for example, as
proposed by WCS, coordination with Mexico could become more difficult. The
United States and Canadian governments were required to complete a similar
process and have done so.
25
<PAGE>
CHANGING REGULATIONS
To provide CD Radio we must retain our FCC license and obtain or retain
other requisite approvals. Our ability to do so could be affected by changes in
laws, FCC regulations, international agreements governing communications policy
generally or international agreements relating specifically to CD Radio. In
addition, the manner in which CD Radio would be offered or regulated could be
affected by any such changes. See "The Company--Government Regulation."
FOREIGN OWNERSHIP RESTRICTIONS
The Communications Act restricts ownership in certain broadcasters by
foreigners. The order granting our FCC license determined that, as a private
carrier, those restrictions do not apply to us. The Executive Branch of the U.S.
government has expressed interest in changing this policy, and may try to impose
foreign ownership restrictions on our shares. The order granting our FCC license
stated that our foreign ownership status under the Communications Act could be
raised in a future proceeding. The pending appeal of the grant of our FCC
license may bring the question of foreign ownership restrictions before the full
FCC. If these foreign ownership restrictions were applied to us, depending on
the percentage of our foreign ownership at the time, we could cease to be in
compliance with the Communications Act.
PUBLIC SERVICE REGULATIONS
The FCC has indicated that it may impose public service obligations on
satellite radio broadcasters in the future. For example, the FCC could require
broadcasters to set aside channels for educational programming. We cannot
predict whether the FCC will impose public service obligations or the impact
that any such obligations would have on our results of operations.
DEPENDENCE ON KEY PERSONNEL
We depend significantly on the services of David Margolese, our
Chairman and Chief Executive Officer, who is responsible for strategic planning.
If we lost the services of Mr. Margolese, our business and prospects could be
materially adversely affected. See "The Company--Government Regulation."
APPLICATION OF EXPORT CONTROL REGULATIONS
U.S. export control regulations govern the shipment of our satellites
to territory outside the United States. We may need export licensing
authorizations from the U.S. government, because certain of Loral's satellite
launch service providers intend to launch our satellites from a launch facility
outside the United States. We cannot assure you that we can obtain the required
export licenses. The United States may change its export control laws and
regulations. In addition, the fact that a particular foreign launch service
provider has obtained prior export approvals does not guarantee that the
provider will obtain export approvals in the future. If we fail to obtain the
necessary export licenses we would need to arrange for alternative launch sites,
which could cause delays, increase costs or increase the risks of a launch
failure.
In addition, we may require export licenses if we arrange to have other
portions of the CD Radio system manufactured or assembled offshore. We cannot
assume that we can obtain these export licenses.
26
<PAGE>
RISK OF SIGNAL THEFT
Consumers may steal the CD Radio signal. Although we plan to use
encryption technology to mitigate signal piracy, we do not believe that any such
technology is infallible. Accordingly, we cannot assure you that we can
eliminate theft of the CD Radio signal. Widespread signal theft could reduce the
number of motorists willing to pay us subscription fees and materially adversely
affect our results of operations.
UNCERTAIN PATENT PROTECTION
Our U.S. patents cover various features of satellite radio technology.
We cannot guarantee that our patents will cover all aspects of our system. If
our patents fail to cover all aspects of our system, others may duplicate our
system without liability to us. In addition, competitors may challenge,
invalidate or circumvent our patents. We may be forced to enforce our patents or
determine the scope and validity of other parties' proprietary rights through
litigation. In this event, we may incur substantial costs and we cannot assure
you of success in any such litigation. In addition, others may block us from
operating our system if our system infringes their patents, their pending patent
applications which mature into patents or their inventions developed earlier
which mature into patents. Should we desire to license our technology, we cannot
assure you that we can do so. Assuming we pay all necessary fees on time, the
earliest expiration date on any of our patents is April 10, 2012. See "The
Company--Technology and Patents."
RISK OF INABILITY TO SATISFY A CHANGE IN CONTROL OFFER
The Senior Notes Indenture and the certificates of designations for the
Series C Preferred Stock and the Junior Preferred Stock contain provisions
governing changes to our control. If someone triggers a Change of Control as
defined in those instruments, we must offer to purchase the Senior Secured
Notes, the Series C Preferred Stock and the Junior Preferred Stock. If we have
to make such an offer, we cannot be sure that we will have enough funds to pay
for all the securities that holders could tender. The Senior Notes Indenture
requires us to purchase all Senior Secured Notes tendered into a Change of
Control offer before we purchase any shares of the Series C Preferred Stock and
the Junior Preferred Stock. If we fail to pay for the Senior Secured Notes in a
Change of Control offer, we will be in default under the Senior Notes Indenture
and the holders of the Senior Secured Notes and their trustee may demand that we
prepay all amounts outstanding under the Senior Secured Notes. If we fail to pay
for the Series C Preferred Stock in a Change of Control offer, the holders of a
majority of the Series C Preferred Stock will be able to elect directors
constituting at least 25% of our Board of Directors, up to a maximum of two
directors. If we fail to pay for the Junior Preferred Stock in a Change of
Control offer because of our obligations to other holders of our debt securities
or preferred stock, we must use our best efforts to satisfy these obligations or
to obtain permission to repurchase the Junior Preferred Stock.
CONTROL BY EXISTING STOCKHOLDERS
As of November 17, 1998, our executive officers and directors
beneficially owned or could vote approximately 23% of the outstanding Common
Stock. In addition, as of that date, our executive officers and directors
together with Prime 66 and the Apollo Investors beneficially owned or could vote
approximately 51% of the outstanding Common Stock (assuming conversion of the
Junior Preferred Stock). As a result of this concentration of ownership, these
stockholders, if they choose to act in concert, may exert considerable influence
over our management and policies. Similarly, some or all of these stockholders
could delay, defer or prevent a change of our control.
27
<PAGE>
DILUTION UPON CONVERSION OF PREFERRED STOCK
Our current common equity holders may be diluted by the following
actions:
o if you convert your Series C Preferred Stock into Common Stock
through participation in the Exchange Offer or otherwise;
o if the Apollo Investors convert their Junior Preferred Stock into
Common Stock, which may be done at any time; or
o if we issue additional equity securities, which we may do at any
time unless prior approval of the stockholders is required under
Delaware law or the rules of the Nasdaq National Market.
ADVERSE EFFECT ON EXISTING MARKET FOR SERIES C PREFERRED STOCK
To the extent we acquire Series C Preferred Stock in the Exchange
Offer, the trading market for the Series C Preferred Stock will be more limited.
Generally, a security with fewer outstanding shares available for trading (a
smaller "float") will command a lower price than a comparable security with a
greater float. Therefore, to the extent we purchase shares of Series C Preferred
Stock in the Exchange Offer, we may adversely affect the market price of these
shares. The reduced float may also increase the price volatility of the Series C
Preferred Stock.
LOSS OF PREFERENTIAL RIGHTS IN SERIES C PREFERRED STOCK
If we acquire your shares of Series C Preferred Stock in the Exchange
Offer, you will lose all the preferential rights of the Series C Preferred
Stock. These preferential rights include:
o the right to receive dividends at an annual rate equal to 10.5% of
the sum of $100 and any accrued and unpaid dividends from November
17, 1997, under certain circumstances;
o the right to receive a redemption price under certain
circumstances;
o the right to sell your Series C Preferred Stock back to us if we
are the subject of a Change of Control;
o the right to receive the liquidation preference if we are
liquidated;
o certain voting rights; and
o the right to elect additional directors under certain
circumstances.
See "Comparison of Series C Preferred Stock and Common Stock."
28
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds to CD Radio Inc. (the "Company") from
the Exchange Offer.
PRICE RANGE OF COMMON STOCK
The Common Stock has been traded on the Nasdaq National Market since
October 24, 1997 and before that date was traded on the Nasdaq Small Cap Market,
in each case under the symbol "CDRD." The following table sets forth the high
and low sales prices for the Common Stock, as reported by the Nasdaq National
Market, for the periods indicated below since October 24, 1997, and the high and
low bid prices for the Common Stock, as reported by the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") for the periods
indicated below prior to such date. Such latter prices reflect interdealer
quotations without retail markups, markdowns, fees or commissions and do not
necessarily reflect actual transactions.
High Low
---- ---
1996:
First Quarter..................................... $ 9 1/8 $ 2 15/16
Second Quarter.................................... 13 3/4 7 1/8
Third Quarter..................................... 9 5/8 6 3/4
Fourth Quarter.................................... 8 1/2 3 7/16
1997:
First Quarter..................................... 8 3 9/16
Second Quarter.................................... 20 1/4 10 3/4
Third Quarter..................................... 20 14
Fourth Quarter.................................... 24 7/8 16 1/2
1998:
First Quarter..................................... 24 1/4 11 1/2
Second Quarter.................................... 44 21 3/4
Third Quarter..................................... 38 7/16 14 3/4
Fourth Quarter (through December 18, 1998)........ 39 14 1/4
On December 18, 1998 the last reported sale price of the Common Stock
on the Nasdaq National Market was $33 5/8 per share. On December 18, 1998, there
were approximately 215 holders of record of the Common Stock.
29
<PAGE>
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently
intend to retain earnings, if any, for use in our business and do not anticipate
paying any cash dividends in the foreseeable future. The Senior Notes Indenture
and our bank credit agreement contain provisions that limit our ability to pay
dividends on both the Series C Preferred Stock and the Common Stock. The
certificates of designation for the Junior Preferred Stock contain provisions
that also limit our ability to pay dividends on the Common Stock.
30
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the
Company as of September 30, 1998 (i) on an historical basis; (ii) on a pro forma
basis, giving effect to the sale in November 1998 of Common Stock to Prime 66
for net proceeds of $98 million and the proposed sale in December 1998 of Series
A Junior Preferred Stock to the Apollo Investors for net proceeds of
approximately $129 million; and (iii) as adjusted for the Exchange Offer
(assuming 100% acceptance by holders of Series C Preferred Stock) after
deducting the fees of the Dealer Manager (defined below) and other estimated
expenses.
<TABLE>
<CAPTION>
As of September 30, 1998
--------------------------------------------
Pro
Forma As
Adjusted
for the
Actual Pro Exchange
Forma Offer
------------ ------------ ------------
(in thousands, except share data)
<S> <C> <C> <C>
Cash and cash equivalents............................................. $ 72,375 $ 299,650 $ o
============ ============ ============
Senior Secured Notes.................................................. $ 144,336 $ 144,336 $ 144,336
Deferred Satellite Payments, long-term................................ 20,570 20,570 20,570
10 1/2% Series C Convertible Preferred Stock, no par value, 1,538,561
shares issued and outstanding, actual and pro forma................ 91,838 91,838 --
9.2% Series A Junior Cumulative Convertible Preferred Stock,
$0.001 par value; 1,350,000 shares issued and outstanding
pro forma and as adjusted.......................................... -- 1 1
Common Stock, $0.001 par value; 17,794,127 shares issued
and outstanding, actual; 22,794,127 shares issued and
outstanding, pro forma; and [ ] shares issued and
outstanding, as adjusted (1)....................................... 18 23 o
Additional paid-in capital............................................ 109,910 337,179 o
Deficit accumulated during the development stage...................... (62,532) (62,532) o
------------ ------------ ------------
Total capitalization........................................... $ 304,140 $ 531,415 $ o
============ ============ ============
</TABLE>
- ---------
(1) All capitalization information excludes: (i) options outstanding as of
September 30, 1998 to purchase 2,269,025 shares of Common Stock and (ii)
warrants issuable as of September 30, 1998 to purchase 2,984,322 shares
of Common Stock.
31
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected consolidated financial data for the Company set forth
below as of and for the years ended December 31, 1993, 1994, 1995, 1996 and
1997, are derived from the Company's respective audited consolidated financial
statements. The financial information as of and for the nine months ended
September 30, 1997 and 1998 is derived from the respective unaudited
consolidated financial statements. In the opinion of management, the unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, that are necessary for a fair presentation of the financial
position and results of operations for these periods. The results of operations
for the nine months ended September 30, 1998 are not necessarily indicative of
the results for the full year. The selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements and related
notes thereto incorporated herein by reference and the information contained
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
For the Nine Months Ended
For the Year Ended December 31, September 30,
------------------------------------------------------------ --------------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues...............$ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss.........................$ (6,568) $ (4,065) $ (2,107) $ (2,831) $ (4,737) $ (1,489) $ (39,259)
Net loss per share of Common
Stock..........................$ (0.79) $ (0.48) $ (0.23) $ (0.29) $ (5.08)(1) $ (4.97)(1)$ (3.51)
Weighted average common shares
outstanding (basic and diluted). 8,284 8,398 9,224 9,642 11,626 10,761 16,859
Preferred stock dividend ........$ -- $ -- $ -- $ -- $ (2,338) $ -- $ (13,563)
Preferred stock deemed dividend..$ -- $ -- $ -- $ -- $ (51,975) $ (51,975) $ --
Accretion of dividends in
connection with the issuance
of warrants on preferred stock.$ -- $ -- $ -- $ -- $ -- $ -- $ (6,434)
As of December 31, As of September 30,
------------------------------------------------------------ --------------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Cash and cash equivalents........$ 777 $ 3,400 $ 1,800 $ 4,584 $ 170,381 $ 29,386 $ 72,375
Working capital (deficit)........ (250) 2,908 1,741 4,442 170,894 29,871 13,424
Total assets..................... 1,663 3,971 2,334 5,065 323,807 148,430 389,694
Deficit accumulated during the
development stage.............. (9,533) (13,598) (15,705) (18,536) (23,273) (72,000) (62,532)
Stockholders' equity............. 505 3,431 1,991 4,898 79,430 32,265 47,396
Book value per share............. 0.07 0.37 0.21 0.48 4.95 2.57 2.66
- --------------------
</TABLE>
(1) Includes a deemed dividend on the Company's 5% Preferred Stock of $52
million, or $4.83 per share. The deemed dividend relates to the discount
feature associated with the 5% Preferred Stock, computed in accordance
with the SEC's position on accounting for preferred stock which is
convertible at a discount to the market price.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read together with the Company's consolidated
financial statements and the related notes incorporated by references in this
Prospectus. Certain statements in this section are "forward-looking statements."
The information under "Special Note Regarding Forward-Looking Statements" on the
inside front cover of this Prospectus should be read for special information
about our forward-looking information.
OVERVIEW
The Company was organized in May 1990 and is in its development stage.
The Company's principal activities to date have included technology development,
obtaining regulatory approval for the CD Radio service, commencement of
construction of four satellites, acquisition of content for its programming,
strategic planning, market research, recruitment of its senior management team
and securing financing for working capital and capital expenditures. The Company
does not expect to generate any revenues from operations until 2000 at the
earliest, and expects that positive cash flow from operations will not be
generated until late 2000 at the earliest. In addition, the Company will require
additional capital to complete development and commence commercial operations of
CD Radio. There can be no assurance that CD Radio will ever commence operations,
attain any particular level of revenues, generate positive cash flow or achieve
profitability.
Upon commencing commercial operations, the Company expects its primary
source of revenues to be monthly subscription fees. The Company currently
anticipates that its subscription fee will be $9.95 per month to receive CD
Radio broadcasts, with a one-time, modest activation fee per subscriber. In
addition, the Company expects to derive additional revenues from directly
selling or bartering a portion of the advertising time on the Company's sports,
news and talk channels. To receive CD Radio, subscribers will need to purchase a
radio card for existing radios or a new generation of radios capable of
receiving S-band as well as AM and FM signals and a new miniature satellite dish
antenna. The Company does not intend to manufacture these products and thus will
not receive any revenues from their sale. Although the Company holds patents
covering certain technology to be used in the radio cards, S-band radios and
miniature satellite dish antennas, the Company expects to license its technology
to manufacturers at no charge.
The Company expects that the operating expenses associated with
commercial operations will consist primarily of marketing, sales, programming,
maintenance of the satellite and broadcasting system and general and
administrative costs. Costs to acquire programming are expected to include
payments to build and maintain an extensive music library and royalty payments
for broadcasting music (calculated based on a percentage of revenues).
Marketing, sales, general and administrative costs are expected to consist
primarily of advertising costs, salaries and/or commissions of employees, rent
and other administrative expenses. The Company expects that the number of its
employees will increase to approximately 150 by the time it commences commercial
operations.
In addition to funding initial operating losses, the Company will
require funds for working capital, interest and financing costs on borrowings
and capital expenditures. The Company's level of outstanding indebtedness has
increased significantly as a result of the public offering of Senior Secured
Notes in 1997 and will increase further as a result of the incurrence of
additional debt in the future. However, a substantial portion of this
indebtedness will not require cash payments of interest and principal until
after the planned commencement of operations.
33
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
The Company recorded net losses of $39.3 million and $1.5 million for
the nine months ended September 30, 1998 and 1997, respectively. The Company's
total operating expenses were $34.0 million and $4.4 million for the nine months
ended September 30, 1998 and 1997, respectively. Excluding the special charges
recorded in the 1998 second quarter totaling $25.7 million, the Company recorded
net losses of $13.6 million and operating costs of $8.3 million.
Legal, consulting and regulatory fees increased to $2.9 million in the
nine months ended September 30, 1998 from $2.6 million in the nine months ended
September 30, 1997. The increase in the level of expenditures was the result of
greater consulting expenses due to the accelerated execution of the Company's
business plan. Consulting fees were generated primarily in connection with the
technical aspects of the Company's business plan, such as satellite
construction, chip set design and terrestrial repeater network build-out. The
major components of legal, consulting and regulatory fees in the 1998 period
were legal (41%), consulting (57%) and regulatory (2%), while in the 1997 period
the major components were legal (57%), consulting (39%) and regulatory (4%).
Research and development costs were $22,000 and $43,000 for the nine
months ended September 30, 1998 and 1997, respectively. These relatively low
levels of research and development costs are the result of the Company
completing the majority of such activities in 1994.
Other general and administrative expenses increased for the nine months
ended September 30, 1998 to $5.4 million from $1.7 million for the nine months
ended September 30, 1997. General and administrative activities have grown as
the Company continues to expand its management team and the workforce necessary
to develop and commence the broadcast of CD Radio. The major components of other
general and administrative costs in the 1998 period were salaries and employment
related costs (57%) and rent and occupancy costs (18%), while in the 1997 period
the major components were salaries and employment related costs (61%) and rent
and occupancy costs (17%). The remaining portion of other general and
administrative costs (25% in the 1998 quarter and 22% in the 1997 quarter)
consists of other costs such as insurance, market research, travel, depreciation
and supplies, with no amount exceeding 10% of the total.
Interest income increased to $5.8 million for the nine months ended
September 30, 1998, from $2.9 million in the nine months ended September 30,
1997 and was the result of a higher average investment balance during the 1998
period. The increase in the investment balance was due to the completion of the
offering of the Senior Secured Notes (together with attached warrants) in
November 1997 and the sale to Loral of $25 million of Common Stock in August
1997.
Interest expense, net of capitalized interest, increased to $11.0
million for the nine months ended September 30, 1998, from $5,000 in the 1997
period. This increase was primarily due to interest expense accruing on the
Senior Secured Notes. No cash interest on the Senior Secured Notes will be paid
until June 2003.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
The Company recorded net losses of $4.7 million ($.41 per share) and
$2.8 million ($.29 per share) for the years ended December 31, 1997 and 1996,
respectively. The Company's total
34
<PAGE>
operating expenses were $6.9 million and $2.9 million for the years ended
December 31, 1997 and 1996, respectively.
Legal, consulting and regulatory fees increased for the year ended
December 31, 1997 to $3.2 million from $1.6 million for the year ended December
31, 1996. These levels of expenditures are the result of increased activity
since winning the FCC license in April 1997, and in connection with the
Company's public offerings of Common Stock and units consisting of Senior
Secured Notes and warrants to purchase additional Senior Secured Notes and the
Company's offer to exchange Series C Preferred Stock for 5% Preferred Stock.
Research and development costs were $57,000 and $117,000 for the years
ended December 31, 1997 and 1996, respectively. The Company completed the
majority of such activities in 1994.
Other general and administrative expenses increased for the year ended
December 31, 1997 to $3.6 million from $1.2 million for the year ended December
31, 1996. General and administrative expenses are expected to continue to
increase as the Company continues to develop its business. The Company also
incurred a non-cash charge of $448,125 for the year ended December 31, 1997,
attributable to the recognition of compensation expense in connection with stock
options issued to an officer of the Company.
The increase in interest income to $4 million for the year ended
December 31, 1997, from $113,000 in the year ended December 31, 1996, was the
result of a higher average cash balance during 1997. The cash and cash
equivalents on hand were primarily obtained from several debt and equity
offerings in 1997.
Interest expense increased for the year ended December 31, 1997 to $1.9
million from $13,000 for the year ended December 31, 1996. The increase is the
result of the issuance of the units consisting of Senior Secured Notes and
warrants to purchase additional Senior Secured Notes in November 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
The Company recorded net losses of $2.8 million ($.29 per share) and
$2.1 million ($.23 per share) for the years ended December 31, 1996 and 1995,
respectively. The Company's total operating expenses were $2.9 million in 1996
compared to $2.2 million in 1995.
Legal, consulting and regulatory fees increased in 1996 to $1.6 million
from $1.0 million in 1995, as the result of increased efforts to obtain the FCC
license.
Research and development costs were $117,000 in 1996, compared with
$122,000 in 1995. Nonrecurring costs associated with the design and development
of the CD Radio demonstration system were substantially completed in 1993. Costs
incurred in subsequent years relate to the operations of the demonstration
system, including leasing satellite time, taking transmission measurements, and
testing multipath fading.
Other general and administrative expenses increased in 1996 to $1.2
million from $1.1 million in 1995. The increase is due to the Company requiring
general administrative support for the effort to obtain its FCC license.
35
<PAGE>
Interest income decreased to $113,000 in 1996 from $143,000 in 1995 as
a result of the Company having a higher average cash balance in 1995. Proceeds
relating to the exercise of stock warrants were not received until late 1996
and, therefore, did not generate a significant amount of interest income.
Interest expense decreased from $20,000 in 1995 to $13,000 in 1996 as a result
of the Company repaying a promissory note due to an officer of the Company in
1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of approximately
$13.4 million compared with $170.9 million at December 31, 1997. The working
capital balance at September 30, 1998 includes short-term indebtedness totaling
$68.4 million, which is due in September 1999. Excluding the short-term
indebtedness due September 1999, the Company has $81.8 million of available
working capital. The decrease in working capital from December 31, 1997 was
primarily the result of payments for satellite and launch construction and
operating expenses exceeding interest income during the period. Working capital
increased on November 2, 1998 when the Company issued 5,000,000 shares of Common
Stock to Prime 66 for gross cash proceeds of $100 million.
FUNDING REQUIREMENTS
The Company is a development stage company and as such will continue to
require substantial amounts of continued outside financing to acquire and
develop its assets and commence commercial operations. The Company estimates
that it will require approximately $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 4, 1998
(which excludes the amounts which may be received from the Apollo Investors),
has received a commitment from the Apollo Investors to invest $200 million for
shares of Junior Preferred Stock (as described below) and has entered into an
agreement with Bank of America to attempt to arrange an additional $106 million
for the Company, leaving anticipated additional cash needs of approximately $74
million to fund its operations through the first quarter of 2000. The Company
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, or a combination thereof.
In April 1997, the Company was the winning bidder in an FCC auction for
one of two FCC licenses with a winning bid of $83.3 million, of which $16.7
million was paid as a deposit. The Company paid the balance due the FCC in
October 1997 and was awarded the FCC license on October 10, 1997. In May 1998,
the Company decided to increase the number of satellites in its system from two
to three and modify its orbital locations from geostationary to inclined,
geosynchronous, elliptical, requiring modification of its FCC license. On
December __, 1998, the Company filed an application with the FCC for this
modification. 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.
To build and launch the satellites necessary for the operation of CD
Radio, on July 28, 1998, the Company entered into an amended and restated
contract with Loral. The Loral Satellite Contract provides for Loral 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. The Company is obligated to make
aggregate payments of approximately $718 million under the Loral Satellite
Contract. As of September 30, 1998, $201 million of this obligation has been
satisfied through $115 million of cash payments from the Company, $58 million
36
<PAGE>
drawn from the existing Bank of America term loan facility and $28 million of
deferred payment financing from Loral. Under the Loral Satellite Contract, with
the exception of a payment made to Loral in March 1993, payments are made in
installments that commenced in April 1997 and end in October 2000. Approximately
half of these payments are contingent upon Loral meeting specified milestones in
the manufacture of the satellites.
In the event of a satellite or launch failure, the Company will be
required to pay Loral the full-deferred amount for the affected satellite no
later than 120 days after the date of the failure. If the Company should elect
to put one of the first three satellites into ground storage, rather than having
it shipped to the launch site, the full-deferred amount for the affected
satellite will become due within 60 days of such election.
The Company also will require funds for working capital, interest on
borrowings, acquisition of programming, financing costs and operating expenses
until some time after the commencement of commercial operations of CD Radio. The
Company's interest expense will increase significantly as a result of its
financing plan; however, the Senior Secured Notes, which represent a substantial
portion of the Company's planned indebtedness, will not require cash payments of
interest until June 2003. The Company believes that its working capital at
September 30, 1998, plus the equity investment from Prime 66 that closed on
November 2, 1998 and the amounts which are expected to be received from the
Apollo Investors in December 1998, will be sufficient to fund planned operations
and construction of its satellite system through the fourth quarter of 1999.
SOURCES OF FUNDING
To date the Company has funded its capital needs through the issuance
of debt and equity. As of September 30, 1998, the Company had received a total
of $222 million in equity capital. A significant portion of the Company's equity
capital was received in 1997 as a result of the Company's issuance of 5,400,000
shares of Series C Preferred Stock and 4,955,488 shares of Common Stock
resulting in net proceeds of $121 million and $71 million, respectively. A total
of 1,905,488 shares of Common Stock were sold to Loral Space in August 1997 and
3,050,000 shares of Common Stock were sold to the public in November 1997. In
November 1997, the Company exchanged (the "1997 Exchange Offer") 1,846,799
shares of Series C Preferred Stock for all of the previously outstanding shares
of 5% Preferred Stock. The Company received no proceeds from the 1997 Exchange
Offer. On November 3, 1998, the Company sold an additional 5,000,000 shares of
Common Stock to Prime 66 for an aggregate purchase price of $100 million.
In November 1997, the Company received net proceeds of $116 million
from the issuance of 12,910 units, each unit consisting of $20,000 aggregate
principal amount at maturity of Senior Secured Notes and a warrant to purchase
additional Senior Secured Notes with an aggregate principal amount at maturity
of $3,000. All such warrants were exercised in 1997. The aggregate principal
amount at maturity of the Senior Secured Notes is $296 million. The Senior
Secured Notes mature on November 15, 2007 with the first cash interest payment
due in June 2003. The Senior Notes Indenture contains certain limitations on the
Company's ability to incur additional indebtedness. The Senior Secured Notes are
secured by a pledge of the stock of Satellite CD Radio, Inc., the subsidiary of
the Company that holds the Company's FCC license.
Loral has agreed to defer a total of $50 million of the payments under
the Loral Satellite Contract. These deferred amounts bear interest at 10% per
annum and all interest on these deferred amounts will accrue until December
2001, at which time interest will be payable quarterly in cash. The principal
amounts of the deferred payments under the Loral Satellite Contract are required
to be
37
<PAGE>
repaid in six installments between June 2002 and December 2003. As collateral
security for these deferred payments, the Company has agreed to grant Loral a
security interest in its terrestrial repeater network.
On July 28, 1998, the Company entered into a credit agreement with a
group of financial institutions (the "Lenders"), including Bank of America as
agent and a lender, pursuant to which the Lenders agreed to provide the Company
a term loan facility (the "Tranche A Facility") in an aggregate principal amount
of up to $115 million (the term loans thereunder, the "Tranche A Loans"). The
proceeds of the Tranche A Loans will be used by the Company to fund a portion of
the progress payments required under the Loral Satellite Contract for the
purchase of launch services and to pay interest, fees and other expenses related
to the Tranche A Facility. The Tranche A Loans are due on September 30, 1999. As
of September 30, 1998, the Company had borrowed $60 million under the Tranche A
Facility, substantially all of which was used to make progress payments under
the Loral Satellite Contract.
In connection with the Tranche A Facility, Loral agreed with Bank of
America that at maturity of the Tranche A Loans (including maturity as a result
of an acceleration), upon the occurrence of a bankruptcy of the Company or upon
the occurrence of an event of default by Loral under its agreement with Bank of
America, Loral will repurchase from the Lenders the Tranche A Loans at a price
equal to the principal amount of the Tranche A Loans plus accrued and unpaid
interest. In exchange for providing such credit support, Loral receives a fee
from the Company equal to 1.25% per annum of the outstanding amount of the
Tranche A Loans from time to time.
The Company has also entered into an agreement with Bank of America
pursuant to which Bank of America has agreed to attempt to arrange a syndicate
of lenders to provide a second term loan facility (the "Tranche B Facility") for
the Company in the aggregate principal amount of $225 million (the term loans
thereunder, the "Tranche B Loans"). It is anticipated that a portion of the
proceeds of the Tranche B Loans will be used on or prior to September 30, 1999
to repay amounts outstanding under the Tranche A Facility and for other general
corporate purposes. Bank of America has not committed to provide the Tranche B
Loans, the closing of the Tranche B Facility is expected to be subject to the
satisfaction of certain significant conditions and there are no assurances that
such Tranche B Loans will be arranged or as to the terms of any such Tranche B
Loans.
On November 2, 1998, the Company issued 5,000,000 shares of Common
Stock to Prime 66 for gross cash proceeds of $100 million.
On November 13, 1998, the Company entered into a stock purchase
agreement with the Apollo Investors (the "Stock Purchase Agreement") pursuant to
which the Company agreed to sell a total of 1,350,000 shares of its Series A
Junior Preferred Stock to the Apollo Investors, for an aggregate purchase price
of $135 million, and the Apollo Investors agreed to grant the Company an option
to sell the Apollo Investors an additional 650,000 shares of its Series B Junior
Preferred Stock for an aggregate purchase price of $65 million. The Company
expects to issue the Series A Junior Preferred Stock before the end of 1998. The
Company may exercise its option to require the Apollo Investors to purchase the
Series B Junior Preferred Stock at any time prior to the earlier of September
30, 1999 and ten months from the closing of the initial issuance and sale of the
Series A Junior Preferred Stock.
The holders of the Junior Preferred Stock may convert such shares into
shares of the Company's Common Stock at a price of $30 per share of Common
Stock. The Company is entitled at its option to redeem the Junior Preferred
Stock beginning November 15, 2001 if the current market
38
<PAGE>
price of the Common Stock, as defined in the certificate of designation of the
Junior Preferred Stock, exceeds $60 per share for a period of 20 consecutive
trading days. In all events the Junior Preferred Stock will be callable at the
option of the Company beginning November 15, 2003 at a price of 100% and must be
redeemed by the Company on November 15, 2011. Dividends on the Junior Preferred
Stock are payable at a rate of 9.2% per annum and are payable in kind or cash
annually, at the option of the Company. The Junior Preferred Stock will have the
right to vote, on an as-converted basis, on matters in which the holders of the
Common Stock of the Company have the right to vote.
The issuance and sale of the Junior Preferred Stock is subject to
approval of the stockholders of the Company and other customary conditions. See
"Description of Capital Stock--Junior Preferred Stock."
The Company expects it will require an additional $74 million in
financing through the first quarter of 2000. However, there can be no assurance
that the Company's actual cash requirements will not exceed such amount.
Potential sources of additional financing include the sale of debt or equity
securities in the public or private markets. There can be no assurance that the
Company will be able to obtain additional financing on favorable terms, or at
all, or that it will be able to do so in a timely fashion. The Senior Notes
Indenture and the Tranche A Facility contain, and documents governing any
indebtedness incurred in the future are expected to contain, provisions limiting
the ability of the Company to incur additional indebtedness. The issuance by the
Company of additional equity securities could cause dilution of the interest in
the Company of the Company's current stockholders. If additional financing were
not available on a timely basis, the Company would be required to delay
satellite and/or launch vehicle construction in order to conserve cash to fund
continued operations, which would cause delays in the commencement of operations
and increase costs.
The amount and timing of the Company's actual cash requirements will
depend upon numerous factors, including costs associated with the construction
and deployment of its satellite system and the rate of growth of its business
after commencing service, costs of financing and the possibility of
unanticipated costs. Additional funds would be required in the event of delay,
cost overruns, unanticipated expenses, launch failure, launch services or
satellite system change orders, or any shortfalls in estimated levels of
operating cash flow.
OTHER MATTERS--THE YEAR 2000 ISSUE
"The Year 2000 Issue" concerns the inability of certain information and
technology ("IT") based and certain non-IT based operating systems to properly
recognize and process date-sensitive information beyond December 31, 1999. The
result of The Year 2000 Issue could be the failure of such systems or
miscalculations that cause disruptions to various activities and operations.
The Company has devised and commenced implementing a compliance program
to ensure it is not subject to problems as a result of The Year 2000 Issue. The
Company anticipates that it will spend less than $100,000 to implement the
compliance program, including making IT and non-IT system and equipment
modifications and replacing certain equipment, which program it expects will be
complete by mid-1999. The expected costs of the Year 2000 compliance program and
the date on which the Company expects to complete the implementation of the plan
are based on management's best estimates and involve certain assumptions, and
actual results could differ materially from the estimates set forth in this
paragraph. In addition, there can be no assurance that the Company's compliance
program will be successful.
39
<PAGE>
The Company has not fully determined the extent to which it may be
impacted by The Year 2000 Issue affecting third parties' IT and non-IT systems
and equipment, including the IT and non-IT systems and equipment of the
Company's suppliers, vendors and service providers. While the Company has
commenced discussions with certain third parties with whom the Company has
relationships and arrangements material to the Company's business, to gain
reassurance that their IT and non-IT systems will not fail or cause disruptions
to the Company's business as the result of The Year 2000 Issue, The Year 2000
Issue may affect third parties with whom the Company deals or on whom the
Company relies. The Company is dependent upon Loral to ensure that the software
to test the satellites prior to launch, to run the satellites and to track and
control the satellites will be capable of handling The Year 2000 Issue. While
currently the above mentioned systems are not fully prepared to handle The Year
2000 Issue, Loral is aware of this and has assured the Company that all Loral
systems will be year 2000 compliant before the critical date of January 1, 2000.
The failure of any third party's IT or non-IT systems as the result of The Year
2000 Issue could cause a material adverse effect on the Company.
40
<PAGE>
THE EXCHANGE OFFER
GENERAL
Participation in the Exchange Offer is voluntary and holders of shares
of Series C Preferred Stock should carefully consider whether to accept. Neither
the Board of Directors of the Company nor the Company makes any recommendation
to holders of shares of Series C Preferred Stock as to whether to tender or
refrain from tendering in the Exchange Offer. Holders of shares of Series C
Preferred Stock are urged to consult their financial and tax advisors in making
their own decisions on what action to take in light of their own particular
circumstances.
The Exchange Offer is open to all holders of shares of Series C
Preferred Stock.
PURPOSE OF THE EXCHANGE OFFER
The principal purposes of the Exchange Offer are to simplify the
Company's capital structure and increase the liquidity of the Company's
outstanding Common Stock. The Company believes that completing the Exchange
Offer will also facilitate its ability to do future financings.
Upon consummation of the Exchange Offer, all shares of Series C
Preferred Stock tendered, accepted and not withdrawn prior to the Expiration
Date (defined below) will be retired.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange (the "Exchange Offer"), upon the
terms and subject to the conditions set forth herein and in the accompanying
Letter of Transmittal (the "Letter of Transmittal"), ___________ shares of its
Common Stock for each of the outstanding shares of its Series C Preferred Stock.
This exchange ratio represents a premium of approximately __% over the existing
conversion ratio of 5.55556 shares of Common Stock for each share of the Series
C Preferred Stock. There will be no separate payment of dividends on shares of
Series C Preferred Stock tendered into the Exchange Offer (equal to
approximately $10.92 per share of Series C Preferred Stock at November 15,
1998). Under the terms of the Series C Preferred Stock, holders of Series C
Preferred Stock who convert shares of such stock prior to November 15, 2002, are
only entitled to receive 5.55556 shares of Common Stock and forfeit any accrued
and unpaid dividends on such stock, 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.
The Company will pay cash to exchanging holders of Series C Preferred
Stock in lieu of issuing fractional shares of Common Stock. The terms of the
Common Stock differ in material respects from the terms of the Series C
Preferred Stock for which it may be exchanged pursuant to this Exchange Offer.
See "Description of Capital Stock--Common Stock" and "--10 1/2% Series C
Convertible Preferred Stock." The Series C Preferred Stock was originally issued
in November 1997. As of November 30, 1998, there were 1,472,016 shares of Series
C Preferred Stock outstanding.
Tendering holders of the shares of Series C Preferred Stock will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer
41
<PAGE>
taxes with respect to the exchange of the shares of Series C Preferred Stock
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION; AMENDMENTS
The Exchange Offer will expire at 11:59 p.m., New York City time, on ,
1999 (the "Expiration Date"), unless the Company in its sole discretion extends
the period during which the Exchange Offer is open, in which event the term
"Expiration Date" shall mean the latest time and date on which the Exchange
Offer, as so extended by the Company, shall expire. The Company reserves the
right to extend the Exchange Offer at any time and from time to time by giving
oral or written notice to the Exchange Agent and making a public announcement
thereof. There can be no assurance that the Company will exercise its right to
extend the Exchange Offer. During any extension of the Exchange Offer, all
shares of Series C Preferred Stock previously tendered and not withdrawn
pursuant to the Exchange Offer will remain subject to the right of a tendering
holder to withdraw its shares of Series C Preferred Stock. See "--Withdrawal
Rights."
The Company also expressly reserves the right, subject to applicable
law, (i) to delay acceptance for exchange of any shares of Series C Preferred
Stock or terminate the Exchange Offer and not accept for exchange any shares of
Series C Preferred Stock and promptly return all such shares to the tendering
holders thereof in the event that any of the conditions specified in
"--Conditions of the Exchange Offer" below are not satisfied or waived by the
Company or to comply with applicable law, by giving oral or written notice of
such delay or termination to the Exchange Agent, (ii) to waive any condition to
the Exchange Offer and accept all shares of Series C Preferred Stock previously
tendered pursuant thereto, (iii) to amend the Exchange Offer in any respect or
(iv) to terminate, cancel, withdraw or otherwise amend or modify the Exchange
Offer at any time for any reason. If the Exchange Offer is so amended, the term
"Exchange Offer" shall mean the Exchange Offer as so amended. The reservation by
the Company of the right to delay acceptance for exchange of shares of Series C
Preferred Stock is subject to the provisions of Rule 13e-4 and Rule 14e-1(c)
under the Exchange Act, which require that the Company pay the consideration
offered or return the shares of Series C Preferred Stock deposited by or on
behalf of holders thereof promptly after the termination or withdrawal of the
Exchange Offer.
Any extension, delay, termination or amendment of the Exchange Offer
will be followed as promptly as practicable by a public announcement thereof.
Without limiting the manner in which the Company may choose to make a public
announcement of any extension, delay, termination or amendment of the Exchange
Offer, the Company will have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by issuing a release to the
Dow Jones News Service, except in the case of an announcement of an extension of
the Exchange Offer, in which case the Company will have no obligation to
publish, advertise or otherwise communicate such announcement other than by
issuing a notice of such extension by press release or other public
announcement, which notice the Company will issue no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
TENDER PROCEDURE
The tender to the Company of shares of Series C Preferred Stock by a
holder thereof pursuant to one of the procedures set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. This Prospectus,
together with the
42
<PAGE>
Letter of Transmittal, will first be sent out on or about ____________ __, 199_,
to all holders of shares of Series C Preferred Stock known to the Company and
the Exchange Agent.
A holder of shares of Series C Preferred Stock may tender the same by
properly completing and signing the Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to the Letter of Transmittal shall be deemed
to include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the shares of Series C Preferred Stock
being tendered and any other documents required by the Letter of Transmittal, to
the Exchange Agent at its address set forth on the Letter of Transmittal on or
prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below).
THE METHOD OF DELIVERY OF THE SHARES OF SERIES C PREFERRED STOCK AND
ALL OTHER DOCUMENTS IS AT YOUR ELECTION AND RISK. IF SENT BY MAIL, THE COMPANY
RECOMMENDS THAT YOU USE REGISTERED MAIL, RETURN RECEIPT REQUESTED, OBTAIN PROPER
INSURANCE, AND MAKE YOUR MAILING SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. NO
LETTERS OF TRANSMITTAL OR SHARES OF SERIES C PREFERRED STOCK SHOULD BE SENT TO
THE COMPANY.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the shares of Series C
Preferred Stock at the book-entry transfer facility for the purpose of
facilitating the Exchange Offer. Subject to the establishment of such accounts,
any financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of the shares of Series C
Preferred Stock by causing such book-entry transfer facility to transfer such
shares of Series C Preferred Stock into the Exchange Agent's account with
respect to the Series C Preferred Stock in accordance with the book-entry
transfer facility's procedures for such transfer. Although you are entitled to
effect delivery of the shares of Series C Preferred Stock through book-entry
transfer into the Exchange Agent's accounts at the book-entry transfer facility,
an appropriate Letter of Transmittal with any required signature guarantee and
all other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth on the Letter of
Transmittal on or prior to the Expiration Date.
The Company will consider a tender as having been received as of the
date when your properly completed and duly signed Letter of Transmittal
accompanied by the shares of Series C Preferred Stock (or a confirmation of
book-entry transfer of such shares of Series C Preferred Stock into the Exchange
Agent's account at the book-entry transfer facility) is received by the Exchange
Agent.
The Company will determine all questions as to the validity, form,
eligibility (including time of receipt) and acceptance for exchange of any
tender of shares of Series C Preferred Stock. The Company's determination will
be final and binding. The Company reserves the absolute right to reject any
shares of Series C Preferred Stock which you do not properly tender or if the
acceptance for exchange of such shares may, in the opinion of the Company's
counsel, be unlawful. The Company also reserves the absolute right to waive any
defect or irregularity in the tender of any shares of Series C Preferred Stock.
Unless waived, any defects or irregularities in connection with tenders of
shares of Series C Preferred Stock for exchange must be cured within such
reasonable period of time as the Company will determine. None of the Company,
the Exchange Agent or any other person will
43
<PAGE>
be under any duty to give notification of any defects or irregularities in
tenders or incur any liability for failure to give any such notification.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer.
The party tendering shares of Series C Preferred Stock for exchange
(the "Transferor") exchanges, assigns and transfers the shares of Series C
Preferred Stock to the Company and irrevocably constitutes and appoints the
Exchange Agent as the Transferor's agent and attorney-in-fact to cause the
shares of Series C Preferred Stock to be assigned, transferred and exchanged.
The Transferor represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the shares of Series C Preferred Stock and
to acquire shares of Common Stock issuable upon the exchange of such tendered
shares of Series C Preferred Stock, and that, when the same are accepted for
exchange, the Company will acquire good and unencumbered title to the tendered
shares of Series C Preferred Stock, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The Transferor
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered shares
of Series C Preferred Stock or transfer ownership of such shares of Series C
Preferred Stock on the account books maintained by a book-entry transfer
facility. All authority conferred by the Transferor will survive the death or
incapacity of the Transferor and every obligation of the Transferor will be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
WITHDRAWAL RIGHTS
Tenders of shares of Series C Preferred Stock pursuant to the Exchange
Offer may be withdrawn at any time prior to 11:59 p.m. on the Expiration Date.
To be effective, a written, telegraphic, telex or facsimile
transmission notice of withdrawal must be timely received by the Exchange Agent
at its address set forth on the Letter of Transmittal, and with respect to a
facsimile transmission, must be confirmed by telephone and an original delivered
by guaranteed overnight delivery. Any such notice of withdrawal must specify the
person named in the Letter of Transmittal as having tendered shares of Series C
Preferred Stock to be withdrawn, the certificate numbers of the shares of Series
C Preferred Stock to be withdrawn, a statement that such holder is withdrawing
his election to have such shares of Series C Preferred Stock exchanged, and the
name of the registered holder of such shares of Series C Preferred Stock, and
must be signed by the holder in the same manner as the original signature on the
Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to the Company that the person withdrawing
the tender has succeeded to the beneficial ownership of the shares of Series C
Preferred Stock being withdrawn. The Exchange Agent will return the properly
withdrawn shares of Series C Preferred Stock promptly following receipt of
notice of withdrawal. If shares of Series C Preferred Stock have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at the book-entry transfer facility
to be credited with the withdrawn shares of Series C Preferred Stock or
otherwise comply with the book-entry transfer procedure. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company, and such determination will be final and binding on
all parties.
44
<PAGE>
Any shares of Series C Preferred Stock so withdrawn will be deemed not
to have been validly tendered to exchange for purposes of the Exchange Offer.
Any shares of Series C Preferred Stock which have been tendered for exchange but
which are not exchanged for any reason will be returned to the holder thereof
without costs to such holder (or, in the case of shares of Series C Preferred
Stock tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such shares will be credited to an account with such book-entry
transfer facility specified by the holder) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn shares of Series C Preferred Stock may be retendered by following one
of the procedures described under "--Tender Procedure" above, at any time on or
prior to the Expiration Date.
THE WITHDRAWAL OF TENDERED SHARES OF SERIES C PREFERRED STOCK WILL BE
DEEMED TO BE A REJECTION OF THE EXCHANGE OFFER.
ACCEPTANCE OF SERIES C PREFERRED STOCK FOR EXCHANGE; DELIVERY OF COMMON STOCK
Upon the satisfaction or waiver of all the terms of the Exchange Offer,
the acceptance for exchange of the shares of Series C Preferred Stock validly
tendered and not withdrawn will be made on the Exchange Date and the issuance of
the shares of Common Stock will be made as promptly as practicable thereafter.
For the purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered shares of Series C Preferred Stock when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent.
The Exchange Agent will act as agent for the tendering holders of
shares of Series C Preferred Stock for the purposes of receiving the shares of
Common Stock from the Company and causing the shares of Series C Preferred Stock
to be assigned, transferred and exchanged. Upon the terms of the Exchange Offer,
delivery of shares of Common Stock to be issued in exchange for accepted shares
of Series C Preferred Stock will be made by the Exchange Agent promptly after
the Exchange Date. Tendered shares of Series C Preferred Stock not accepted for
exchange by the Company will be returned without expense to the tendering
holders promptly following the Expiration Date as described above under
"--Withdrawal Rights."
ACCRUED DIVIDENDS
Holders of shares of Series C Preferred Stock accepted for exchange
pursuant to the Exchange Offer will not receive, and will forfeit, accrued
dividends on such Series C Preferred Stock accrued from November 17, 1997 to the
date of issuance of Common Stock. The amount of accrued dividends per share of
Series C Preferred Stock was approximately $10.92 as of November 15, 1998.
Dividends of shares of Series C Preferred Stock not exchanged in the
Exchange Offer will continue to accrue and be payable, when and as declared by
the Board of Directors.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
will not be required to accept for exchange, or, subject to any applicable rules
and regulations of the SEC, including Rule 14e-1(c) (relating to the Company's
obligation to exchange and issue shares of Common Stock for or return tendered
shares of Series C Preferred Stock promptly after termination of the Exchange
Offer), exchange and issue shares of Common Stock for any shares of Series C
Preferred Stock tendered and may postpone the acceptance for exchange of or,
subject to the restriction set forth
45
<PAGE>
above, the exchange and issuance of, shares of Common Stock for shares of Series
C Preferred Stock tendered and to be exchanged and may terminate or amend the
Exchange Offer if a minimum of __% of the issued and outstanding shares of the
Series C Preferred Stock are not validly tendered for exchange (and not
withdrawn) prior to the Expiration Date (the "Minimum Condition") or (ii) the
General Conditions (see below) are not satisfied.
For purposes of the preceding paragraph, all of the "General
Conditions" shall be deemed to have been satisfied unless any of the following
events shall occur on or after the date of this Prospectus and prior to the
Expiration Date:
(a) any change (or any condition, event or development
involving a prospective change) shall have occurred or been threatened
in the business, properties, assets, liabilities, capitalization,
stockholders' equity, financial condition, operations, results of
operations or prospects of the Company, or in the general economic or
financial market conditions in the United States or abroad, which is
or, in the reasonable judgment of the Company, may be materially
adverse to the Company or its stockholders or to the value of the
shares of Series C Preferred Stock or there shall have been a
significant decrease in the market prices of or trading in the shares
of Series C Preferred Stock, or the Company shall have become aware of
any fact or occurrence which is or may be materially adverse with
respect to the value of the shares of Series C Preferred Stock or with
respect to the contemplated benefits to the Company of the Exchange
Offer; or
(b) there shall have occurred (1) any general suspension of
trading in, or limitation on prices for, securities on any national
securities exchange or the over-the-counter market, (2) a declaration
of a banking moratorium or any suspension of payments in respect of
banks in the United States, (3) declaration of a national emergency or
a commencement of a war, armed hostilities or other national or
international calamity directly or indirectly involving the United
States, (4) any limitation (whether or not mandatory) by any
governmental or regulatory authority on, or any other event which might
affect, the nature or extension of credit by banks or other financial
institutions, (5) any significant adverse change in the United States
securities or financial markets, or (6) in the case of any of the
foregoing existing at the time of the commencement of the Exchange
Offer, a material acceleration, escalation or worsening thereof; or
(c) there shall be threatened, instituted or pending any
action, proceeding or claim by or before any court or governmental,
administrative or regulatory agency or authority or any other person or
tribunal, domestic or foreign, challenging the making of the Exchange
Offer or the acquisition by the Company of any shares of Series C
Preferred Stock, or seeking to obtain any material damages as a result
thereof, or otherwise adversely affecting the Company or the value of
the Series C Preferred Stock which makes it inadvisable to proceed with
the Exchange Offer, the acceptance for exchange of shares of Series C
Preferred Stock or the issuance of the shares of Common Stock in
exchange therefor.
All of the foregoing conditions are for the sole benefit of the Company
and may be asserted by the Company regardless of the circumstances giving rise
to such condition and may be waived by the Company, in whole or in part, at any
time and from time to time, in the sole discretion of the Company. The failure
by the Company at any time to exercise any of the foregoing rights will not be
deemed a waiver of any such right, and each such right will be deemed an ongoing
right which may be asserted at any time and from time to time. Any determination
by the Company concerning the foregoing conditions will be final and binding.
46
<PAGE>
If any of the foregoing conditions shall not be satisfied (or, with
respect to the above enumerated events, shall have occurred), the Company may,
subject to applicable law:
(i) terminate the Exchange Offer and return all shares of
Series C Preferred Stock tendered pursuant to the Exchange Offer to
tendering security holders as described above under "--Withdrawal
Rights ";
(ii) extend the Exchange Offer and retain all tendered shares
of Series C Preferred Stock until the Expiration Date for the extended
Exchange Offer; or
(iii) waive the unsatisfied conditions with respect to the
Exchange Offer and accept all shares of Series C Preferred Stock
tendered pursuant to the Exchange Offer.
In addition, the Company reserves the right to amend or modify any or all of the
Exchange Offer at any time for any reason.
DISSENTERS' RIGHTS
Holders of the shares of Series C Preferred Stock do not have any
appraisal or dissenters' rights under the Delaware General Corporation Law or
the Certificate of Designations in connection with the Exchange Offer.
DEALER MANAGER
The Company has retained Merrill Lynch & Co. ("Merrill Lynch") to act
as the dealer manager (the "Dealer Manager") in connection with the Exchange
Offer. Merrill Lynch is also acting as financial advisor to the Company and, as
such, is advising the Company with respect to, among other things, the terms and
timing of the Exchange Offer. In its capacity as Dealer Manager, Merrill Lynch
may contact holders of shares of Series C Preferred Stock regarding the Exchange
Offer and may request brokers, dealers and other nominees to forward this
Prospectus and related materials to beneficial owners of shares of Series C
Preferred Stock. Questions and requests for assistance may be directed to the
Dealer Manager at its address and telephone number set forth on the back cover
of this Prospectus.
The Company has agreed to pay Merrill Lynch for its services as Dealer
Manager and financial advisor in connection with the Exchange Offer a fee of
$1.25 million; provided, however, that if (i) the Exchange Offer is abandoned by
the Company because of the failure of the holders to tender at least 50% of the
number of shares of Series C Preferred Stock outstanding immediately prior to
commencing the offer, or (ii) the Exchange Offer is completed but results in the
exchange of less than 50% of the number of shares of Series C Preferred Stock
outstanding immediately prior to commencing the offer, then such fee will be pro
rated by the ratio that the percent of the outstanding Series C Preferred Stocks
either (x) tendered pursuant to the Exchange Offer and not withdrawn prior to
the date that the Company abandons the Exchange Offer, or (y) actually exchanged
pursuant to the Exchange Offer, as applicable, bears to 50%. In addition, the
Company will reimburse the Dealer Manager for its reasonable out-of-pocket
expenses, including up to $50,000 for its legal counsel. The Company also has
agreed to indemnify the Dealer Manager and its affiliates against certain
liabilities caused by, relating to, arising out of or in connection with the
Exchange Offer or the engagement of Merrill Lynch as financial advisor. Other
than as described above, the Company will not make any payments to brokers,
dealers or others for soliciting acceptance of the Exchange Offer.
47
<PAGE>
EXCHANGE AND INFORMATION AGENTS
IBJ Schroder Bank & Trust Company (the "Exchange Agent") has been
appointed as the Exchange Agent for the Exchange Offer. D.F. King & Co., Inc.
(the "Information Agent") has been appointed as the Information Agent for the
Exchange Offer. The Company will pay the Exchange Agent and the Information
Agent reasonable and customary fees for their services and will reimburse them
for their reasonable out-of-pocket expenses. Letters of Transmittal must be
addressed to the Exchange Agent at its address set forth on the Letter of
Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE
A VALID DELIVERY.
TRANSFER TAXES
Holders who tender their shares of Series C Preferred Stock for
exchange will not be obligated to pay any transfer taxes in connection with the
transfer and exchange.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of shares of Series C Preferred Stock who do not exchange their
shares of Series C Preferred Stock for shares of Common Stock pursuant to the
Exchange Offer or whose Series C Preferred Stock is not accepted for exchange
will continue to hold such shares of Series C Preferred Stock and will be
entitled to all the rights and preferences, and subject to all of the
limitations, applicable thereto. To the extent that shares of Series C Preferred
Stock are tendered and accepted in the Exchange Offer, the liquidity and trading
market for untendered shares of Series C Preferred Stock, and the terms upon
which such shares could be sold, could be adversely affected.
ACCOUNTING TREATMENT
For accounting purposes, the Company expects to exchange the Series C
Preferred Stock for Common Stock. This exchange will occur at an exchange ratio
in excess of the original terms of the Series C Preferred Stock. The fair value
of the premium received by the holders of the Series C Preferred Stock will be
recorded by the Company as a deemed dividend. Based on a conversion ratio of __
shares of Common Stock for each share of Series C Preferred Stock, the deemed
dividend is estimated at $__ million. The Company will record this dividend at
the time the Exchange Offer is completed.
MARKET AND TRADING INFORMATION
Until the Exchange Offer is completed, rules of the SEC may limit the
ability of the Dealer Manager to bid for and purchase the Common Stock and the
Series C Preferred Stock. As an exception to these rules, the Dealer Manager is
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
In general, purchases of a security for the purpose of stabilization
could cause the price of the security to be higher than it might be in the
absence of such purchases.
48
<PAGE>
The Dealer Manager and other dealers may engage in passive market
making transactions in the Series C Preferred Stock in accordance with Rule 103
of Regulation M promulgated by the SEC. In general, a passive market maker may
not bid for, or purchase, the Series C Preferred Stock at a price that exceeds
the highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% of its average daily trading
volume in the Series C Preferred Stock during a specified two-month prior period
or 200 shares, whichever is greater. A passive market maker must identify
passive market making bids as such on the Nasdaq electronic inter-dealer
reporting system. Passive market making may stabilize or maintain the market
price of the Series C Preferred Stock above independent market levels. The
Dealer Manager and dealers are not required to engage in passive market making
and may end passive market making activities at any time.
Neither the Company nor the Dealer Manager makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock and the Series C
Preferred Stock. In addition, neither the Company nor the Dealer Manager makes
any representation that the Dealer Manager will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.
49
<PAGE>
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. 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.
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 the following
range of music categories:
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, including Bloomberg
News Radio, C-SPAN, Sports Byline USA, Classic Radio, Hispanic Radio Network and
World Radio Network. 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.
The Company's 100 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
50
<PAGE>
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 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 radio cards 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
at the earliest.
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.
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.
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
51
<PAGE>
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
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
52
<PAGE>
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 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
Space
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
53
<PAGE>
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 sell up to $200 million of Junior Preferred Stock to the
Apollo Investors
Began construction of National Broadcast Studio
Complete significant satellite construction milestones
1999: Complete agreements with consumer electronics manufacturers for S-band
radios and radio cards
Nationwide rollout of terrestrial repeater network
Select additional non-music channel content providers
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
54
<PAGE>
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.
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
55
<PAGE>
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.
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
56
<PAGE>
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.
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 1997, U.S. consumers spent
approximately $3 billion on autosound equipment for aftermarket installation in
their vehicles, which the Company believes included approximately 7.5 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
57
<PAGE>
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.
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 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.
58
<PAGE>
At any given time, two of the three satellites will operate from the upper
portion of the orbit, while the third satellite will be shut off as it traverses
the lower portion.
CD Radio is designed to broadcast the same signals from two of the
three satellites 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.
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 periods of time over North America in order 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
transmitting satellites 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
59
<PAGE>
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.
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
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 either a third Proton launch vehicle, an Atlas IIIA 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
60
<PAGE>
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 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. 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.
61
<PAGE>
Satellites are designed to minimize the adverse effects of transmission
component failure through the incorporation of redundant components which
activate automatically or by ground command upon failure. If multiple component
failures occur as the satellite ages, and the supply of redundant components is
exhausted, the satellite generally will continue to operate, but at reduced
capacity. In that event, signal quality may be preserved by reducing the number
of channels broadcast until a replacement satellite can be launched.
Alternatively, the number of broadcast channels may be preserved by reducing the
signal quality until a replacement satellite can be launched.
THE RECEIVERS
Subscribers to CD Radio will not need to replace their existing AM/FM
car radios. Instead, they will be able to receive CD Radio in their vehicles
using a radio card that has been designed to plug easily into the cassette or
compact disc slot of their existing radio. Customers also will be able to
receive CD Radio using an S-band radio. CD Radio reception with either a radio
card or an S-band radio will be via a miniature silver dollar-sized satellite
dish antenna mounted on a small base housing a wireless transmitter that will
relay the CD Radio signal to the vehicle's radio card or S-band radio. Neither
the radio cards, S-band radios nor the miniature satellite dish antennas
currently are available.
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
62
<PAGE>
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 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.
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 Company's
license is conditioned upon 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 different transmission technology from
that of the Company. We have made progress towards developing a receiver which
is interoperable with the satellite digital audio radio system XM is
constructing. We cannot predict whether we will be able to satisfy this
interoperability requirement because of the various technological challenges
involved. See "Risk Factors--Unavailability of Radio Cards, S-band Radios or
Miniature Satellite Dish Antennas."
63
<PAGE>
THE NATIONAL BROADCAST STUDIO
The Company plans to originate its 100 channels of programming from its
National Broadcast Studio 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 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 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. For this
purpose, the Company selected a test range covering several
64
<PAGE>
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, 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 also may 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.
65
<PAGE>
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.
XM is the other holder of an FCC license. WorldSpace, Inc. (an
affiliate of a company that plans to provide satellite radio service outside of
the United States) has an 81% interest in XM. 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 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.
66
<PAGE>
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, 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 its 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
67
<PAGE>
milestones will render the FCC license null and void. On May 6, 1997, the
Company notified the FCC that it had begun construction on the first of its
satellites. On March 27, 1997, a third party requested reconsideration of the
FCC Licensing Rules, seeking, among other things, that the time period allotted
for these milestones be shortened. 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.
On December 11, 1998, the Company filed an application with the FCC for this
modification. 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. 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
68
<PAGE>
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 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. We have made progress towards developing a receiver
which is interoperable with the satellite digital audio radio system XM is
constructing. However, because of the various technological challenges involved
in developing an interoperable receiver, we cannot predict whether we will be
able to satisfy this 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
69
<PAGE>
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.
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 satisfactory.
LEGAL PROCEEDINGS
The Company is not a party to any litigation.
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR SECURED DISCOUNT NOTES DUE 2007
The Senior Secured Notes were originally issued on November 27, 1997,
will mature on December 1, 2007 and are secured by a pledge of the stock of
Satellite CD Radio, Inc. The Senior Secured Notes accrue the original issue
discount at a rate of 15% per annum until December 1, 2002, and thereafter will
bear interest at the same rate, payable in cash semiannually in arrears. The
Senior Notes Indenture does not provide for a sinking fund.
The Senior Secured Notes are not redeemable prior to December 1, 2002.
Thereafter, the Senior Secured Notes are redeemable, in whole or in part, at the
option of the Company, at the redemption prices set forth in the Senior Notes
Indenture, plus accrued interest to the applicable redemption date.
Specifically, if redeemed during the 12-month period commencing on December 1 of
the years set forth below, the redemption price will be that amount, expressed
as a percentage of the principal amount of the Senior Secured Notes, set forth
below:
Year Redemption Price
- ---- ----------------
2002.............................................. 112.5%
2003.............................................. 110.0%
2004.............................................. 107.5%
2005.............................................. 105.0%
2006.............................................. 102.5%
Upon a Change of Control of the Company (as defined in the Senior Notes
Indenture), or in the event of asset sales in certain circumstances, the Company
will be required by the terms of the Senior Notes Indenture to make an offer to
purchase the outstanding Senior Secured Notes at a
70
<PAGE>
purchase price equal to 101% of the accrued value thereof, plus accrued interest
to the date of purchase.
The indebtedness of the Company evidenced by the Senior Secured Notes
ranks PARI PASSU in right of payment with all other existing and future
unsubordinated indebtedness of the Company and senior in right of payment to all
existing and future obligations of the Company expressly subordinated in right
of payment to the Senior Secured Notes.
The Senior Notes Indenture contains a number of covenants restricting
the operations of the Company and its subsidiaries, including those restricting
the incurrence of indebtedness; the making of restricted payments (in the form
of the declaration or payment of certain dividends or distributions, the
purchase, redemption or other acquisition of any capital stock of the Company,
the voluntary prepayment of PARI PASSU or subordinated indebtedness and the
making of certain investments, loans and advances); transactions with
affiliates; the issuance of liens; sale-leaseback transactions; the transfer of
assets; issuances and sales of capital stock of subsidiaries; the issuance of
guarantees by subsidiaries; dividend and other payment restrictions affecting
subsidiaries; and consolidation, merger or sale of substantially all of the
Company's assets.
The events of default under the Senior Notes Indenture include
provisions that are typical of senior debt financings, including a
cross-acceleration to a default by the Company or any material subsidiary on any
indebtedness that has an aggregate principal amount in excess of $5 million.
Upon the occurrence of such an event of default, the trustee or the holders of
not less than 25% in principal amount at maturity of the outstanding Senior
Secured Notes may immediately accelerate the maturity of all the Senior Secured
Notes as provided in the Senior Notes Indenture.
VENDOR FINANCING
The Company entered into the Tranche A Facility with Bank of America
and other financial institutions pursuant to which the Lenders have committed to
provide the Company a term loan facility in the aggregate principal amount of up
to $115 million. The proceeds of the loans will be used by the Company to fund a
portion of the progress payments required to be made by the Company under the
Loral Satellite Contract for the purchase of launch services and to pay
interest, fees and other expenses related to the Tranche A Facility. The loans
are due on September 30, 1999 and bear interest, at the option of the Company,
at either (i) the London Interbank Offered Rate plus 1.75% or (ii) the higher of
(a) the rate publicly announced by Bank of America as its reference rate and (b)
0.50% per annum above the Federal Funds Rate then in effect. The loans are
secured by the grant of a security interest by the Company in the portion of the
Loral Satellite Contract relating to launch services. The Tranche A Facility
also contains covenants relating to financial information, the conduct of
business of the Company, payments under the Loral Satellite Contract,
maintenance of governmental and other approvals, maintenance of existence and
qualifications, maintenance of books and records, maintenance of property and
insurance, compliance with laws and notice of defaults. In addition, the terms
of the Tranche A Facility require the Company to maintain a minimum net worth
and sufficient cash. As of September 30, 1998, the Company had borrowed $60
million under the Tranche A Facility, substantially all of which was used to
make progress payments under the Loral Satellite Contract.
Loral assisted the Company in arranging the Tranche A Facility.
Specifically, Loral has agreed that at maturity of the loans (including maturity
as a result of an acceleration), upon the occurrence of a bankruptcy of the
Company or upon the occurrence of an event of default by Loral Space under its
agreement with Bank of America, Loral Space will repurchase from Bank of America
71
<PAGE>
and the other Lenders the loans at a price equal the principal amount of the
loans plus accrued and unpaid interest. In exchange for providing such credit
support, the Company pays Loral Space a fee equal to 1.25% per annum of the
outstanding amount of the loans from time to time.
The Company has also entered into an agreement with Bank of America
pursuant to which Bank of America has agreed to attempt to arrange a syndicate
of lenders to provide a term loan facility in the aggregate principal amount of
$225 million. It is anticipated that a portion of the proceeds of these loans
would be used on or prior to September 30, 1999 to repay amounts outstanding
under the Tranche A Facility and for other general corporate purposes. Bank of
America has not committed to provide these loans and there can be no assurances
that such loans will be arranged or the terms of any such loans.
DESCRIPTION OF CAPITAL STOCK
The Company's Amended and Restated Certificate of Incorporation
provides for authorized capital of 250,000,000 shares, consisting of 200,000,000
shares of Common Stock, par value $0.001 per share, and 50,000,000 shares of
Preferred Stock, par value $0.001 per share.
COMMON STOCK
As of November 17, 1998, the Company had 23,178,464 shares of Common
Stock outstanding held of record by 215 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.
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 offered 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
72
<PAGE>
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 make
it inapplicable to the purchase of 5,000,000 shares of Common Stock by Prime 66
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 purchase
of the Junior Preferred Stock by the Apollo Investors 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.
Initially, no separate Right Certificates (defined below) 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 (defined below)
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
73
<PAGE>
outstanding shares of Common Stock made in accordance with applicable laws,
which remains open for at least 40 Business Days (as defined in the Rights
Agreement) 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 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).
74
<PAGE>
At any time after the date of the Rights Agreement until ten Business
Days (a period that can be extended) following the Shares Acquisition Date, the
Board of Directors, with the concurrence of a majority of the Independent
Directors (those members of the Board who are not officers or employees of the
Company or of any Subsidiary of the Company and who are not Acquiring Persons or
their Affiliates, Associates, nominees or representatives, and who either (a)
were members of the Board prior to the adoption of the Rights Plan or (b) were
subsequently elected to the Board and were recommended for election or approved
by a majority of the Independent Directors then on the Board), may redeem the
Rights, in whole but not in part, at a price of $0.01 per Right, subject to
adjustment. Thereafter, the Board may only redeem the Rights in certain
specified circumstances including in connection with certain events not
involving an Acquiring Person or an Affiliate or Associate of an Acquiring
Person. In addition, the Company's right of redemption may be reinstated if (a)
an Acquiring Person reduces its beneficial ownership to 10% or less of the
outstanding 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 stockholder 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 stockholders or to the Company, stockholders 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
stockholders 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).
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 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
75
<PAGE>
"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.
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 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 in 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 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 Liquidation Preference
76
<PAGE>
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 Liquidation Preference of the Junior Preferred Stock 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 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 "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 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 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
77
<PAGE>
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 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 (the "Securities Act")).
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 Liquidation Preference of
the Junior Preferred Stock (without unpaid dividends) by $30 (as adjusted from
time to time, the "Conversion Price"). The 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 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
78
<PAGE>
shares in such offering) and (vii) a consolidation or merger to which the
Company is a party or the sale or transfer of all or substantially all of the
assets of the Company.
The 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 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 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, 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
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 Stock Purchase
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
79
<PAGE>
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 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 Series C 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 "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
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.
80
<PAGE>
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 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 Stock Purchase 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") 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.
VOTING AGREEMENT. In connection with the execution of the Stock
Purchase Agreement, David Margolese, Chairman and Chief Executive of the
Company, entered into a voting agreement with the Apollo Investors pursuant to
which he agreed to, and did, consent to the transactions contemplated by the
Stock Purchase Agreement, including the issuance of the Junior Preferred Stock,
with respect to 1,600,000 shares of Common Stock of the Company owned by him and
an additional 2,834,500 shares of Common Stock which he has the right to vote
pursuant to the terms of a voting trust agreement of which he is the voting
trustee.
TAG-ALONG AGREEMENT. In connection with the execution of the Stock
Purchase Agreement, David Margolese and the Company also entered into a
tag-along agreement with Apollo Investors. Pursuant to such tag-along agreement,
in the event that Mr. Margolese sells more than 800,00 shares
81
<PAGE>
of Common Stock of the Company prior to the earlier of the date that the Apollo
Investor beneficially own less than 2,000,000 shares of the Common Stock or the
date that is six months after the nationwide commercial introduction of the
Company's CD Radio service, then the Apollo Investors have certain rights to
sell, on a pro rata basis with Mr. Margolese, a portion of the Common Stock
owned by the Apollo Investors in any subsequent transaction in which Mr.
Margolese disposes of 80,000 or more shares of Common Stock of the Company.
WARRANTS
In connection with the issuance of a class of preferred stock which is
no longer outstanding, the Company issued warrants (the "Warrants") as of April
9, 1997, to Libra Investments, Inc. ("Libra") and certain individuals and
entities designated by Libra (the "Warrant Holders"). The Warrants may be
exercised for an aggregate of 177,178 shares of Series C Preferred Stock.
Warrant Holders may exercise their Warrants until April 9, 2002, at an exercise
price which declines every month. During December 1998, the exercise price for
each Warrant is $67.03 per share of Series C Preferred Stock. Warrant Holders
who exercise their Warrants for shares of Series C Preferred Stock, may tender
their shares of Series C Preferred Stock into the Exchange Offer.
REGISTRATION RIGHTS
In connection with the sale of 5,000,000 shares of Common Stock to
Prime 66, the Company granted registration rights to Prime 66. Under these
registration rights, Prime 66 has the right to make two demands, at any time
after October 1, 2000, which will require the Company to use its best efforts to
effect the registration of Prime 66's shares of Common Stock.
In addition, if the Company determines to register any shares of Common
Stock for one or more security holders, Prime 66 has the right, subject to
customary limitations and the rights of such other security holders, to request
that such registration include Prime 66's Common Stock. Prime 66 is entitled to
an unlimited number of such "piggyback" registrations.
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.
GENERAL. The following description of the Series C Preferred Stock set
forth herein does not purport to be complete and is subject to, and qualified in
its entirety by, the provisions of the Company's Amended and Restated
Certificate of Incorporation incorporated by reference into the Registration
Statement, and the Certificate of Designations relating to the Series C
Preferred Stock, the form of which is incorporated by reference into the
Registration Statement.
RANK. The Series C Preferred Stock, with respect to dividend rights and
rights upon liquidation, winding up or dissolution, ranks (i) senior and prior
to the Common Stock and to any other stock issued by the Company designated as
junior to the Series C Preferred Stock and (ii) on a parity with any class or
series of stock of the Company, the terms of which do not designate such class
or series as either junior or senior to the Series C Preferred Stock.
DIVIDENDS. The annual dividend rate per share of the Series C Preferred
Stock is an amount equal to 10.5% of the sum of (x) the liquidation preference
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
82
<PAGE>
Series C Preferred Stock are cumulative, accruing quarterly and, when and as
declared by the Board of Directors of the Company, are 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 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.
Dividends on the shares of Series C Preferred Stock are payable to the
holders of record thereof as they appear on the stock register of the Company on
such record date, not more than 40 days nor fewer than 10 days preceding the
payment date thereof, as will be fixed by the Board of Directors. Dividends on
account of arrears for any past dividend periods may be declared and paid at any
time, without reference to any Dividend Payment Date, to the holders of record
on such date, not exceeding 40 days nor less than 10 days preceding the payment
date thereof, as may be fixed by the Board of Directors. Dividends paid in cash
will be paid to each holder of record in United States dollars by check mailed
to such holder at its address appearing on the books of the Company. Any shares
of Common Stock issued, at the option of the Company, to pay any dividends on
shares of Series C Preferred Stock will thereupon be duly authorized, validly
issued, fully paid and non-assessable. No fractional shares of Common Stock will
be issued as dividends.
REDEMPTION. Except as described below, the shares of 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
83
<PAGE>
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..................................................... 102.63%
2004..................................................... 101.81%
2005 and thereafter...................................... 100.00%
plus, in each case, accrued and unpaid dividends, if any, to the redemption
date.
The amount paid to the holders of shares of Series C Preferred Stock
upon redemption which 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.
The Company is required to give notice of any proposed redemption of
shares of Series C Preferred Stock upon not less than 15 days nor more than 40
days (such date to be determined by the Company, the "Redemption Record Date")
prior to the date of redemption, to the holders of record on the Redemption
Record Date of the shares to be redeemed at their addresses appearing on the
books of the Company. Each such notice will specify the shares of Series C
Preferred Stock called for redemption, the redemption price and the time, place
and date of redemption. Neither failure to mail such notice, nor any defect
therein or in the mailing thereof, to any particular holder shall affect the
sufficiency of the notice or the validity of the proceedings for redemption with
respect to the other holders. On or after the redemption date, each holder of
shares of Series C Preferred Stock being redeemed will present and surrender
such holder's certificate or certificates evidencing such shares to the Company
at the place set forth in the redemption notice, whereupon the Company will
cancel such shares and will pay to such holders the redemption price for such
surrendered shares, plus accrued and unpaid dividends, if any, to the redemption
date. If fewer than all the shares of Series C Preferred Stock represented by
any holder's certificate are redeemed, the Company will issue a new certificate
representing the unredeemed shares of Series C Preferred Stock.
In the event fewer than all of the outstanding shares of Series C
Preferred Stock are being redeemed, the shares to be redeemed will be selected
pro rata or by lot or in such other manner as the Board of Directors of the
Company may determine, provided that only whole shares shall be selected for
redemption.
Any shares of Series C Preferred Stock which have been called for
redemption may be converted into shares of Common Stock before being redeemed
provided that the holder thereof gives written notice to the Company, prior to
the close of business on the business day immediately preceding the date of
redemption, of such holder's election to convert such shares of Series C
Preferred Stock into shares of Common Stock, together with the certificate or
certificates evidencing such shares, duly endorsed or assigned to the Company,
and any necessary transfer tax payment as described below. See "--Conversion."
84
<PAGE>
CHANGE IN CONTROL. Upon the occurrence of a Change in Control, the
Company must make an offer to purchase (an "Offer to Purchase") all then
outstanding shares of 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, 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 Senior Secured Notes are outstanding, those transactions that are
not deemed a "Change of Control" under the terms of the Senior Secured
Indenture; (c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election to such Board of Directors, or
whose nomination for election by the stockholders of the Company, was approved
by a vote of 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 (d) 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 the Senior Secured Notes are outstanding, those
transactions that are not deemed a "Change of Control" under the terms of the
Senior Notes Indenture.
Within 30 days following any Change in Control, the Company must give
written notice of such Change in Control to each holder of shares of Series C
Preferred Stock by first-class mail, postage prepaid, at his address appearing
in the stock register of the Company, stating, among other things, the purchase
price and that the purchase date shall be a business day no earlier than 30 days
nor later than 60 days from the date such notice is mailed, or such later date
as is necessary to comply with requirements under the Exchange Act; that any
shares of Series C Preferred Stock not tendered will continue to accumulate
dividends; that, unless the Company defaults in the payment of the purchase
price, any shares of Series C Preferred Stock accepted for payment pursuant to
the Offer to Purchase shall cease to accumulate dividends after the Change in
Control Purchase Date; and certain other procedures that a holder of shares of
Series C Preferred Stock must follow to accept an Offer to Purchase or to
withdraw such acceptance.
If an Offer to Purchase is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change in Control
Purchase Price for any or all of the shares of Series C Preferred Stock that
might be delivered by holders thereof seeking to accept the Offer to Purchase
and, accordingly, none of the holders of the shares of Series C Preferred Stock
may receive the Change in Control Purchase Price for their Series C Preferred
Stock in the event of a Change in Control.
The existence of a holder's right to require the Company to repurchase
such holder's Series C Preferred Stock upon a Change in Control may deter a
third party from acquiring the Company in a transaction which constitutes a
Change in Control. Furthermore, the possibility that a third party
85
<PAGE>
would be deterred from acquiring the Company may have an adverse effect on the
market price of the Company's Series C Preferred Stock.
The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with an Offer to Purchase.
CONVERSION. Each share of 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 a
conversion price (the "Conversion Price") equal to $18. 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 or shares of Common Stock, or a combination thereof, at the option of
the Company. No accrued dividends will be paid on any shares of 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 electing to convert
such shares after having received a notice of redemption for such shares. Common
Stock issued to pay dividends will be valued at the average closing price of the
Common Stock as reported in THE WALL STREET JOURNAL for the 20 consecutive
trading days immediately preceding the date of such payment.
To convert shares of Series C Preferred Stock into Common Stock, the
registered holder of such shares of Series C Preferred Stock must give written
notice to the Company that it elects to convert such shares and surrender at the
office of the Transfer Agent, or at such other office or offices, if any, as the
Board of Directors may designate, the certificate or certificates therefor, duly
endorsed or assigned to the Company or in blank, together with any payment for
stamp or similar taxes that may be required to be paid by the holder, as
described below.
Shares of Series C Preferred Stock will be deemed to have been
converted immediately prior to the close of business on the day of the surrender
of such shares for conversion, and the person or persons entitled to receive the
Common Stock issuable upon such conversion will be treated for all purposes as
the record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Company will issue and deliver
a certificate or certificates for the number of full shares of Common Stock
issuable upon such conversion, together with any payment in lieu of issuing any
fractional shares of Common Stock, to the person or persons entitled to receive
the same. In case shares of Series C Preferred Stock are called for redemption,
the right to convert such shares will terminate at the close of business on the
business day immediately preceding the redemption date, unless default shall be
made in payment of the redemption price.
The Conversion Price for shares of 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.
86
<PAGE>
The Company will pay any and all stamp or other similar taxes that may
be payable in respect of the issue or delivery of shares of Common Stock upon
conversion of shares of Series C Preferred Stock. The Company will not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issue and delivery of shares of Common Stock in a name other
than that in which the shares of Series C Preferred Stock so converted or
exchanged were registered, and no such issue or delivery will be made unless and
until the person requesting such issue has paid to the Company the amount of any
such tax, or has established to the satisfaction of the Company that such tax
has been paid. All shares of Series C Preferred Stock issued upon conversion of
shares of Common Stock shall be validly issued, fully paid and nonassessable.
VOTING RIGHTS. Other than the consent rights described below with
respect to certain corporate actions, and except as otherwise provided by
applicable law, holders of shares of Series C Preferred Stock 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 which 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 less directors on the Board of Directors at
such time or (ii) two directors in the event that there are eight or more
directors on the Board of Directors at such time.
In exercising the voting rights set forth herein or when otherwise
granted voting rights by operation of law, each share of Series C Preferred
Stock will be entitled to one vote per share.
No consent of the holders of the Series C Preferred Stock is 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 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, plus accrued and unpaid dividends on such share of Series C Preferred
Stock, if any, to the date of final distribution.
87
<PAGE>
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.
SINKING FUND; OTHER MATTERS. The Series C Preferred Stock is not
subject to any mandatory sinking fund redemption. Holders of shares of Series C
Preferred Stock have no pre-emptive rights.
TRANSFER AGENT. The transfer agent for the Series C Preferred Stock is
Continental Stock Transfer & Trust Company, New York, New York.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the opinion of Paul, Weiss,
Rifkind, Wharton & Garrison with respect to certain material expected United
States federal income tax consequences applicable under current law to holders
of Series C Preferred Stock who exchange such stock for Common Stock pursuant to
the Exchange Offer who hold Series C Preferred Stock and will hold Common Stock
received in exchange therefor as capital assets within the meaning of Section
1221 of the Code. This discussion is for general information only and is not
intended as a substitute for careful tax planning. The discussion is based upon
the Internal Revenue Code of 1986, as amended (the "Code"), regulations
promulgated by the U.S. Department of the Treasury (the "Treasury Regulations"),
and Internal Revenue Service (the "IRS") rulings and judicial decisions now in
effect, all of which are subject to change at any time by legislative, judicial
or administrative action. Any such changes could be retroactively applied in a
manner that could adversely affect a holder of the Common Stock received
pursuant to the Exchange Offer. The discussion does not cover all aspects of
federal taxation that may be relevant to, or the actual tax effect that any of
the matters described herein will have on, particular persons, and it does not
deal with state, local or foreign income or other tax laws. In addition, holders
(including financial institutions, tax-exempt organizations, broker-dealers,
insurance companies, stockholders who hold their stock as part of a hedge,
straddle or conversion transaction, and foreign individuals and entities) may be
subject to special rules not discussed below. The discussion assumes that
recipients of Common Stock will hold the Common Stock as a capital asset within
the meaning of Section 1221 of the Code. Persons considering exchanging Series C
Preferred Stock for Common Stock should consult their own tax advisors with
respect to their particular situations as well as any tax consequences arising
under the laws of any state, local or foreign taxing jurisdiction.
88
<PAGE>
EXCHANGE OF SERIES C PREFERRED STOCK FOR COMMON STOCK
An exchange of Series C Preferred Stock for Common Stock pursuant to
the Exchange Offer will not be taxable, except as described below under
"Constructive Section 305 Distribution" and "Treatment of Cash Received in Lieu
of Fractional Share Interests." The tax basis of the Common Stock (excluding any
Common Stock treated as received in a Section 305 stock distribution as a result
of the Exchange Offer) will be equal to the tax basis of the Series C Preferred
Stock for which it is exchanged (though calculated by treating those receiving
Common Stock as also receiving fractional share interests of Common Stock rather
than cash, as described in "Treatment of Cash Received in Lieu of Fractional
Share Interests" below). The tax basis of any Common Stock treated as received
in a Section 305 stock distribution as a result of the Exchange Offer will be
the fair market value of such stock on the day it is received and the holding
period of such stock will begin on such date.
CONSTRUCTIVE SECTION 305 STOCK DISTRIBUTION. Under Section 305 of the
Code and Treasury Regulations thereunder, holders of Series C Preferred Stock
accruing dividends that have not yet become payable may have been treated as
receiving constructive distributions of additional stock that would have been
taxable to such holders in the manner described below ("Constructive
Distributions"). Alternatively, if Constructive Distributions are not deemed to
have occurred, holders of Series C Preferred Stock with dividends in arrears
will be treated as receiving a constructive Section 305 stock distribution with
respect to an exchange of such stock for Common Stock, in the amount of the
lesser of (i) the amount by which the fair market value of the stock received in
the exchange (determined immediately following the exchange) exceeds the issue
price of the Series C Preferred Stock surrendered, or (ii) the amount of the
dividends in arrears. In either case, the deemed distribution will be treated as
a dividend and taxable as ordinary income to the extent that the distributions
are made out of either the Company's current or accumulated earnings and
profits. To the extent that such a distribution is not made out of the Company's
current or accumulated earnings and profits, the distribution will first
constitute a non-taxable return of capital, reducing the holder's adjusted tax
basis in the shares of Series C Preferred Stock held, and then, to the extent
the distribution exceeds such tax basis, will result in a gain from the sale or
exchange of such stock. Any amount treated as a dividend under the rules
described above will be eligible for the dividends-received deduction available
to domestic corporate holders, subject to the complex limitations imposed
thereon under the Code (see "-Dividends-Received Deduction" below). The amount
of a deemed distribution treated as a dividend may also be treated as an
"extraordinary dividend" if the Company has a sufficient amount of current or
accumulated earnings and profits at the time of the exchange. (The Company does
not believe that it currently has any current or accumulated earnings and
profits, and does not expect to have any until after it commences commercial
operations.) In such case, a corporate holder of Series C Preferred Stock would
be required to reduce its tax basis of such stock by the non-taxed portion of
such dividend and, to the extent the non-taxed portion exceeds the corporate
holder's stock basis, recognize such excess as capital gain for the taxable year
in which the holder received the extraordinary dividend.
TREATMENT OF CASH RECEIVED IN LIEU OF FRACTIONAL SHARE INTERESTS. The
receipt of cash in lieu of fractional share interests of Common Stock should
generally be treated as a separate event for federal income tax purposes, in
which the holder making the exchange is treated as first receiving in the
exchange the fractional share interest of Common Stock to which the holder is
entitled and then redeeming the fractional shares of Common Stock for cash.
While the matter is not free from doubt, counsel to the Company believes that
under principles of Section 302 of the Code such a redemption should be treated
as a distribution in payment in exchange for the Common Stock. See "-Sale or
Exchange of Common Stock," below, for the tax consequences of an exchange of
Common Stock.
89
<PAGE>
DIVIDENDS ON COMMON STOCK
Distributions with respect to the Common Stock will be treated as
dividends and taxable as ordinary income to the extent that the distributions
are made out of either the Company's current or accumulated earnings and
profits. To the extent that such a distribution is not made out of the Company's
current or accumulated earnings and profits, the distribution will first
constitute a non-taxable return of capital, reducing the holder's adjusted tax
basis in the shares of Common Stock held, and then, to the extent the
distribution exceeds such tax basis, will result in a gain from the sale or
exchange of such stock. Any amount treated as a dividend under the rules
described above will be eligible for the dividends-received deduction available
to domestic corporate holders, subject to the complex limitations imposed
thereon under the Code (see "-Dividends-Received Deduction" below). Such
dividends may also be treated as extraordinary dividends under certain
circumstances.
DIVIDENDS-RECEIVED DEDUCTION. In calculating their taxable income,
corporate stockholders will generally be eligible to claim a dividends-received
deduction (currently 70% of the amount of the dividend for most corporate
stockholders) with respect to distributions that are treated as dividends on the
Common Stock (i.e., distributions out of current or accumulated earnings and
profits, which the Company does not believe that it currently has and does not
expect to have until after it commences commercial operations). However, complex
rules apply which may cause disallowance or limitation of the dividends-received
deduction under circumstances described in the Code. Corporate stockholders
should consult their own tax advisors as to the possible application of these
provisions.
SALE OR EXCHANGE OF COMMON STOCK
Upon the sale or exchange of Common Stock, the holder will recognize
gain or loss equal to the difference between the amount realized and his or her
tax basis in the Common Stock. The resulting gain or loss will be a capital gain
or loss and will be a long-term capital gain or loss if the Common Stock was
held for more than one year. The holding period of the Common Stock (other than
Common Stock treated as received in a constructive stock distribution under
Section 305 (see "-Constructive Section 305 Stock Distribution" above)) will
also include the time during which the Series C Preferred Stock was held.
BACK-UP WITHHOLDING
Under Section 3406 of the Code and applicable Treasury Regulations, a
holder of Common Stock may be subject to back-up withholding tax at the rate of
31% with respect to dividends paid or on the proceeds of a sale or exchange of
the Common Stock. The Company will be required to deduct and withhold the tax if
(i) the holder fails to furnish a taxpayer identification number ("TIN") to the
Company, (ii) the IRS notifies the Company that the TIN furnished by the holder
is incorrect, (iii) there has been a notified holder under-reporting with
respect to dividends described in Section 3406(c) of the Code, or (iv) there has
been a failure of the holder to certify under the penalty of perjury that the
holder is not subject to withholding under Section 3406(a)(1)(C) of the Code.
The Company will be required to withhold a tax equal to 31% from any dividend
payment made with respect to the Common Stock if any one of the events discussed
above occurs. Holders should consult their tax advisors regarding their
qualification for exemption from back-up withholding and the procedure for
obtaining any applicable exemption.
The foregoing summary is included herein for general information only.
Accordingly, prospective participants in the Exchange Offer should consult with
their own tax advisors as to the specific tax consequences to them, including
the application and effect of state, local and foreign income and other tax
laws.
90
<PAGE>
LEGAL OPINIONS
The validity of the shares of Common Stock to be issued in the Exchange
Offer will be passed upon for, and an opinion with respect to certain material
tax consequences of the Exchange Offer will be rendered to, the Company by Paul,
Weiss, Rifkind, Wharton & Garrison, New York, New York. Certain regulatory
matters arising under the Communications Act are being passed upon by Wiley,
Rein & Fielding, Washington, D.C. The Dealer Manager has been represented by
Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, and for the period from May 17, 1990 (date of inception) to December 31,
1997, have been incorporated by reference herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
91
<PAGE>
TABLE OF CONTENTS
Page
----
Available Information..........................................................2
Incorporation by Reference.....................................................2
Special Note Regarding Forward-looking Statements..............................3
Prospectus Summary.............................................................4
Risk Factors..................................................................13
Use of Proceeds...............................................................29
Price Range of Common Stock...................................................29
Dividend Policy...............................................................30
Capitalization................................................................31
Selected Historical Financial Information.....................................32
Management's Discussion and Analysis Of Financial Condition and Results of
Operations....................................................................33
The Exchange Offer............................................................41
The Company...................................................................50
Description of Certain Indebtedness...........................................70
Description of Capital Stock..................................................72
Certain United States Federal Income Tax Consequences.........................88
Legal Opinions................................................................91
Experts .....................................................................91
<PAGE>
Facsimile copies of the Letter of Transmittal will be accepted. Letters
of Transmittal, certificates representing shares of Series C Preferred Stock and
any other required documents should be sent by each stockholder or his or her
broker, dealer, commercial bank, trust company or other nominee to the Exchange
Agent at one of the addresses as set forth below:
THE EXCHANGE AGENT IS:
IBJ SCHRODER BANK & TRUST COMPANY
1 State Street
New York, New York 10004
BY MAIL: BY HAND OR OVERNIGHT COURIER:
P.O. Box 84 1 State Street
Bowling Green Station New York, New York 10004
New York, New York 10274-0084 Attn.: Reorganization Dept.
Attn.: Reorganization Dept. Securities Processing Window SC-1
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
(212) 858-2611
Confirm Receipt of Notice of Guaranteed Delivery by Telephone:
(212) 858-2103
The Information Agent for the Exchange Offer is:
D.F. KING & CO., INC.
77 Water Street
New York, New York 10005
(800) 326-3066
Any questions or requests for assistance or additional copies of this
Prospectus or the Letter of Transmittal may be directed to the Information Agent
at its telephone number and location set forth on this page. You may also
contact your broker, dealer, commercial bank or trust company or other nominee
for assistance concerning the Exchange Offer.
THE DEALER MANAGER FOR THE EXCHANGE OFFER IS:
MERRILL LYNCH & CO.
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281
93
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a
corporation to indemnify its directors, officers, employees and agents against
certain liabilities they may incur in such capacities, including liabilities
under the Securities Act, 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 stockholders
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 directors and officers for claims asserted
against them or incurred by them in such capacity, including claims brought
under the Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The Exhibit Index beginning on page E-1 is hereby incorporated by
reference.
ITEM 22. UNDERTAKINGS.
The undersigned 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 of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
II-1
<PAGE>
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on December 18, 1998.
CD RADIO INC.
By: /s/ David Margolese
-----------------------
David Margolese
Chairman and Chief Executive Officer
II-3
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints David Margolese or Patrick L.
Donnelly or either of them his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate in connection therewith, granting unto
such agent, proxy and attorney-in-fact full power and authority to do and
perform each and every act and thing necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact or any of their substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ David Margolese Chairman and Chief Executive Officer December 18, 1998
- ------------------- (Principal Executive Officer)
David Margolese
/s/ Andrew J. Greenebaum Executive Vice President and Chief December 18, 1998
- ------------------------ Financial Officer (Principal
Andrew J. Greenebaum Financial Officer)
/s/ John T. McClain Vice President and Controller December 18, 1998
- ------------------- (Principal Accounting Officer)
John T. McClain
/s/ Robert D. Briskman Director December 18, 1998
- ----------------------
Robert D. Briskman
/s/ Lawrence F. Gilberti Director December 18, 1998
- ------------------------
Lawrence F. Gilberti
/s/ Joseph V. Vittoria Director December 18, 1998
- ----------------------
Joseph V. Vittoria
/s/ Ralph W. Whitworth Director December 18, 1998
- ----------------------
Ralph W. Whitworth
II-4
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
1.1* Dealer Manager Agreement
4.1.1 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)).
4.1.2 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, filed with
the Commission on October 30, 1997 (the "Form 8-A")).
4.1.3 Form of Certificate of Designations of Series B Preferred
Stock (incorporated by reference to Exhibit A to Exhibit 1
to the company's Registration Statement on the Form 8-A).
4.1.4 Form of Right Certificate (incorporated by reference to
Exhibit B to Exhibit 1 to the Form 8-A).
4.1.5 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 filed on October 13,
1998).
4.1.6 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 filed on November 17,
1998).
4.1.7 Form of Certificate of Designations, Preferences and
Relative, Participating, Optional and Other Special Rights
of 10 1/2% Series C Convertible Preferred Stock (the "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)).
4.1.8 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.)
4.1.9 Certificate of Increase of 10 1/2% Series C Convertible
Preferred 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).
4.1.10 Exhibit A to the Stock Purchase 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 filed on November 17,
1998).
E-1
<PAGE>
Exhibit Description Page
------- ----------- ----
4.1.11 Exhibit B to the Stock Purchase 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 filed on November 17,
1998).
4.2.1 Indenture, dated as of November 26, 1997, between the
Company and IBJ Schroder Bank & Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-34769)
(the "Notes Registration Statement")).
4.2.2 Form of Note (incorporated by reference to Exhibit 4.2 to
the Notes Registration Statement).
4.2.3 Pledge Agreement, dated as of November 26, 1997, between
the Company, as Pledgor, and IBJ Schroder Bank & Trust
Company, as Collateral Agent (incorporated by reference to
Exhibit 4.5 to the Notes Registration Statement).
5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison re
legality.
8.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison re tax
matters.
23.1.1 Consent of PricewaterhouseCoopers LLP
23.1.2 Consents of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibit 5.1 and Exhibit 8.1)
24.1 Power of Attorney (included on signature page).
99.1 Form of Letter of Transmittal for Exchange Offer.
- ---------------
* To be filed by amendment.
E-2
EXHIBIT 5.1
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 Avenue of the Americas
New York, New York 10019-6064
December 18, 1998
CD Radio Inc.
1180 Avenue of the Americas
New York, New York 10036
CD Radio Inc. --
Registration Statement on Form S-4
Registration No. 333-
----------------------------------
Ladies and Gentlemen:
In connection with the referenced Registration Statement on Form S-4
(the "Registration Statement"), filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations under it (the "Rules"), we have been requested by CD Radio
Inc., a Delaware corporation (the "Company"), to furnish our opinion as to the
legality of the shares of the Company's Common Stock, par value $.001 per share
(the "Common Stock"), being registered.
In connection with the furnishing of this opinion, we have reviewed (i)
the Registration Statement (including all amendments filed on or before today);
(ii) the Company's Certificate of Incorporation and By-laws; and (iii) records
of certain of the Company's corporate proceedings.
We also have examined and relied upon representations as to factual
matters contained in certificates of officers of the Company, and have made
those other investigations of fact and law and have examined and relied upon the
originals, or copies certified or otherwise identified to our satisfaction, of
those documents, records, certificates or other instruments, and upon factual
information otherwise supplied to us, as in our judgment are necessary or
appropriate to render the opinion expressed below.
<PAGE>
2
In addition, we have assumed, without independent investigation, the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity of original documents to all documents submitted
to us as certified, photostatic, reproduced or conformed copies, the
authenticity of all the latter documents and the legal capacity of all
individuals who have executed any of the documents reviewed by us.
Based upon the above, we are of the opinion that the Common Stock is
duly authorized and, when issued, delivered and paid for as contemplated in the
Registration Statement, the Common Stock will be validly issued, fully paid and
nonassessable.
Our opinion expressed above is limited to the General Corporation Law
of the State of Delaware. Please be advised that no member of this firm is
admitted to practice in the State of Delaware. Our opinion is rendered only with
respect to laws, and the rules, regulations and orders under them, which are
currently in effect.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Opinions" contained in the Prospectus included in the Registration Statement. In
giving this consent, we do not thereby admit that we come within the category of
persons whose consent is required by the Act or the Rules.
Very truly yours,
/s/ PAUL, WEISS, RIFKIND, WHARTON & GARRISON
--------------------------------------------
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
EXHIBIT 8.1
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 Avenue of the Americas
New York, New York 10019-6064
December 18, 1998
CD Radio Inc.
1180 Avenue of the Americas
New York, New York 10036
CD Radio Inc. --
Registration Statement on Form S-4
Registration No.
----------------------------------
Ladies and Gentlemen:
In connection with the referenced Registration Statement on Form S-4
(the "Registration Statement"), filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations promulgated thereunder (the "Rules"), we have been
requested by CD Radio Inc., a Delaware corporation (the "Company"), to furnish
our opinion as to the matters hereinafter set forth. Capitalized terms used and
not otherwise defined herein have the meaning given them in the Registration
Statement.
For purposes of our opinion, we have reviewed the Registration
Statement (including the exhibits thereto) and relied upon the description of
the Exchange Offer contained therein. We have also made such other
investigations of fact and law and have examined the originals, or copies
authenticated to our satisfaction, of such other documents, records,
certificates or other instruments as in our judgment are necessary or
appropriate to render the opinion expressed below.
The opinion set forth below is limited to the Internal Revenue Code of
1986, as amended, administrative rulings, judicial decisions, treasury
regulations and other applicable authorities, all as in effect on the date
hereof. The statutory provisions, regulations, and interpretations upon which
our opinion is based are
<PAGE>
2
subject to change, and such changes could apply retroactively. Any such change
could affect the continuing validity of the opinion set forth below.
Based upon and subject to the foregoing, and subject to the
qualifications set forth herein, we hereby confirm that the discussion set forth
in the Registration Statement under the heading "CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES" is our opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "LEGAL
COUNSEL" in the prospectus included in the Registration Statement. In giving
this consent, we do not hereby admit that we come within the category of persons
whose consent is required by the Act or the Rules.
Very truly yours,
/s/ PAUL, WEISS, RIFKIND, WHARTON & GARRISON
--------------------------------------------
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration
statement of CD Radio Inc. and Subsidiary (the "Company") on Form S-4 (File No.
333- ) of our report dated March 3, 1998, except as to the third paragraph
therein for which the date is December 10, 1998, on our audits of the
consolidated financial statements of the Company as of December 31, 1997 and
1996, for each of the three years in the period ended December 31, 1997, and for
the period May 17, 1990 (date of inception) to December 31, 1997, which report
is included in the Company's Current Report on Form 8-K filed on December 10,
1998. We also consent to the reference to our firm under the caption "EXPERTS."
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
New York, New York
December 18, 1998
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO EXCHANGE SHARES
OF THE 10 1/2% SERIES C CONVERTIBLE PREFERRED STOCK
(THE "SERIES C PREFERRED STOCK")
OF
CD RADIO INC.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 11:59, NEW YORK CITY TIME ON [ , 1999]
UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF SERIES C PREFERRED STOCK
MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
To tender, this Letter of Transmittal should be delivered only to:
IBJ SCHRODER BANK & TRUST COMPANY, EXCHANGE AGENT
Facsimile Transmission:
(212) 858-2611
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail: Overnight Delivery: By Hand:
P.O. Box 84 1 State Street 1 State Street
Bowling Green Station New York, New York 10004 New York, New York 10004
New York, New York 10274-0084 Attn.: Reorganization Dept. Attn.: Reorganization Dept.
Attn.: Reorganization Dept. Securities Processing Window SC-1 Securities Processing Window SC-1
</TABLE>
To confirm receipt of this Letter of Transmittal, please call:
(212) 858-2103
The Information Agent for the Exchange Offer is:
D.F. King & Co., Inc.
77 Water St.
New York, New York 10005
(212) 269-5550
or
Call Toll-Free (800) 326-3066
Any questions concerning the Exchange Offer or requests for additional
copies of this Letter of Transmittal may be directed to the Information Agent.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A
NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated December
__, 1999 (the "Prospectus") of CD Radio Inc. (the "Company") and this Letter of
Transmittal, which together describe the Company's offer to exchange (the
"Exchange Offer") up to __________ shares of its Common Stock, par value $.001
per share (the "Common Stock"), for up to all of the outstanding shares of its
Series C Preferred Stock at an exchange ratio of _______ shares of Common Stock
for each share of the Series C Preferred Stock. As of December __, 1999, there
were ____________ shares of Common Stock and ____________ shares of Series C
Preferred Stock issued and outstanding.
The undersigned has checked the appropriate boxes below and has signed
this Letter of Transmittal to indicate the action the undersigned desires to
take with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE
INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE INFORMATION AGENT OR THE
EXCHANGE AGENT AT THE ADDRESSES AND TELEPHONE NUMBERS SET FORTH ABOVE.
1
<PAGE>
List below the shares of the Series C Preferred Stock to which this
Letter of Transmittal relates. If the space provided below is inadequate, the
certificate numbers and/or the number of shares of the Series C Preferred Stock
tendered should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
DESCRIPTION OF SHARES OF SERIES C PREFERRED STOCK TENDERED
- ------------------------------------------------------------------------------------------------------------------------------------
NAMES(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) SHARES OF SERIES C PREFERRED STOCK TENDERED
(PLEASE FILL IN, IF BLANK) (ATTACH ADDITIONAL SIGNED SCHEDULE IF NECESSARY)
(1) (2) (3) (4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL NUMBER
OF SHARES NUMBER OF
REPRESENTED SHARES
CERTIFICATE BY TENDERED+ (IF
NUMBER(S)* CERTIFICATE(S)*+ LESS THAN ALL)
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Need not be completed by book-entry holders.
+Unless otherwise indicated, the holder will be deemed to have tendered the full
number of shares of Series C Preferred Stock.
- --------------------------------------------------------------------------------
This Letter of Transmittal is to be used either if certificates of
shares of the Series C Preferred Stock are to be forwarded herewith or if
delivery of shares of the Series C Preferred Stock is to be made by book-entry
transfer to an account maintained by the Exchange Agent at The Depository Trust
Company, pursuant to the procedures set forth in "The Exchange Offer--Tender
Procedure" in the Prospectus. Delivery of documents to the book-entry transfer
facility does not constitute delivery to the Exchange Agent.
2
<PAGE>
[ ] CHECK HERE IF TENDERED SHARES OF SERIES C PREFERRED STOCK ARE ENCLOSED
HEREWITH.
[ ] CHECK HERE IF TENDERED SHARES OF SERIES C PREFERRED STOCK ARE BEING
DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE EXCHANGE AGENT'S ACCOUNT
AT THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ..................................................
Book-Entry Transfer Facility: The Depository Trust Company
Account No........................ Transaction Code No.........................
Date Tendered ..................................................................
[ ] CHECK HERE IF TENDERED SHARES OF SERIES C PREFERRED STOCK ARE BEING
DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT
TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Holder(s) ...........................................................
Date of Execution of Notice of Guaranteed Delivery .............................
Name of Institution that Guaranteed Delivery....................................
If delivery is by book-entry transfer, specify the account number of the
Book-Entry Transfer Facility and transaction code number.
Book-Entry Transfer Facility: The Depository Trust Company
Account No........................ Transaction Code No.........................
Date Tendered ..................................................................
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name ...........................................................................
Address ........................................................................
3
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to the Company the number of shares of
Series C Preferred Stock indicated above upon the terms and subject to the
conditions set forth in the Prospectus (receipt of which is hereby acknowledged)
and in this Letter of Transmittal, both of which together constitute the
Company's offer (the "Exchange Offer") to exchange Common Stock for shares of
Series C Preferred Stock properly tendered.
Subject to, and effective upon, the acceptance for exchange of the
shares of the Series C Preferred Stock tendered herewith, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such shares of the Series C Preferred Stock.
The undersigned hereby irrevocably constitutes and appoints the Exchange Agent
the true and lawful agent and attorney-in-fact of the undersigned (with full
knowledge that said Exchange Agent acts as the agent of the Company, in
connection with the Exchange Offer) to cause the shares of Series C Preferred
Stock to be assigned, transferred and exchanged. The undersigned represents and
warrants that it has full power and authority to tender, exchange, assign and
transfer the shares of the Series C Preferred Stock and to acquire shares of the
Common Stock issuable upon the exchange of such tendered shares of the Series C
Preferred Stock, and that, when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered shares of the Series C
Preferred Stock, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The undersigned also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered shares of the Series C
Preferred Stock or transfer ownership of such shares of the Series C Preferred
Stock on the account books maintained by the book-entry transfer facility.
The undersigned understands that tenders of shares of Series C
Preferred Stock pursuant to the procedures described in the Prospectus under the
heading "The Exchange Offer--Tender Procedure" and in the instructions hereto
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions described in the Prospectus.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Conditions of the Exchange
Offer." The undersigned recognizes that as a result of these conditions (which
may be waived, in whole or in part, at any time and from time to time, by the
Company), as more particularly set forth in the Prospectus, the Company may not
be required to exchange any of the shares of Series C Preferred Stock tendered
hereby and, in such event, the shares of Series C Preferred Stock not exchanged
will be returned to the undersigned at the address shown below the signature of
the undersigned.
The name(s) and address(es) of the registered holder(s) should be
printed above under "Description of Shares of Series C Preferred Stock
Tendered," if not already printed thereunder, exactly as they appear on the
shares of the Series C Preferred Stock tendered hereby. The certificate
number(s) and the number of shares of the Series C Preferred Stock to which this
Letter of Transmittal relates, together with the number of shares of the Series
C Preferred Stock that the undersigned wishes to tender, should be indicated in
the appropriate boxes above under "Description of Shares of Series C Preferred
Stock Tendered."
All authority conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
personal representatives, successors and assigns of the undersigned. A tender of
shares of Series C Preferred Stock made pursuant to the Exchange Offer may not
be withdrawn after the Expiration Date. A purported notice
4
<PAGE>
of withdrawal will be effective only if delivered to the Exchange Agent in
accordance with the specific procedure set forth in the Prospectus under the
heading "The Exchange Offer--Withdrawal Rights."
Certificates for all shares of Common Stock delivered in exchange for
tendered shares of Series C Preferred Stock and any shares of Series C Preferred
Stock delivered herewith but not exchanged, and registered in the name of the
undersigned, shall be delivered to the undersigned at the address shown below
the signature of the undersigned.
<TABLE>
<CAPTION>
TENDERING HOLDER(S) SIGN HERE
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
.................................................................... ..............................................................
Signature of Holder Signature of Holder (if more than one)
Dated: ......................................................, 199..
(Must be signed by registered holder(s) exactly as name(s) appear(s) on certificate(s) for Series C Preferred Stock. If signature is
by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or
representative capacity, please set forth the full title of such person.) See Instruction 3.
Names(s): Address:
.................................................................... ..............................................................
.................................................................... ..............................................................
(Please Print)
..............................................................
(Include Zip Code)
Capacity (full title): Area Code and
Telephone Number: ............................................
....................................................................
Taxpayer Identification No. ..................................
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
Certificates for all physically delivered shares of Series C Preferred
Stock or confirmation of any book-entry transfer to the Exchange Agent's or its
agent's account at a book-entry transfer facility of shares of Series C
Preferred Stock tendered by book-entry transfer, as well as a properly completed
and duly executed copy of this Letter of Transmittal or facsimile thereof, and
any other documents required by this Letter of Transmittal, must be received by
the Exchange Agent at any of its addresses set forth herein at any time prior to
the Expiration Date (as defined in the Prospectus).
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE SHARES OF
SERIES C PREFERRED STOCK AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND
RISK OF THE HOLDER, AND EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF
SUCH DELIVERY IS BY MAIL, IT IS SUGGESTED THAT REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, PROPERLY INSURED, BE USED. IN ALL CASES SUFFICIENT TIME
SHOULD BE ALLOWED TO PERMIT TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR
CERTIFICATES FOR SHARES OF SERIES C PREFERRED STOCK SHOULD BE SENT TO THE
COMPANY.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the shares of Series C Preferred Stock for exchange.
2. PARTIAL TENDERS; WITHDRAWALS.
If fewer than all of the shares of Series C Preferred Stock evidenced
by a submitted certificate are tendered, the tendering holder should fill in the
number of shares tendered in the column entitled "Number of Shares Tendered." A
newly issued certificate for the shares of Series C Preferred Stock submitted
but not tendered will be sent to such holder as soon as practicable after the
Expiration Date. All shares of Series C Preferred Stock delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise clearly
indicated.
Tenders of Series C Preferred Stock pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration Date. To be effective, a
written, telegraphic, telex or facsimile transmission notice of withdrawal must
be received by the Exchange Agent prior to the Expiration Date at any of its
addresses set forth herein, and with respect to a facsimile transmission, must
be confirmed by telephone and an original delivered by guaranteed overnight
delivery. Any such notice of withdrawal must specify the person named in this
Letter of Transmittal as having tendered the shares of Series C Preferred Stock
be withdrawn, the certificate numbers of the shares of Series C Preferred Stock
to be withdrawn, a statement that such holder is withdrawing his election to
have such shares of Series C Preferred Stock exchanged, and the name of the
registered holder of such shares of Series C Preferred Stock, and must be signed
by the holder in the same manner as the original signature on this Letter of
Transmittal (including any required signature guarantees) or be accompanied by
evidence satisfactory to the Company that the person withdrawing the tender has
succeeded to the beneficial ownership of the shares of Series C Preferred Stock
being withdrawn. The Exchange Agent will return the properly withdrawn shares of
Series C Preferred Stock promptly following receipt of notice of withdrawal. If
shares of Series C Preferred Stock have been tendered pursuant to the procedure
for book-entry transfer, any notice of withdrawal must specify the name and
number of the account at the book-entry transfer facility to be credited with
the withdrawn shares of
6
<PAGE>
Series C Preferred Stock or otherwise comply with the book-entry transfer
procedure. All questions as to the validity of notices of withdrawals, including
time of receipt, will be determined by the Company, and such determination will
be final and binding on all parties.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL WRITTEN INSTRUCTION AND
ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder(s) of
the shares of Series C Preferred Stock tendered hereby, the signature must
correspond with the name(s) as written on the face of the certificates without
alteration, enlargement or any change whatsoever.
If any of the shares of Series C Preferred Stock tendered hereby are
owned of record by two or more joint owners, all such owners must sign this
Letter of Transmittal.
If a number of shares of Series C Preferred Stock registered in
different names are tendered, it will be necessary to complete, sign and submit
as many separate copies of this Letter of Transmittal as there are different
registrations of shares of Series C Preferred Stock.
When this Letter of Transmittal is signed by the registered holders or
holders (which term, for the purposes described herein, shall include the
book-entry transfer facility whose name appears on a security listing as the
owner of the shares of Series C Preferred Stock) of shares of Series C Preferred
Stock listed and tendered hereby, no endorsements of certificates or separate
written instruments of transfer or exchange are required.
If this Letter of Transmittal or any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
4. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the
transfer and exchange of shares of Series C Preferred Stock to it or its order
pursuant to the Exchange Offer. If a transfer tax is imposed for any reason
other than the transfer and exchange of shares of Series C Preferred Stock to
the Company or its order pursuant to the Exchange Offer, the amount of any such
transfer taxes (whether imposed on the registered holder or any other person)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exception therefrom is not submitted herewith the amount of such
transfer taxes will be billed directly to such tendering holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the certificates representing shares of
Series C Preferred Stock listed in this Letter of Transmittal.
5. WAIVER OF CONDITIONS.
The Company reserves the right to waive in its reasonable judgment, in
whole or in part, at any time and from time to time, any of the conditions to
the Exchange Offer set forth in the Prospectus.
7
<PAGE>
6. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES.
Any holder whose certificates representing shares of Series C Preferred
Stock have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at the address set forth above for further instructions.
7. IRREGULARITIES.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of shares of Series C
Preferred Stock will be determined by the Company, whose determination will be
final and binding. The Company reserves the absolute right to reject any shares
of Series C Preferred Stock not properly tendered or the acceptance for exchange
of which may, in the opinion of the Company's counsel, be unlawful. The Company
also reserves the absolute right to waive any defect or irregularity in the
tender of any shares of Series C Preferred Stock. Unless waived, any defects or
irregularities in connection with tenders of shares of Series C Preferred Stock
for exchange must be cured within such reasonable period of time as the Company
will determine. None of the Company, the Information Agent, the Exchange Agent
or any other person will be under any duty to give notification of any defects
or irregularities in tenders or incur any liability for failure to give any such
notification.
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests
for assistance or additional copies of the Prospectus and this Letter of
Transmittal, may be directed to the Information Agent or the Exchange Agent at
the addresses and telephone numbers set forth above.
IMPORTANT: This Letter of Transmittal or a facsimile thereof (together
with certificates representing shares of Series C Preferred Stock or
confirmation of book-entry transfer and all other required documents) or a
Notice of Guaranteed Delivery must be received by the Exchange Agent on or prior
to the Expiration Date.
8
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: CD RADIO INC.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name (see Specific Instructions following):
.................................................................................................
Business name, if different from above (see Specific Instructions following):
.................................................................................................
PART 1--PLEASE PROVIDE YOUR TIN IN
THE BOX AT RIGHT AND CERTIFY BY TIN:..............................................
SUBSTITUTE SIGNING AND DATING BELOW Social Security Number or
FORM W-9 Employer Identification Number
DEPARTMENT OF TREASURY
INTERNAL REVENUE SERVICE
PAYOR'S REQUEST FOR
TAXPAYER IDENTIFICATION PART 2--TIN APPLIED FOR [ ]
NUMBER ("TIN") AND CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
CERTIFICATION (1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting
for a number to be issued to me).
(2) I am not subject to backup withholding either because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service (the "IRS")
that I am subject to backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding,
and
(3) any other information provided on this form is true and correct.
SIGNATURE:................................................. DATE ................................
You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup
withholding because of underreporting of interest or dividends on your tax return and you have not been notified by the IRS that you
are no longer subject to backup withholding.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE
BOX IN PART 2 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of the
exchange, 31 percent of all reportable payments made to me thereafter will be
withheld until I provide a number.
........................................... ...................................
Signature Date
- --------------------------------------------------------------------------------
9
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9
SECTION REFERENCES ARE TO THE INTERNAL REVENUE CODE.
Purpose of Form. A person who is required to file an information return
with the IRS must obtain your correct taxpayer identification number ("TIN") to
report, for instance, income paid to you, real estate transactions, mortgage
interest you paid, the acquisition or abandonment of secured property,
cancellation of debt, or contributions you made to an IRA. For individuals, the
TIN is generally a social security number ("SSN"). Use Form W-9 to furnish your
correct TIN to the requester (the person asking you to furnish your TIN) and,
when applicable, (1) to certify that the TIN you are furnishing is correct (or
that you are waiting for a number to be issued), (2) to certify that you are not
subject to backup withholding, and (3) to claim exemption from backup
withholding if you are an exempt payee. Furnishing your correct TIN and making
the appropriate certifications will prevent certain payments from being subject
to backup withholding.
Note: If a requester gives you a form other than a W-9 that is
substantially similar to a Form W-9 to request your TIN, you must use the
requester's form.
How to Obtain a TIN. If you do not have a TIN, apply for one
immediately. To apply, get Form SS-5, Application for a Social Security Card
(for individuals), from your local office of the Social Security Administration,
or get either Form W-7, Application for IRS Individual TIN (for use by
individuals who are not U.S. citizens, nationals, or permanent residents), or
Form SS-4, Application for Employer Identification Number (for businesses and
all other entities), from your local IRS office or by calling the IRS at
1-800-TAX-FORM (1- 800-829-3676).
To complete Form W-9 if you do not have a TIN, write "Applied For" in
the space for the TIN in Part 1 (or check the box in Part 2 of Substitute Form
W-9), sign and date the form, and give it to the requester. Generally, you must
obtain a TIN and furnish it to the requester by the time of payment, but in any
case, within 60 calendar days. If the requester does not receive your TIN by the
time of payment, backup withholding, if applicable, will begin and continue
until you furnish your TIN to the requester.
Note: Writing "Applied For" (or checking the box in Part 2 of the
Substitute Form W-9) on the form means that you have already applied for a TIN
OR that you intend to apply for one in the near future.
As soon as you receive your TIN, complete another Form W-9, include
your TIN, sign and date the form, and give it to the requester.
What is Backup Withholding? Persons making certain payments to you are
required to withhold and pay to the IRS 31% of such payments under certain
conditions. This is called "backup withholding." Payments that could be subject
to backup withholding include interest, dividends, broker and barter exchange
transactions, rents, royalties, nonemployee compensation, and certain payments
from fishing boat operators, but do not include real estate transactions.
If you give the requester your correct TIN, make the appropriate
certifications, and report all your taxable interest and dividends on your tax
return, your payments will not be subject to backup withholding. Payments you
receive will be subject to backup withholding if:
1. You do not furnish your TIN to the requester, or
2. The IRS notifies the requester that you furnished an incorrect TIN,
or
10
<PAGE>
3. You are notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and dividends on your
tax return (for reportable interest and dividends only), or
4. You do not certify to the requester that you are not subject to
backup withholding under 3 above (for, reportable interest and dividend accounts
opened after 1983 only), or
5. You do not certify your TIN when required. See Signing the
Certification under Specific Instructions, below.
Certain payees and payments are exempt from backup withholding and
information reporting. See Payees and Payments Exempt From Backup Withholding,
below, and Exempt Payees and Payments under Specific Instructions, below, if you
are an exempt payee.
Payees and Payments Exempt From Backup Withholding. The following is a
list of payees exempt from backup withholding and for which no information
reporting is required. For interest and dividends, all listed payees are exempt
except item (9). For broker transactions, payees listed in (1) through (13) and
a person registered under the Investment Advisors Act of 1940 who regularly acts
as a broker is exempt. Payments subject to reporting under sections 6041 and
6041A are generally exempt from backup withholding only if made to payees
described in items (1) through (7), except certain corporations that provide
medical and health care services or bill and collect payments for such services
are not exempt from backup withholding or information reporting. Only payees
described in item (2) through (6) are exempt from backup withholding for barter
exchange transactions and patronage dividends.
(1) A corporation. (2) An organization exempt from tax under section
501(a), or an IRA, or a custodial account under section 403(b)(7), if the
account satisfies the requirements of section 401(f)(2). (3) The United States
or any of its agencies or instrumentalities. (4) A state, the District of
Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities. (5) A foreign government or any of its
political subdivisions, agencies, or instrumentalities. (6) An international
organization or any of its agencies or instrumentalities. (7) A foreign central
bank of issue. (8) A dealer in securities or commodities required to register in
the United States, the District of Columbia, or a possession of the United
States. (9) A futures commission merchant registered with the Commodity Futures
Trading Commission. (10) A real estate investment trust. (11) An entity
registered at all times during the tax year under the Investment Company Act of
1940. (12) A common trust fund operated by a bank under section 584(a). (13) A
financial institution. (14) A middleman known in the investment community as a
nominee or who is listed in the most recent publication of the American Society
of Corporate Secretaries, Inc., Nominee List. (15) A trust exempt from tax under
section 664 or described in section 4947.
Payments of dividend and patronage dividends generally not subject to
backup withholding include the following:
o Payments to nonresident aliens subject to withholding under section
1441.
o Payments to partnerships not engaged in a trade or business in the
United States and that have at least one nonresident alien partner.
o Payments of patronage dividends not paid in money.
o Payments made by certain foreign organizations.
o Section 404(k) payments made by an ESOP.
Payments of interest generally not subject to backup withholding
include the following:
o Payments of interest on obligations issued by individuals.
11
<PAGE>
Note: You may be subject to backup withholding if this interest is $600
or more and is paid in the course of the payer's trade or business and you have
not provided your correct TIN to the payer.
o Payments of tax-exempt interest (including exempt-interest dividends
under section 852).
o Payments described in section 6049(b)(5) to nonresident aliens.
o Payments on tax-free covenant bonds under section 1451.
o Payments made by certain foreign organizations.
o Mortgage interest paid to you.
Payments that are not subject to information reporting are also not
subject to backup withholding. For details, see sections 6041, 6041A, 6042,
6044, 6045, 6049, 6050A, and 6050N, and the applicable regulations.
PENALTIES
Failure To Furnish TIN. If you fail to furnish your correct TIN to a
requester, you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect.
Civil Penalty for False Information With Respect to Withholding. If you
make a false statement with no reasonable basis that results in no backup
withholding, you will be subject to a $500 penalty.
Criminal Penalty for Falsifying Information. If you willfully make a
false certification, then, in addition to any other penalty provided by law,
upon conviction thereof, you will be fined or imprisoned or both.
Misuse of TINS. If the requester discloses or uses TINs in violation of
Federal law, the requester may be subject to civil and criminal penalties.
SPECIFIC INSTRUCTIONS
Name. If you are an individual, you must generally provide the name
shown on your social security card. However, if you have changed your last name,
for instance, due to marriage, without informing the Social Security
Administration of the name change, please enter your first name, the last name
shown on your social security card, and your new last name.
If the account is in joint names, list first and then circle the name
of the person or entity whose number you enter in Part 1 of the form.
If you are a sole proprietor, you must furnish your individual name and
either your SSN or EIN. You may also enter your business name or "doing business
as" name on the business name line. Enter your name(s) as shown on your social
security card and/or as it was used to apply for your EIN on Form SS-4.
With respect to other entities, you should enter the business name as
shown on required Federal tax documents. This name should match the name shown
on the charter or other legal document creating the entity. You may enter any
business, trade, or "doing business as" name on the business name line.
12
<PAGE>
Signing the Certification.
1. Interest, Dividend, and Barter Exchange Accounts Opened
Before 1984 and Broker Accounts Considered Active During 1983.
You are required to furnish your correct TIN, but you are not
required to sign the certification.
2. Interest, Dividend, Broker, and Barter Exchange Accounts
Opened After 1983 and Broker Accounts Considered Inactive
During 1983. You must sign the certification or backup
withholding will apply. If you are subject to backup
withholding and you are merely providing your correct TIN to
the requester, you must cross out item 2 in the certification
before signing the form.
3. Real Estate Transactions. You must sign the certification.
You may cross out item 2 of the certification.
4. Other Payments. You are required to furnish your correct
TIN, but you are not required to sign the certification unless
you have been notified of an incorrect TIN. Other payments
include payments made in the course of the requester's trade
or business for rents, royalties, goods (other than bills for
merchandise), medical and health care services (including
payments to corporations), payments to a nonemployee for
services (including attorney and accounting fees), and
payments to certain fishing boat crew members.
5. Mortgage Interest Paid by You, Acquisition or Abandonment
of Secured Property, Cancellation of Debt, or IRA
Contributions. You are required to furnish your correct TIN,
but you are not required to sign the certification.
Exempt Payees and Payments. If you are exempt from backup withholding,
you should complete this form to avoid possible erroneous backup withholding.
Enter your correct TIN in Part 1, certify your taxpayer identification number on
Part 2 of the form, write "EXEMPT" on the face of the form, and sign and date
the form. If you are a nonresident alien or foreign entity not subject to backup
withholding, give the requester a complete Form W-8, Certificate of Foreign
Status.
TIN "Applied For." Follow the instructions under "How To Obtain a TIN"
above, and sign and date this form.
Signature. For a joint account, only the person whose TIN is shown in
Part 1 should sign.
Privacy Act Notice. Section 6109 requires you to furnish your correct
TIN to persons who must file information returns with the IRS to report
interest, dividends, and certain other income paid to you, mortgage interest you
paid, the acquisition or abandonment of secured property, cancellation of debt,
or contributions you made to an IRA. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. The IRS may also
provide this information to the Department of Justice for civil and criminal
litigation and to cities, states, and the District of Columbia to carry out
their tax laws. You must provide your TIN whether or not you are required to
file a tax return. Payers must generally withhold 31% of taxable interest,
dividend, and certain other payments to a payee who does not furnish a TIN to a
payer. Certain penalties may also apply.
13
<PAGE>
WHAT NAME AND NUMBER TO GIVE THE REQUESTER
<TABLE>
<CAPTION>
For this type of account: Give name and SSN of:
------------------------- ---------------------
<S> <C>
1. Individual The individual
2. Two or more individuals (joint account) The actual owner of the account or, if combined
funds, the first individual on the account(1)
3. Custodian account of a minor (Uniform Gift to Minors Act) The Minor(2)
4. a. The usual revocable savings trust (grantor is also
trustee) The grantor-trustee(3)
b. So-called trust account that is not a legal or valid
trust under state law The actual owner(3)
5. Sole proprietorship The owner(4)
For this type of account: Give name and EIN of:
------------------------- ---------------------
6. Sole proprietorship The owner(4)
7. A valid trust, estate, or pension trust Legal entity(5)
8. Corporate The corporation
9. Association, club, religious, charitable, educational,
or other tax-exempt organization The organization
10. Partnership The partnership
11. A broker or registered nominee The broker or nominee
12. Account with the Department of Agriculture in the name
of a public entity (such as a state or local government,
school district, or prison) that receives agricultural
program payments The public entity
Note: If no name is circled when more than one name is listed, the number will be considered to be that of the first name listed.
</TABLE>
- ----------------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has an SSN, that person's number must
be furnished.
(2) Circle the minor's name and furnish the minor's SSN.
(3) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has an SSN, that person's number must
be furnished.
(4) Show your individual name, but you may also enter your business or "doing
business as" name. You may use either your SSN or EIN (if you have one).
(5) List first and circle the name of the legal trust, estate, or pension
trust. (Do not furnish the TIN of the personal representative or trustee
unless the legal entity itself is not designated in the account title.)
14
