________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-24710
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CD RADIO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 52-1700207
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
SIXTH FLOOR, 2175 K STREET, N.W.
WASHINGTON, D.C. 20037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 296-6192
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On March 2, 1998 the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, using the closing price
of the Registrant's Common Stock on such date, was $153,419,223.
The number of shares of the Registrant's common stock outstanding as of
March 2, 1998 was 16,048,691.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Part into which incorporated:
Shareholders to be held on April 20, 1998 Part III -- Items 10, 11, 12 and 13
________________________________________________________________________________
CD RADIO INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------------- ----
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 22
Item 3. Legal Proceedings.............................................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............................................ 22
Item 4a. Executive Officers of the Registrant........................................................... 23
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........................... 25
Item 6. Selected Financial Data........................................................................ 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 26
Item 8. Financial Statements and Supplementary Data.................................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 46
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 47
Item 11. Executive Compensation......................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 47
Item 13. Certain Relationships and Related Transactions................................................. 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 48
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the 'Reform Act'), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made in
this Annual Report on Form 10-K. Any statements that express, or involve
discussions as to, expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as 'will likely result,' 'are expected to,' 'will continue,' 'is
anticipated,' 'estimated,' 'intends,' 'plans,' 'projection' and 'outlook') are
not historical facts and may be forward-looking and, accordingly, such
statements involve estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed in the forward-looking
statements. Accordingly, any such statements are qualified in their entirety by
reference to, and are accompanied by, the factors discussed throughout this
Annual Report on Form 10-K, and particularly in the risk factors set forth
herein under 'Business -- Risk Factors.' Among the key factors that have a
direct bearing on the Company's results of operations are the potential risk of
delay in implementing the Company's business plan; increased costs of
construction and launch of necessary satellites; dependence on satellite
construction and launch contractors; risk of launch failure; unproven market and
unproven applications of existing technology; and the Company's need for
substantial additional financing. These and other factors are discussed herein
including under 'Business -- Risk Factors' in Part I of this Annual Report on
Form 10-K.
The risk factors described herein could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements of the
Company made by or on behalf of the Company and investors, therefore, should not
place undue reliance on any such forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
ITEM 1. BUSINESS
CD Radio Inc. was founded in 1990 to pioneer and commercialize a digital
quality, multi-channel radio service broadcast directly from satellites to
vehicles. In October 1997, the Company was granted one of two licenses (the 'FCC
Licenses') from the Federal Communications Commission (the 'FCC') to build,
launch and operate a national satellite radio broadcast system. The Company is
constructing two satellites that it plans to launch into geosynchronous orbit to
broadcast its radio service throughout the United States. The Company's service,
which will be marketed under the brand name 'CD Radio,' is expected to consist
of 30 channels of commercial-free, digital quality music programming and 20
channels of news, sports and talk programming. CD Radio will be broadcast over a
frequency band, the 'S-band,' that will augment traditional AM and FM radio
bands. Under its FCC License, the Company has the exclusive use of a 12.5
megahertz portion of the S-band for this purpose. The Company currently expects
to commence CD Radio broadcasts in late 1999 at a subscription price of $9.95
per month.
The Company is positioning itself as an entertainment company and
accordingly plans to design and originate programming on each of its 30 music
channels. Each channel will be operated as a separate radio station, with a
distinct format. Certain music channels will offer continuous music while others
will have program hosts, depending on the type of music programming. CD Radio
will offer a wide range of music categories, such as:
1
Symphonic Classic Rock Soft Rock
Chamber Music 50's Oldies Singers & Songs
Opera 60's Oldies Beautiful Instrumentals
Today's Country Folk Rock Album Rock
Traditional Country Latin Ballads Alternative Rock
Contemporary Jazz Latin Rhythms New Age
Classic Jazz Reggae Broadway's Best
Blues Rap Gospel
Big Band/Swing Dance Children's Entertainment
Top of the Charts Urban Contemporary World Beat
The Company's 50 music and non-music channels will be housed at its
national broadcast studio (the 'National Broadcast Studio') which will be
located in New York City. The National Broadcast Studio will contain the
Company's music library, facilities for programming origination, programming
personnel and program hosts, as well as facilities to uplink programming to the
satellites, to activate or deactivate service to subscribers and to perform the
tracking, telemetry and control of the orbiting satellites.
THE CD RADIO OPPORTUNITY
The Company believes that there is a significant market for music and other
radio programming delivered through advanced radio technology. While television
technology has advanced steadily -- from black and white to color, from
broadcast to cable, and from ordinary to high-definition television -- the last
major advance in radio technology was the introduction of FM broadcasts. CD
Radio will provide a new generation of radio service, offering a wide variety of
music formats available on demand, 'seamless' signal coverage throughout the
United States and commercial-free, 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, a market
research organization, estimates that there will be approximately 198 million
registered private motor vehicles in the United States by the end of 1999, when
the Company expects to commence broadcasting. At present, approximately 89% of
all private vehicles have a radio that could easily be utilized to receive CD
Radio's broadcasts, with this number estimated to be approximately 182 million
vehicles in 1999, and approximately 199 million in 2004. CD Radio will initially
target a number of demographic groups among the drivers of these vehicles,
including 110 million commuters, 34 million of whom spend between one and two
hours commuting daily, three million truck drivers and three million owners of
recreational vehicles, among other groups.
According to 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 1996, approximately 79% of total radio listening was to FM
stations, which primarily provides music programming, as compared with AM
stations which devote a greater proportion of their programming to talk and
news.
The Company believes that its ability to offer a wide variety of musical
formats simultaneously throughout the United States will enable it to tap
significant unmet consumer demand for specialized musical programming. The
economics of the existing advertiser supported radio industry dictate that
conventional radio stations generally program for the greatest potential
audience. Even in the largest metropolitan areas, station formats are limited.
Nearly half of all commercial radio stations in the United States offer one of
only three formats: country, adult contemporary and news/talk, and the next
three most prevalent formats account for another 30% of all stations. Although
niche music categories such as classical, jazz, rap, gospel, oldies,
soundtracks, new age, children's programming and others accounted for
approximately 27% of sales of recorded music in 1996, such formats generally are
unavailable on existing radio stations in many markets. Even in New York City,
the nation's largest radio market, there are no radio stations devoted solely to
such programming as opera, blues, chamber
2
music, soundtracks, reggae, children's programming and many others. CD Radio's
wide choice of formats is expected to appeal to the large number of currently
underserved listeners.
In addition, the limited coverage area of conventional radio broadcasting
means that listeners often travel beyond the range of any single station. Unlike
conventional FM stations, which have an average range of only approximately 30
miles before reception fades, CD Radio's signal is designed to cover the entire
continental United States, enabling listeners almost always to remain within its
broadcast range. The Company's satellite delivery system is designed to permit
CD Radio to be received by motorists in all outdoor locations where the vehicle
has an unobstructed line-of-sight with one of the Company's satellites or is
within range of one of the Company's terrestrial repeating transmitters. The
ability to broadcast nationwide will also allow the Company to serve currently
underserved radio markets.
The Company also believes that CD Radio will have a competitive advantage
over conventional radio stations because its music channels will be
commercial-free. In contrast, conventional radio stations interrupt their
broadcasts with up to 18 minutes of commercials in every hour of music
programming, and most stations also frequently interrupt programming with news,
promotional announcements, public service announcements and miscellaneous
information. The Company believes that consumers dislike frequent radio
commercial interruptions and that 'station surfing' to avoid them is common.
PROGRESS TO DATE AND SIGNIFICANT DEVELOPMENT MILESTONES
The following chart sets forth the Company's past and projected development
milestones. There can be no assurance that the Company will be able to meet any
of its projections for 1998 or 1999, including completion of construction of its
National Broadcast Studio, completion of its satellite launches, or commencement
of its commercial operations in late 1999 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 Space Systems/Loral, Inc. ('Loral') for satellite construction
Contracted with Arianespace S.A. ('Arianespace') for satellite launch
Conducted additional nationwide focus groups
1994: Completed initial public offering of its common stock
1995: Completed Loral satellite design
Filed orbital slot registrations
Completed development of proprietary miniature satellite dish antenna
1996: Designed the radio card receiver
1997: Won auction for FCC license
Received one of two FCC national satellite radio broadcasting licenses
Completed $135 million private placement of 5% Delayed Convertible Preferred Stock ('5%
Preferred Stock')
Commenced construction of three satellites
Completed receipt of satellite broadcast patents
Arranged $105 million vendor financing with Arianespace Finance S.A. ('AEF')
Recruited key programming, marketing and financial management team
Completed strategic $25 million sale of Common Stock to Loral Space & Communications Ltd.
('Loral Space')
Executed radio manufacturer memoranda of understanding
3
Completed exchange offer of 10 1/2% Series C Convertible Preferred Stock for all outstanding
shares of 5% Preferred Stock
Completed public offerings of 3,050,00 shares of Common Stock and 15% Senior Secured Discount
Notes due 2007
1998: Select non-music channel content providers
Select chipset manufacturer
Select radio card manufacturer
Complete significant satellite construction milestones
Begin terrestrial repeating transmitter build-out
1999: Complete construction of National Broadcast Studio
Begin commercial production of radio cards
Complete satellite launches
Test markets
Begin commercial operations
THE CD RADIO SERVICE
CD Radio will offer motorists (i) a wide choice of finely focused music
formats; (ii) nearly seamless signal coverage throughout the continental United
States; (iii) commercial-free music programming; and (iv) plug and play
convenience.
Wide Choice of Programming. Each of CD Radio's 30 music channels will have
a distinctive format, such as opera, reggae, classic jazz and children's
entertainment, intended to cater to specific subscriber tastes. In most markets,
radio broadcasters target their programming to broad audience segments. Even in
the largest metropolitan markets the variety of station formats generally is
limited, and many of the Company's planned formats are unavailable.
'Seamless' Signal Coverage. CD Radio will be available throughout the
continental United States, enabling listeners almost always to be within its
broadcast range. The Company expects its nearly seamless signal will appeal to
motorists who frequently travel long distances, including truck drivers and
recreational vehicle owners, as well as commuters and others who outdrive the
range of their FM signals. In addition, the Company expects its broadcasts will
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 and not an advertiser-supported service, its
music channels will not contain commercials.
Plug and Play Convenience. Consumers will be able to receive CD Radio
broadcasts by acquiring an adapter (a 'radio card') and an easily attachable,
silver dollar-sized satellite dish antenna. Listeners will not be required to
replace their existing car radios and will be able to use the radio card by
plugging it into their radio's cassette or compact disc slot. CD Radio listeners
using a radio card will be able to push a button to switch between AM, FM and CD
Radio. Radio cards will have a visual display that will indicate the 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 30 channels of commercial-free, all-music
programming and 20 additional channels of other formats that do not require
compact disc quality audio, such as all-news, all-sports and all-talk
programming. Each music channel will have a distinctive format, intended to
cater to specific subscriber tastes. The Company expects that the initial
subscription fee for CD Radio, which will entitle subscribers to receive all CD
Radio channels, will be $9.95 per month.
4
The Company intends to recruit program managers from the recording,
broadcasting and entertainment industries to manage the development of daily
programming for each CD Radio channel. In order to be accessible to these
industries, the Company plans to locate its National Broadcast Studio in New
York City. Program managers also will coordinate the Company's continuing market
research to measure audience satisfaction, refine channel definitions and themes
and select program hosts for those channels that have hosts.
Music programming will be selected from the Company's music library. The
Company intends to create an extensive music library which will consist of a
deep range of recorded music in each genre broadcast. In addition to updating
its music library with new recordings as they are released, the Company will
seek to acquire recordings that in certain cases are no longer commercially
available.
In addition to its music channels, the Company expects to offer 20 channels
of news, sports and talk programming. The Company does not intend to produce the
programming for these non-music channels. The Company believes, based on its
discussions to date, that there is sufficient interest on the part of providers
of news, sports and talk programming in CD Radio to permit the Company to offer
a variety of non-music programming. News, talk and sports programming obtained
from third party sources will include commercial advertising. On January 22,
1998, the Company and Bloomberg L.P. announced that they entered into an
agreement under which CD Radio will carry Bloomberg's 24 hour news and
information service on CD Radio channel 31. Under terms of the agreement, CD
Radio will make Bloomberg News Radio available to all subscribers. The two
companies also agreed to work together to jointly to develop custom programming
for an additional non-music channel on CD Radio.
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)
the strategy for creating consumer awareness of CD Radio, (ii) the strategy for
generating subscriptions to CD Radio and (iii) the strategy for generating
purchases of radio cards and a new generation of radios capable of receiving
S-band as well as AM and FM signals ('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, 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 between
one and two hours daily. To reach these commuters, the Company plans to purchase
radio advertising spots on stations with frequent traffic reports, purchase
outdoor billboard advertising on long commute roads and place inserts in
gasoline credit card bills.
Niche Music Listeners. Niche music categories, such as classical, jazz,
rap, gospel, soundtracks, oldies and children's programming, constitute
approximately 27% of the market for recorded music sales. To reach niche music
listeners, the Company intends to work with the recording industry to include
print material about CD Radio inside niche music compact disc packaging, place
print advertising in specialty music magazines targeted to niche music listeners
and members of fan clubs,
5
conduct direct mailings to specialized music mailing lists of record clubs and
sponsor and advertise at certain music events.
Truck Drivers. According to the U.S. Department of Transportation, there
are approximately three million professional truck drivers in the United States,
of whom approximately 1.1 million are long-distance haulers. The Company intends
to place sampling displays at truck stops and to advertise in publications and
on internet sites which cater to truck drivers.
Recreational Vehicle Owners. There are approximately three million
recreational vehicles in the United States. The Company plans to advertise in
magazines targeted to recreational vehicle enthusiasts, conduct direct mailings
targeted to these individuals and place sampling displays at recreational
vehicle dealerships.
Sparse Radio Zones. More than 45 million people aged 12 and over live in
areas with such limited radio station coverage that the areas are not monitored
by Arbitron. The Company believes that of these people, approximately 22 million
people receive five or fewer FM stations, 1.6 million receive only one FM
station and at least one million people receive no FM stations. To reach these
consumers, the Company plans to utilize local newspaper advertisements during
the Company's initial launch period and target direct mailings to music
enthusiasts in these areas.
SALES OF RADIO CARDS AND S-BAND RADIOS
Consumers will receive CD Radio through radio cards or S-band radios and
associated miniature satellite dish antennas. Although the Company does not
intend to manufacture or distribute radio cards, S-band radios or miniature
satellite dish antennas, their availability will be critical to the Company
because they are the only means by which to receive CD Radio. Accordingly, the
Company has devised strategies to make radio cards and S-band radios together
with their associated miniature satellite dish antennas widely available to
consumers.
Sales of Radio Cards. The Company believes that the availability of radio
cards will be critical to the Company's market penetration for a number of years
following the introduction of CD Radio. The Company expects that radio cards
will be sold at retail outlets and mass merchandisers that sell consumer
electronics. The retail price of the radio card together with the miniature
satellite dish currently is expected to be approximately $200.
Sales of S-band Radios. Distribution of S-band radios is an important
element in the Company's marketing strategy. In 1996, U.S. consumers spent
approximately $3 billion on autosound equipment for aftermarket installation in
their vehicles, which the Company believes included approximately 4.6 million
new AM/FM radios. The Company believes that this autosound equipment market is
comprised largely of young, music oriented early adopters of new technology and
that, in the course of purchasing a new car radio, some of these consumers would
select one with built-in S-band capability. The Company expects S-band radios to
be sold at retail outlets that sell consumer electronics, as well as at
autosound specialty dealers. Like existing autosound equipment, S-band radios
will require installation by the retailer or a third party.
The Company's long term objective is to promote the adoption of S-band
radios as standard equipment or optional equipment 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
6
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 Company has designed the CD Radio delivery system to transmit an
identical signal from two satellites placed in geosynchronous orbit. The two
satellite system will permit CD Radio to provide seamless signal coverage
throughout the continental United States. This means that listeners will 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.
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
103 feet long, 8 feet wide and 31 feet tall.
Simple Design ('Bent Pipe'). 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.
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. The Company plans to position its two satellites in complementary
orbital locations so as to achieve efficient signal diversity and allow the
memory buffer to mitigate service interruptions which can result from signal
blockage and fading. The Company currently expects that its two satellites will
be placed in a geosynchronous orbit at equatorial crossings of 80[d]W and
110[d]W longitude. The Company has been granted patents on its satellite
broadcasting system, which incorporate a multisatellite design and memory
buffer.
7
As with any wireless broadcast service, the Company expects to experience
occasional 'dead zones' where the service from one satellite will be interrupted
by nearby tall buildings, elevations in topography, tree clusters, highway
overpasses and similar obstructions; however, in most such places the Company
expects subscribers will continue to receive a signal from its memory buffer. In
certain areas with high concentrations of tall buildings, such as urban cores,
or in tunnels, however, signals from both satellites will be blocked and
reception will be adversely affected. In such urban areas, the Company plans to
install terrestrial repeating transmitters to rebroadcast its satellite signals,
improving the quality of reception. The FCC has not yet established rules
governing such terrestrial repeaters, and the Company cannot predict the outcome
of the FCC's current rulemaking on this subject. The Company also will need to
obtain the rights to use of roofs of certain structures where the repeaters will
be installed. There can be no assurance that the Company can obtain such roof
rights on acceptable terms or in appropriate locations for the operation of CD
Radio.
Satellite Construction. The Company has entered into a contract for $275.8
million with Loral (the 'Loral Satellite Contract'), pursuant to which Loral is
building three satellites, two of which the Company intends to launch and one of
which it intends to keep in reserve as a spare. Loral has agreed to deliver the
first satellite to the launch site in Kourou, French Guiana by August 1999, to
deliver the second satellite to the launch site five months after the delivery
of the first satellite and to deliver the third satellite to a Company
designated storage site within eleven months of delivery of the second
satellite. Loral has also agreed to endeavor to accelerate delivery of the
second satellite to October 1999 and of the third satellite to April 2000. There
can be no assurance, however, that Loral will be able to meet such an
accelerated schedule. Although the Loral Satellite Contract provides for certain
late delivery payments, Loral will not be liable for indirect or consequential
damages or lost revenues or profits resulting from late delivery or other
defaults. Under the Loral Satellite Contract, the Company has an option to
order a fourth satellite at any time prior to March 10, 1999.
Following the launch of each satellite, Loral will conduct in-orbit
performance verification. In the event that such testing shows that a satellite
is not meeting the satellite performance specifications contained in the Loral
Satellite Contract, Loral and the Company have agreed to negotiate an equitable
reduction in the final payment to be made by the Company for the affected
satellite.
Launch Services. On July 22, 1997, the Company contracted for two launches
(the 'Arianespace Launch Service Agreement') for $176.0 million with
Arianespace, a leading supplier of satellite launch services. The initial launch
period for the first launch extends from August 1, 1999 to January 31, 2000. The
initial launch period for the second launch extends from October 1, 1999 to
March 31, 2000. These initial launch periods will be reduced to three month
periods at least twelve months prior to the start of the respective initial
launch periods. One month launch slots will be selected for each of the launches
at least eight months prior to the start of the respective shortened launch
periods. Launch dates will be selected for each of the launches at least four
months prior to the start of the respective launch periods. The Company is
entitled to accelerate the second launch by shipping the satellite to the launch
base and preparing the satellite for launch at the next available launch
opportunity.
If the Company's satellites are not available for launch during the
prescribed periods, the Company will arrange to launch the satellites on the
first launch dates available after the satellites are completed. While the
Company has been able to reschedule its reserved launch dates with Arianespace
in the past, there can be no assurance that it will be able to do so in the
future. If the Company postpones a launch for more than 12 months, or postpones
a launch within 12 months of a scheduled launch, postponement fees may be
charged under the terms of the Arianespace Launch Service Agreement.
Satellite launches are subject to significant risks, including satellite
destruction or damage during launch or failure to achieve proper orbital
placement. Launch failure rates vary depending on the particular launch vehicle
and contractor. Arianespace, one of the world's leading commercial satellite
launch service companies, has advised the Company that as of March 2, 1998, 95
of 100 Arianespace launches (95%) have been completed successfully since May
1984. See ' -- Risk Factors -- Dependence upon Satellites,' ' -- Risk
Factors -- Dependence upon Satellite and Launch Contractors' and ' -- Risk
Factors -- Satellite Launch Risks.' However, the Ariane 5, the particular launch
vehicle being planned for the launch of the Company's satellites, has had only
two launches, one of which was a failure. There is no assurance that
Arianespace's launches of the Company's satellites will be successful. If the
third qualification flight of the Ariane 5 launch vehicle results in a failure,
or if for any reason there have not
8
been at least two successful Ariane 5 launches prior to each of Company's
scheduled launches, or if Arianespace postpones one of Company's launches for
more than six months due to a delay in the development of the Ariane 5 program,
then, under the terms of the Arianespace Launch Service Agreement, the Company
has the right to require Arianespace to negotiate in good faith an amendment to
the Arianespace Launch Service Agreement to provide for launches using the
Ariane 4 launch vehicle, with launch dates on the first available Ariane 4
launch opportunities after the scheduled launch dates, unless the Company agrees
to earlier launch dates.
The Company will rely upon Arianespace for the timely launch of the
satellites. Failure of Arianespace to launch the satellites in a timely manner
could materially adversely affect the Company's business. The Arianespace Launch
Service Agreement entitles Arianespace to postpone either of Company's launches
for a variety of reasons, including technical problems, lack of co-passenger(s)
for the Company's launch, the need to conduct a replacement launch for another
customer, a launch of a scientific satellite whose mission may be degraded by
delay, or a launch of another customer's satellite whose launch was postponed.
Although the Arianespace Launch Service Agreement provides liquidated damages
for delay, depending on the length of the delay, and entitles the Company to
terminate the agreement for delay exceeding 12 months, there can be no assurance
that these remedies will adequately mitigate any damage to the Company's
business caused by launch delays.
Arianespace has assisted the Company in securing financing for the launch
service prices through its subsidiary, AEF. The Company and AEF have entered
into two loan agreements (collectively, the 'AEF Agreements') which govern the
provisions of such financing. See Note 3 to the Company's Consolidated Financial
Statements included in Part II of this Annual Report on Form 10-K.
Risk Management and Insurance. Two custom-designed, fully dedicated
satellites are required to broadcast CD Radio. The Company has selected a launch
service supplier that has achieved the most reliable launch record in its class
in the industry. Each of the Company's two operational satellites will be
launched separately. The Arianespace Launch Service Agreement contains a
provision entitling the Company to a replacement launch in the event of a launch
failure caused by the Arianespace launch vehicle. In such event, the Company
would utilize the spare satellite that will be constructed. Thus, the Company
does not intend to insure for this contingency. The Company intends to insure
against other contingencies, including a failure during launch caused by factors
other than the launch vehicle and/or a failure involving the second satellite in
a situation in which the spare satellite has been used to replace the first
satellite. If the Company is required to launch the spare satellite due to
failure of the launch of one of the operational satellites, its operational
timetable would be delayed for approximately six months or more. The launch or
in-orbit failure of two satellites would require the Company to arrange for
additional satellites to be built and could delay the commencement or
continuation of the Company's operations for three years or more. See ' -- Risk
Factors -- Dependence upon Satellites,' ' -- Risk Factors -- Dependence upon
Satellite and Launch Contractors' and ' -- Risk Factors -- Satellite Launch
Risks.'
Once properly deployed and operational, the historical risk of premature
total satellite failure has been less than 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.
THE RECEIVERS
Subscribers to CD Radio will not need to replace their existing AM/FM car
radios. Instead, they will be able to receive CD Radio in their vehicles using a
radio card that has been designed to plug easily into the cassette or compact
disc slot of their existing radio. Customers also will be able to receive CD
Radio using an S-band radio. CD Radio reception with either a radio card or an
S-band radio will be via a miniature silver dollar-sized satellite dish antenna
mounted on a small base housing a wireless transmitter that will relay the CD
Radio signal to the vehicle's radio card or S-band radio. Neither the radio
cards, S-band radios nor the miniature satellite dish antennas currently are
available and the Company is unaware of any manufacturer currently developing
such products.
9
The Company anticipates that radio cards will be easy to install because
they will require no wiring or other assembly and will be installed simply by
inserting the card into the radio's cassette or compact disc slot. Upon
insertion of the card into the radio, listeners will be able to switch between
AM, FM and CD Radio. The radio card can be removed by pushing the radio's
'eject' button. Radio cards are portable and will be able to be moved from car
to car, if desired. S-band radios will be capable of receiving AM, FM and S-band
radio transmissions. The Company anticipates that S-band radios will be similar
to conventional AM/FM radios in size and appearance. Like existing conventional
radios, a number of these radios may also incorporate cassette or compact disc
players.
In addition to a radio card or S-band radio, a vehicle must be equipped
with a miniature satellite dish antenna in order to receive CD Radio. To satisfy
this requirement, the Company has designed a miniature satellite dish antenna.
The 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. All that is required is that
the satellite dish antenna be positioned upward on an unobstructed line-of-sight
with one of the Company's satellites or be within range of a terrestrial
repeating transmitter. The satellite dish antenna will be mounted on a small
base housing a solar recharging battery and wireless transmitter that will relay
the CD Radio signal to a vehicle's radio card or S-band radio.
The Company expects radio cards, S-band radios and miniature satellite dish
antennas to be sold through a variety of retail outlets, including consumer
electronics, car audio, department and music stores. The Company currently
expects that the radio card together with the satellite dish antenna can be sold
at a retail price of approximately $200.
The Company believes that, when manufactured in quantity, S-band radios
will be incrementally more expensive than today's car radios, while radio
cards, which will have no installation costs if the customer has a radio
with a cassette or compact disc slot, will be less expensive. The Company
expects that the satellite dish antenna will be substantially less expensive
than the radio card for consumers wishing to purchase additional dish antennas
separately. The Company believes that the availability and pricing of plug
and play radio cards will be of prime importance to the Company's market
penetration for a number of years.
THE NATIONAL BROADCAST STUDIO
The Company plans to originate its 50 channels of programming from its
National Broadcast Studio, which will be located in New York City. The National
Broadcast Studio will house the Company's music library, facilities for
programming origination, programming personnel and program hosts, as well as
facilities to uplink programming to the satellites, to activate or deactivate
service to subscribers and to perform the tracking, telemetry and control of the
orbiting satellites.
The Company 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 two satellites for broadcast to CD Radio
subscribers. The Company expects that its broadcast transmissions will be
uplinked to its satellites at frequencies in the 7025.0-7075.0 MHz band. The
satellites will receive and convert the signal to the 2320.0-2332.5 MHz band.
The satellites then will broadcast the signal to the United States, at a power
sufficient to enable its receipt directly by the miniature satellite dish
antennas to be used by subscribers.
Service-related commands also will be relayed from the National Broadcast
Studio to the Company's satellites for retransmission to subscribers' radio
cards and S-band radios. These service-related commands include those required
to (i) initiate and suspend subscriber service, (ii) change the
10
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 16, 1998 the Company entered into an agreement with GE American
Communications Inc. ('GE Americom'), a subsidiary of GE Capital Corp., to
provide back-up telemetry tracking and control services for the Company's
satellites for a 15-year term. The agreement requires the Company to make an
initial nonrefundable payment of $3.0 million on signing, and annual payments
ranging from $0.9 - $1.95 million during the term, beginning on the launch of
the Company's satellites. The initial $3.0 million payment is to be credited
against payments that become due in the last two years of the term.
The Company has reached an agreement in principle on the significant
economic terms of a 15-year lease for an aggregate of approximately 100,000
square feet of class A office space in New York City to serve as the future
location of its executive offices and National Broadcast Studio. The Company
anticipates entering into a definitive lease in April 1998. Occupancy of the
space is expected in March 1999.
DEMONSTRATIONS OF THE CD RADIO SYSTEM
In support of the Company's application for the FCC License, the Company
conducted a demonstration of its proposed radio service from November 1993
through November 1994. The demonstration involved the transmission of S-band
signals to a prototype S-band radio and miniature satellite dish antenna
installed in a car to simulate certain transmission characters of the Company's
planned system. Because there currently are no commercial satellites in orbit
capable of transmitting S-band frequencies to the United States, the Company
constructed a terrestrial simulation of its planned system. For this purpose,
the Company selected a test range covering several kilometers near Washington,
D.C. which included areas shadowed by buildings, trees and overpasses. The
Company placed S-band transmitters on the rooftops of a number of tall buildings
in such a way as to simulate the signal power and angle of arrival of satellite
transmissions to be used for its proposed service. The Company also modified the
standard factory installed sound system of an automobile to create a radio
receiving AM, FM and S-band, and integrated the Company's satellite dish antenna
into the car roof. The demonstrations included the reception of 30 channels of
compact disc quality stereo music by the prototype radio while the car was
driven throughout the range. Prior to testing with orbiting satellites,
miniature satellite dish antennas and radio cards or S-band radios suitable for
commercial production, there can be no assurance that the CD Radio system will
function as intended. See ' -- Risk Factors -- Reliance on Unproven Technology.'
COMPETITION
The Company expects to face competition from two principal sources: (i)
conventional AM/FM radio broadcasting, including, when available, terrestrial
digital radio broadcasting; and (ii) American Mobile Radio Corporation ('AMRC'),
the other holder of an FCC License.
The AM/FM radio broadcasting industry is very competitive. Radio stations
compete for listeners and advertising revenues directly with other radio
stations within their markets on the basis of a variety of factors, including
program content, on-air talent, transmitter power, assigned frequency, audience
characteristics, local program acceptance and the number and characteristics of
other radio stations in the market. Many of the Company's radio broadcasting
competitors have substantially greater financial, management and technical
resources than the Company.
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
11
compact disc sound quality. In order to receive these digital AM/FM broadcasts,
listeners will need to purchase new digital radios which currently are not
commercially available. While the development of digital broadcasting would
eliminate one of the advantages of CD Radio over FM radio, the Company does not
believe it would affect broadcasters' ability to address the other advantages of
CD Radio. In addition, the Company views the growth of terrestrial digital
broadcasting as a positive force that would be likely to encourage radio
replacement and thereby facilitate the introduction of S-band radios.
Although certain existing satellite operators currently provide music
programming to customers at fixed locations, these operators are incapable of
providing CD Radio-type service to vehicles as a result of some or all of the
following reasons: (i) these operators do not broadcast on radio frequencies
suitable for reception in a mobile environment; (ii) CD Radio-type service
requires fully dedicated satellites; (iii) CD Radio type service requires a
custom satellite system design; and (iv) CD Radio-type service requires
regulatory approvals, which existing satellite operators do not have.
AMRC, a subsidiary of American Mobile Satellite Corporation ('AMSC'), is
the other holder of an FCC License. AMRC, in which WorldSpace, Inc. (a company
that plans to provide satellite radio service outside of the United States) has
a 20% interest, and AMSC, which is owned in part by the Hughes Electronics
Corporation subsidiary of General Motors Corporation, have financial, management
and technical resources that exceed those of the Company. In addition, the FCC
could grant new licenses which would enable further competition to broadcast
satellite radio. Finally, there are many portions of the electromagnetic
spectrum that are currently licensed for other uses and certain other portions
for which licenses have been granted by the FCC without restriction as to use,
and there can be no assurance that these portions of the spectrum could not be
utilized for satellite radio broadcasting in the future. Although any such
licensees would face cost and competition barriers, there can be no assurance
that there will not be an increase in the number of competitors in the satellite
radio industry. See ' -- Risk Factors -- Competition.'
The Company believes that cassettes and compact discs generally are used in
automobiles as supplements to radio rather than as substitutes, and that these
media are used primarily as backup when radio reception is unavailable or
unsatisfactory, or when desired programming is unavailable or unsatisfactory.
Cassettes and compact discs lack the convenience of radio, as well as the
spontaneity and freshness that characterize radio programming. According to a
1996 market study, although almost all vehicles contain either a cassette or
compact disc player, 87% of automobile commuters listened to the radio an
average of 50 minutes a day while commuting. Accordingly, the Company does not
view its service as directly competitive with these media.
TECHNOLOGY AND PATENTS
The Company has been granted certain U.S. patents (U.S. Patent Nos.
5,278,863; 5,319,673; 5,485,485; 5,592,471) on various features of satellite
radio technology. 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 or infringed by others, or that if
challenged would be held to be valid. The Company has filed patent applications
covering CD Radio system technology in Argentina, Australia, Brazil, Canada,
China, France, Germany, India, Italy, Japan, South Korea, Mexico, the
Netherlands, Spain, Switzerland and the United Kingdom, and has been granted
patents in a number of these countries. There can be no assurance that
additional foreign patents will be awarded to the Company or, if any such
patents are granted, that the laws of foreign countries where the Company
receives patents will protect the Company's proprietary rights to its technology
to the same extent as the laws of the United States. Although the Company
believes that obtaining patent protection may provide benefits to the Company,
the Company does not believe that its business is dependent on obtaining patent
protection or successfully defending any such patents that may be obtained
against infringement by others.
Certain of the Company's know-how and technology are not the subject of
U.S. patents. To protect its rights, the Company requires certain employees,
consultants, advisors and collaborators to enter into confidentiality
agreements. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure. In
addition, the Company's business may be adversely affected by competitors who
independently develop competing technologies.
12
The Company's proprietary technology was developed by Robert D. Briskman,
the Company's co-founder, and was assigned to the Company. The Company believes
that Mr. Briskman independently developed the technology covered by the
Company's issued patents and that it does not violate the proprietary rights of
any person. There can be no assurance, however, that third parties will not
bring suit against the Company for patent infringement or for declaratory
judgment to have any patents which may be issued to the Company declared
invalid.
If a dispute arises concerning the Company's technology, litigation might
be necessary to enforce the Company's patents, to protect the Company's trade
secrets or know-how or 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 of
1934, as amended (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. AMRC 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 is 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 could 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 full
Commission was filed by one of the low-bidding applicants in the auction. This
petition requests, among other things, that the Commission adopt restrictions on
foreign ownership, which were not applied in the a license issued to the Company
by the FCC's International Bureau on October 10, 1997 (the 'IB Order'), and, on
the basis of the Company's ownership, overrule the IB Order. Although the
Company believes the FCC will uphold the IB Order, the Company cannot predict
the ultimate outcome of any proceedings relating to this petition or any other
proceeding that may be filed. If this petition is denied, the complaining party
may file an appeal with the U.S. Court of Appeals which must find that the
decision of the FCC was not supported by substantial evidence, or was arbitrary,
capricious or unlawful in order to overturn the grant of the Company's FCC
License.
Pursuant to the FCC Licensing Rules, the Company is required to meet
certain progress milestones. Licensees are required to begin satellite
construction within one year of the grant of the FCC License; to launch and
begin operating their first satellites within four years; and to begin operating
their entire system within six years. The IB Order states that failure to meet
those milestones will render the FCC License null and void. On May 6, 1997, the
Company notified the FCC that it had begun construction on the first of its
satellites. On March 27, 1997, a third party requested reconsideration of the
FCC Licensing Rules, seeking, among other things, that the time period allotted
for these milestones be shortened. The Company cannot predict the outcome of
this petition.
The term of the FCC License for each satellite is eight years, commencing
from the time each satellite is declared operational after having been inserted
into orbit. Upon the expiration of the term with respect to each satellite, the
Company will be required to apply for a renewal of the relevant FCC License.
Although the Company anticipates that, absent significant misconduct on the part
of the
13
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. The United
States government must coordinate the United States' use of this spectrum with
the Canadian and Mexican governments before any United States satellite may
become operational. The Company has performed analyses which show that its
proposed use will not cause undue interference to most Canadian stations and can
be coordinated with others by various techniques. The FCC Licensing Rules
require that the licensees successfully complete detailed frequency coordination
with existing operations in Canada and Mexico, and the IB Order conditions the
FCC License on such coordination. With respect to Mexico, this obligation could
be complicated by that country's plan to license a similar satellite radio
service on the same frequencies as licensed for use by the Company in the United
States. There can be no assurance that the licensees will be able to coordinate
the use of this spectrum with Canadian or Mexican operators or will be able to
do so in a timely manner.
In order to operate its satellites, the Company also will have to obtain a
license from the FCC to operate its uplink facility. Normally, such approval is
sought after issuance of the FCC License. Although there can be no assurances
that such licenses will be granted, the Company does not expect difficulties in
obtaining a feeder link frequency and ground station approval in the ordinary
course.
The CD Radio system is designed to permit CD Radio to be received by
motorists in all outdoor locations where the vehicle has an unobstructed
line-of-sight with one of the Company's satellites. In certain areas with high
concentrations of tall buildings, such as urban cores, or in tunnels, signals
from both satellites will be blocked and reception will be adversely affected.
In such cases, the Company plans to install terrestrial repeating transmitters
to broadcast CD Radio. The FCC has not yet established rules governing the
application procedure for obtaining authorizations to construct and operate
terrestrial repeating transmitters. A rulemaking on the subject was initiated by
the FCC on March 3, 1997. The deadline for the public to file comments was June
13, 1997 and the deadline for filing reply comments was June 27, 1997. Several
comments were received by the FCC that sought to cause the FCC to consider
placing restrictions on the Company's ability to deploy its terrestrial
repeating transmitters. However, the Company believes that the FCC will neither
prohibit it from deploying such transmitters nor place unreasonable requirements
upon such deployment.
AMRC 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 final receiver design is interoperable with respect to the
final receiver design of the other licensee. The Company believes that it can
design an interoperable receiver, but there can be no assurance that this effort
will be successful or result in a commercially feasible receiver.
The Company's business operations as currently contemplated may require a
variety of permits, licenses and authorizations from governmental authorities
other than the FCC, but the Company has not identified any such permit, license
or authorization that it believes could not be obtained in the ordinary course
of business.
PERSONNEL
As of March 2, 1998, the Company had 14 employees, of whom four were
involved in technology development, six in business development and four 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 130 employees. The extent and timing of the increase in staffing
will depend on the availability of qualified personnel and other developments in
the Company's business. None of the Company's employees is represented by a
labor union, and the Company believes that its relationship with its employees
is good.
14
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
the following factors should be considered carefully in evaluating the Company
and its business. This Annual Report on Form 10-K contains certain forward
looking statements within the meaning of the federal securities laws. Actual
results and the timing of certain events could differ materially from those
projected in the forward looking statements due to a number of factors,
including those set forth below and elsewhere herein. See 'Special Note
Regarding Forward Looking Statements.'
EXPECTATION OF CONTINUING LOSSES; NEGATIVE CASH FLOW
The Company is a development stage company and its proposed service, CD
Radio, is in an early stage of development. Since its inception, the Company's
activities have been concentrated on raising capital, obtaining required
licenses, developing technology, strategic planning and market research. From
its inception on May 17, 1990 through December 31, 1997, the Company has had no
revenues and has incurred aggregate net losses of approximately $23.3 million,
including net losses of approximately $2.8 million during the year ended
December 31, 1996 and $4.7 million during the year ended December 31, 1997. 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. The ability of the Company to
generate revenues and achieve profitability will depend upon a number of
factors, including the timely receipt of all necessary FCC authorizations, the
successful and timely construction and deployment of its satellite system, the
development and manufacture of radio cards, S-band radios and miniature
satellite dish antennas by consumer electronics manufacturers, the timely
establishment of its National Broadcast Studio and the successful marketing and
consumer acceptance of CD Radio. There can be no assurance that any of the
foregoing will be accomplished, that CD Radio will ever commence operations,
that the Company will attain any particular level of revenues or that the
Company will achieve profitability.
NEED FOR SUBSTANTIAL ADDITIONAL FINANCING
The Company estimates that it will require approximately $648.5 million to
develop and commence commercial operation of CD Radio by the end of 1999. Of
this amount, the Company has raised approximately $446.4 million to date,
leaving anticipated additional cash needs of approximately $202.1 million to
fund its operations through 1999. The Company anticipates additional cash
requirements of approximately $100.0 million to fund its operations through the
year 2000. The Company expects to finance the remainder of its funding
requirements through the issuance of debt or equity securities or a combination
thereof. Additional funds, however, would be required in the event of delays,
cost overruns, launch failure or other adverse developments. Furthermore, if the
Company were to exercise its option under the Loral Satellite Contract to
purchase and deploy an additional satellite, substantial additional funds would
be required. The Company currently does not have sufficient financing
commitments to fund all of its capital needs, and there can be no assurance that
the Company will be able to obtain additional financing on favorable terms, if
at all, or that it will be able to do so on a timely basis. The AEF Agreements
and the indenture (the 'Indenture') governing the Company's outstanding 15%
Senior Secured Discount Notes due 2007 (the 'Notes') issued in November 1997
contain, and documents governing any other future indebtedness are likely to
contain, provisions that limit the ability of the Company to incur additional
indebtedness. The Company has substantial near-term funding requirements related
to the construction and launch of its satellites. The Company is committed to
make aggregate payments of $275.8 million under the Loral Satellite Contract and
$176.0 million under the Arianespace Launch Service Agreement. Under the Loral
Satellite Contract, payments are to be made in 22 installments, which commenced
in April 1997. Payments due under the Arianespace Launch Service Agreement
commenced in November 1997 for the first launch and February 1998 for the second
launch. See 'Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Funding
Requirements.' Failure to secure the necessary financing on a timely basis could
result in delays and increases in the cost of satellite construction or launch
or other activities necessary to put CD Radio into operation, could cause the
Company to default on its commitments to its satellite construction or satellite
launch
15
contractors, its creditors or others, could render the Company unable to put CD
Radio into operation and could force the Company to discontinue operations or
seek a purchaser for its business. The issuance by the Company of additional
equity securities could cause substantial dilution of the interest in the
Company's current stockholders of the common stock, par value $.001 per share
(the 'Common Stock').
POSSIBLE DELAYS AND ADVERSE EFFECT OF DELAY ON FINANCING REQUIREMENTS
The Company currently expects to begin offering CD Radio in late 1999. The
Company's ability to meet that objective will depend on several factors. For
both of the two satellites required for the CD Radio service to be launched and
in operation by the end of 1999, Loral will be required to deliver the second
satellite three months prior to the delivery date specified in the contract,
which cannot be assured. Furthermore, the launch of both satellites will have to
occur within the early months of the launch periods reserved with Arianespace,
which also cannot be assured. A significant delay in the planned development,
construction, launch and commencement of operation of the Company's satellites
would have a material adverse effect on the Company. Other delays in the
development or commencement of commercial operations of CD Radio may also have a
material adverse effect on the Company. Any such delays could result from a
variety of causes, including delays associated with obtaining additional FCC
authorizations, coordinating use of spectrum with Canada and Mexico, inability
to obtain necessary financing in a timely manner, delays in or modifications to
the design, development, construction or testing of satellites, the National
Broadcast Studio or other aspects of the CD Radio system, changes of technical
specifications, delay in commercial availability of radio cards, S-band radios
or miniature satellite dish antennas, failure of the Company's vendors to
perform as anticipated or a delayed or unsuccessful satellite launch or
deployment. During any period of delay, the Company would continue to have
significant cash requirements, including capital expenditures, administrative
and overhead costs, contractual obligations and debt service requirements that
could materially increase the aggregate amount of funding required to permit the
Company to commence operating CD Radio. Additional financing may not be
available on favorable terms or at all during periods of delay. Delay also could
cause the Company to be placed at a competitive disadvantage in relation to any
competitor that succeeds in beginning operations earlier than the Company.
RELIANCE ON UNPROVEN APPLICATIONS OF TECHNOLOGY
CD Radio is designed to be broadcast from two satellites in geosynchronous
orbit that transmit identical signals to radio cards or S-band radios through
miniature satellite dish antennas. This design involves new applications of
existing technology which have not been deployed and there can be no assurance
that the CD Radio system will work as planned. In addition, radio cards, S-band
radios and miniature satellite dish antennas are not currently available. In
certain areas with high concentrations of tall buildings and other obstructions,
such as large urban areas, or in tunnels, signals from both satellites will be
blocked and CD Radio reception will be adversely affected. In urban areas, the
Company plans to install terrestrial repeating transmitters to rebroadcast CD
Radio; however, certain areas with impediments to satellite line-of-sight may
still experience 'dead zones.' Although management believes that the technology
developed by the Company will allow the CD Radio system to operate as planned,
there can be no assurance that it will do so.
DEPENDENCE UPON SATELLITE AND LAUNCH CONTRACTORS
The Company's business will depend upon the successful construction and
launch of the satellites which will be used to transmit CD Radio. The Company
will rely upon its satellite vendor, Loral, for the construction and timely
delivery of these satellites. Failure by Loral to deliver functioning satellites
in a timely manner could materially adversely affect the Company's business.
Although the Loral Satellite Contract provides for certain late delivery
penalties, Loral will not be liable for indirect or consequential damages or
lost revenues or profits resulting from late delivery or other defaults. Title
and risk of loss for the first and second satellites are to pass to the Company
at the time of launch. The satellites are warranted to be in accordance with the
performance specifications in the Loral Satellite Contract and free from defects
in materials and workmanship at the time of delivery, which for the first
16
two satellites will be deemed to occur at the time of arrival of the satellites
at the launch base. After delivery, no warranty coverage applies if the
satellite is launched.
The Company is dependent on its satellite launch vendor, Arianespace, for
the construction of launch vehicles and the successful launch of the Company's
satellites. Failure of Arianespace to launch the satellites in a timely manner
could materially adversely affect the Company's business. The Arianespace Launch
Service Agreement entitles Arianespace to postpone either of the Company's
launches for a variety of reasons, including technical problems, lack of
co-passenger(s) for the Company's launch or the need to conduct a replacement
launch for another customer, a launch of a scientific satellite whose mission
may be degraded by delay, or a launch of another customer's satellite whose
launch was postponed. Although the Arianespace Launch Service Agreement provides
liquidated damages for delay, depending on the length of the delay, and entitles
the Company to terminate the agreement for delay exceeding 12 months, there can
be no assurance that these remedies will adequately mitigate any damage to the
Company's business caused by launch delays. The liability of Arianespace in the
event of a launch failure is limited to providing a replacement launch in the
case of a total launch failure or paying an amount based on lost satellite
capacity in the case of a partial launch failure.
SATELLITE LAUNCH RISKS
Satellite launches are subject to significant risks, including launch
failure, satellite destruction or damage during launch and failure to achieve
proper orbital placement. Launch failure rates may vary depending on the
particular launch vehicle and contractor. Although past experience is not
necessarily indicative of future performance, Arianespace has advised the
Company that as of March 2, 1998, 95 of 100 Arianespace launches (95%) have been
completed successfully since May 1984. However, the Ariane 5, the particular
launch vehicle intended for the launches of the Company's satellites, has had
only two launches, one of which was a failure. In the event of a significant
delay in the Ariane 5 program, the Company has the right to request launch on an
Ariane 4 launch vehicle. There is no assurance that Arianespace's launches of
the Company's satellites will be successful. Satellites also may fail to achieve
a proper orbit or be damaged in space. As part of its risk management program,
the Company plans to construct a third, backup satellite and to obtain insurance
covering a replacement launch to the extent required to cover risks not assumed
by Arianespace under the Arianespace Launch Service Agreement. See
' -- Insurance Risks.' The launch of a replacement satellite would delay the
commencement or continuation of the Company's commercial operations for a period
of at least several months, which could have a material adverse effect on the
demand for the Company's services and on its revenues and results of operations.
UNCERTAIN MARKET ACCEPTANCE
There is currently no satellite radio service such as CD Radio in
commercial operation in the United States. As a result, the extent of the
potential demand for such a service and the degree to which the Company's
proposed service will meet that demand cannot be estimated with certainty, and
there can be no assurance that there will be sufficient demand for CD Radio to
enable the Company to achieve significant revenues or cash flow or profitable
operations. The success of CD Radio in gaining market acceptance will be
affected by a number of factors beyond the Company's control, including the
willingness of consumers to pay subscription fees to obtain satellite radio
broadcasts, the cost, availability and consumer acceptance of radio cards,
S-band radios and miniature satellite dish antennas, the marketing and pricing
strategies of competitors, the development of alternative technologies or
services and general economic conditions.
LIMITED LIFE OF SATELLITES; IN-ORBIT FAILURE
A number of factors will affect the useful lives of the Company's
satellites, including the quality of construction, the expected gradual
environmental degradation of solar panels, the amount of fuel on board and the
durability of component parts. Random failure of satellite components could
result in damage to or loss of a satellite. In rare cases, satellites could also
be damaged or destroyed by
17
electrostatic storms or collisions with other objects in space. If the Company
is required to launch the spare satellite, due to failure of the launch or
in-orbit failure of one of the operational satellites, its operational timetable
would be delayed for approximately six months or more. The launch or in-orbit
failure of two satellites would require the Company to arrange for additional
satellites to be built and could delay the commencement or continuation of the
Company's operations for three years or more. The Company's satellites are
expected to have useful lives of approximately 15 years, after which their
performance in delivering CD Radio is expected to deteriorate. There can be no
assurance, however, of the specific longevity of any particular satellite. The
Company's operating results would be adversely affected in the event the useful
life of its initial satellites is significantly shorter than 15 years.
INSURANCE RISKS
Pursuant to the Loral Satellite Contract and the Arianespace Launch Service
Agreement, the Company is the beneficiary of certain limited warranties with
respect to the services provided under each agreement. However, these limited
warranties do not cover a substantial portion of the risks inherent in satellite
launches or in-orbit operations, and the Company will have to obtain insurance
to adequately protect against such risks.
The Arianespace Launch Service Agreement contains a provision entitling the
Company to a replacement launch in the event of a launch failure caused by the
launch vehicle used to launch the Company's satellites. In such event, the
Company would utilize the spare satellite that it is having constructed. Thus,
the Company does not intend to purchase additional insurance for launch failure
of the launch vehicle. The Company intends to insure against other
contingencies, including a failure during launch caused by factors other than
the launch vehicle and/or a failure involving the second or third satellite in a
situation in which the spare satellite has been used to replace the first or
second satellite. Any adverse change in insurance market conditions may result
in an increase, which may be substantial, in the insurance premiums paid by the
Company. There is no assurance that launch insurance will be available or, if
available, that it can be obtained at a cost or on terms acceptable to the
Company.
If the launch of either of the Company's two satellites is a full or
partial failure or if, following launch, either of the satellites does not
perform to specifications, there may be circumstances in which insurance will
not fully reimburse the Company for its expenditures with respect to the
applicable satellite. In addition, the Company has not acquired insurance that
would reimburse the Company for business interruption, loss of business and
similar losses which might arise from such events or from delay in the launch of
either of the satellites. Any insurance obtained by the Company also will likely
contain certain exclusions and material change conditions that are customary in
the industry.
RISK ASSOCIATED WITH CHANGING TECHNOLOGY
The industry in which the Company operates is characterized by rapid
technological advances and innovations. There is no assurance that one or more
of the technologies utilized or under development by the Company will not become
obsolete, or that its services will be in demand at the time they are offered.
The Company will be dependent upon technologies developed by third parties to
implement key aspects of its proposed system, and there can be no assurance that
more advanced technologies will be available to the Company on a timely basis or
on reasonable terms or that more advanced technologies will be used by the
Company's competitors and that such technologies will be available to the
Company. In addition, unforeseen problems in the development of the Company's
satellite radio broadcasting system may occur that could adversely affect
performance, cost or timely implementation of the system and could have a
material adverse effect on the Company.
UNAVAILABILITY OF RADIO CARDS, S-BAND RADIOS OR MINIATURE SATELLITE DISH
ANTENNAS
The Company's business strategy requires that subscribers to CD Radio
purchase radio cards or S-band radios as well as the associated miniature
satellite dish antennas in order to receive the service. Neither the radio
cards, S-band radios nor miniature satellite dish antennas currently are
available, and the Company is unaware of any manufacturer currently developing
such products. The Company does
18
not intend to manufacture or distribute radio cards, S-band radios or miniature
satellite dish antennas. The Company has entered into non-binding memoranda of
understanding with two major consumer electronics manufacturers, and has
commenced discussions with several other such manufacturers, regarding the
manufacture of radio cards, S-band radios and miniature satellite dish antennas
for retail sale in the United States. The Company currently intends to select
one manufacturer for each of these products on an exclusive basis for the first
year of CD Radio broadcasts. There can be no assurance, however, that these
discussions or memoranda of understanding will result in a binding commitment on
the part of any manufacturer to produce radio cards, S-band radios and miniature
satellite dish antennas in a timely manner and at an affordable price so as to
permit the widespread introduction of CD Radio in accordance with the Company's
business plan or that sufficient quantities of radio cards, S-band radios and
miniature satellite dish antennas will be available to meet anticipated consumer
demand. The failure to have one or more consumer electronics manufacturers
develop these products for commercial sale in a timely manner, at an affordable
price and with mass market nationwide distribution would have a material adverse
effect on the Company's business. In addition, the FCC, in its order granting
the FCC License, conditioned the Company's license on certification by the
Company that its final receiver design is interoperable with respect to the
final receiver design of the other licensee, which has proposed to use a
different transmission technology from that of the Company. The Company believes
that it can design an interoperable receiver, but there can be no assurance that
this effort will be successful or result in a commercially feasible receiver.
NEED TO OBTAIN RIGHTS TO PROGRAMMING
In connection with its music programming, the Company will be required to
negotiate and enter into royalty arrangements with performing rights societies,
such as The American Society of Composers, Authors and Publishers, Broadcast
Music, Inc. and SESAC, Inc. These organizations collect royalties and distribute
them to songwriters and music publishers. Copyright users negotiate a fee with
these organizations based on a percentage of advertising and/or subscription
revenues. Broadcasters currently pay a combined total of approximately 3% of
their revenues to the performing rights societies. The Company also will be
required to negotiate similar arrangements, pursuant to the Digital Performance
Right in Sound Recordings Act of 1995 (the 'Digital Recordings Act'), with the
owners of the sound recordings. The determination of certain royalty
arrangements with the owners of sound recordings under the Digital Recordings
Act currently are subject to arbitration proceedings. The Company believes that
it will be able to negotiate royalty arrangements with these organizations and
the owners of sound recordings, but there can be no assurance as to the terms of
any such royalty arrangements ultimately negotiated or established by
arbitration.
DEVELOPMENT OF BUSINESS AND MANAGEMENT OF GROWTH
The Company has not yet commenced CD Radio broadcasts. The Company expects
to experience significant and rapid growth in the scope and complexity of its
business as it proceeds with the development of its satellite radio system and
the commencement of CD Radio. Currently, the Company has only fourteen employees
and does not have sufficient staff to program its broadcast service, manage
operations, control the operation of its satellites, handle sales and marketing
efforts or perform finance and accounting functions. Although the Company has
recently retained experienced executives in several of these areas, the Company
will be required to hire a broad range of additional personnel before its
planned service begins commercial operations. Growth, including the creation of
a management infrastructure and staffing, is likely to place a substantial
strain on the Company's management and operational resources. The failure to
develop and implement effective systems or to hire and train sufficient
personnel for the performance of all of the functions necessary to the effective
provision of its service and management of its subscriber base and business, and
the failure to manage growth effectively, would have a material adverse effect
on the Company.
19
CONTINUING OVERSIGHT BY THE FCC
In order to offer CD Radio, the Company was required to obtain a license
from the FCC to launch and operate its satellites. The Company was a winning
bidder in the April 1997 FCC auction for an FCC License to build, launch and
operate a national satellite radio broadcast service and the FCC's International
Bureau issued such a license to the Company on October 10, 1997. Although the
FCC License is effective immediately, for a period of 30 days following the
grant of the FCC License certain parties could petition either the International
Bureau or the full FCC to reconsider the decision to grant the FCC License to
the Company. An application for review by the full Commission was filed by one
of the low-bidding applicants in the auction. This petition requests, among
other things, that the Commission adopt restrictions on foreign ownership, which
were not applied in the IB Order, and, on the basis of the Company's ownership,
overrule the IB Order. If this petition is denied, the complaining party may
file an appeal with the U.S. Court of Appeals, which must find that the decision
of the FCC was not supported by substantial evidence, or was arbitrary,
capricious or unlawful in order to overturn the grant of the Company's FCC
License. Although the Company believes the FCC will uphold the IB Order, the
Company cannot predict the ultimate outcome of any proceedings relating to this
petition or any other proceedings that may be filed.
In order to ensure compliance with the transfer of control rule
restrictions contained in the Communications Act, any future assignments or
transfers of control of the Company's license must be approved by the FCC. There
can be no assurance that the FCC would approve any such transfer or assignment.
The term of the FCC License with respect to each satellite is eight years,
commencing from the date each satellite is declared operational after having
been inserted into orbit. Upon the expiration of the term with respect to each
satellite, the Company will be required to apply for a renewal of the relevant
license. Although the Company believes that the FCC will grant such renewals
absent significant misconduct on the part of the Company, there can be no
assurance that such renewals in fact will be obtained.
The CD Radio system is designed to permit CD Radio to be received by
motorists in all outdoor locations where the vehicle has an unobstructed
line-of-sight with one of the Company's satellites. However, in certain areas
with high concentrations of tall buildings, such as urban cores, or in tunnels,
signals from both satellites will be blocked and reception will be adversely
affected. Therefore, the Company plans to install terrestrial repeating
transmitters to rebroadcast CD Radio in certain areas. The FCC has not yet
established rules governing the application procedure for obtaining
authorizations to construct and operate terrestrial repeating transmitters. The
Company cannot predict the outcome of this process. In addition, in connection
with the installation and operation of the terrestrial repeating transmitters,
the Company will need to obtain the rights to use the roofs of certain
structures where the repeating transmitters will be installed. There can be no
assurance that the Company can obtain such roof rights on acceptable terms or in
appropriate locations for the operation of CD Radio. Also, the FCC Licensing
Rules (as defined herein) require that the Company complete frequency
coordination with Canada and Mexico. With respect to Mexico, this obligation
could be complicated by that country's plan to license a similar satellite radio
service on the same frequencies as licensed for use by the Company in the United
States. There can be no assurance that the Company will be able to coordinate
use of this spectrum or will be able to do so in a timely manner.
Changes in law, FCC regulations or international agreements relating to
communications policy generally or to matters relating specifically to the
services to be offered by the Company could affect the Company's ability to
retain the FCC License and obtain or retain other approvals required to provide
CD Radio or the manner in which CD Radio would be offered or regulated.
The IB Order determined that as a private carrier, the Company is not
subject to the current provisions of the Communications Act restricting
ownership in the Company by non-U.S. private citizens or organizations. The
Executive Branch of the U.S. government has expressed interest in changing this
policy, which could lead to restrictions on foreign ownership of the Company's
shares in the future. The IB Order stated that its finding that the Company is
not subject to the foreign ownership restrictions of the Communications Act is
subject to being revisited in a future proceeding The pending
20
application for review of the IB Order brings the question of foreign ownership
restrictions before the full FCC.
The FCC has indicated that it may in the future impose public service
obligations, such as channel set-asides for educational programming, on
satellite radio licensees. The Company cannot predict whether the FCC will
impose public service obligations or the impact that any such obligations, if
imposed, would have on the Company.
The foregoing discussion reflects the application of current communications
law, FCC regulations and international agreements to the Company's proposed
service in the United States. Changes in law, regulations or international
agreements relating to communications policy generally or to matters affecting
specifically the services proposed by the Company could adversely affect the
Company's ability to retain the FCC License and obtain or retain other approvals
required to provide CD Radio or the manner in which the Company's proposed
service would be regulated. Further, actions of the FCC are subject to judicial
review and there can be no assurance that if challenged, such actions would be
upheld.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the services of David Margolese,
Chairman and Chief Executive Officer, who is responsible for the Company's
operations and strategic planning. The loss of the services of Mr. Margolese
could have a material adverse effect upon the business and prospects of the
Company.
RISK OF SIGNAL THEFT
The CD Radio signal, like all broadcasts, is subject to the risk of piracy.
Although the Company plans to use encryption technology to mitigate signal
theft, the Company does not believe that any such technology is infallible.
Accordingly, there can be no assurance that theft of the CD Radio signal will
not occur. Signal theft, if widespread, could have a material adverse effect on
the Company.
COMPETITION
The Company will be seeking market acceptance of its proposed service in a
new, untested market and will compete with established conventional radio
stations, which do not charge subscription fees or require the purchase of radio
cards or S-band radios and associated miniature satellite dish antennas to
receive their services. Many radio stations also offer information programming
of a local nature such as local news or traffic reports which the Company will
be unable to offer. In addition, the Company expects that, within several years,
some traditional FM radio broadcasting stations will begin to transmit digital
quality signals. The Company also expects to compete directly with AMRC, a
subsidiary of AMSC, which is the holder of the other FCC License. AMSC, which is
owned in part by the Hughes Electronics Corporation subsidiary of General Motors
Corporation, has financial, management and technical resources that exceed those
of the Company. In addition, the FCC could grant new licenses which would enable
further competition to broadcast satellite radio. Finally, there are many
portions of the electromagnetic spectrum that are currently licensed for other
uses and certain other portions for which licenses have been granted by the FCC
without restriction as to use, and there can be no assurance that these portions
of the spectrum could not be utilized for satellite radio broadcasting in the
future. Although any such licensees would face cost and competition barriers,
there can be no assurance that there will not be an increase in the number of
competitors in the satellite radio industry or any assurance that one or more
competitors will not design a satellite radio broadcast system that is superior
to the Company's system, either of which events could have a material adverse
effect on the Company.
UNCERTAIN PATENT PROTECTION
The Company has been granted certain U.S. patents covering various features
of satellite radio technology including, among other features, signal diversity
and memory reception. There can be no certainty that the Company's system or
products will be covered by the Company's patents. If the
21
Company's system or products are not covered by the Company's patents, others
may duplicate the Company's system or products without liability to the Company.
In addition, there can be no assurance that the Company's U.S. patents will not
be challenged, invalidated or circumvented by others. Litigation, which could
result in substantial cost to the Company, may be necessary to enforce the
Company's patents or may occur to determine the scope and validity of other
parties' proprietary rights, and there can be no assurance of success in any
such litigation. There can be no assurance that there are no patents, or pending
patent applications which will later mature into patents, or inventions
developed earlier which will later mature into patents, of others which may
block the Company's ability to operate its system or license its technology. The
earliest of the Company's patents is due to expire, upon payment of all
necessary fees, on April 10, 2012.
ITEM 2. PROPERTIES
The Company's executive offices are located at Sixth Floor, 2175 K Street,
N.W., Washington, D.C. 20037, and are leased pursuant to a lease agreement that
will expire on October 31, 1998.
The Company has reached an agreement in principle on the significant
economic terms of a 15-year lease for an aggregate of approximately 100,000
square feet of class A office space in New York City to serve as the future
location of its executive offices and National Broadcast Studio. The Company
anticipates entering into a definitive lease in April 1998. Occupancy of the
space is expected in March 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 23, 1997, the Company mailed stockholders a notice of proposed
amendments (the 'Proposed Amendment') to the Certificate of Designations of the
Company's 5% Preferred Stock and solicited their consent to the Proposed
Amendment pursuant to an accompanying Consent Solicitation Statement (the
'Consent Solicitation'). The Proposed Amendment would allow the Company (i) to
redeem the 5% Preferred Stock (to the extent not previously converted) in whole
or in part upon the sale of any equity or debt securities in one or more
offerings occurring after the initial issuance of the 5% Preferred Stock and on
or prior to December 30, 1997 for gross proceeds in an aggregate cash amount of
not less than $100 million, and (ii) to amend certain of the provisions of the
Certificate of Designations relating to the delivery of a notice of redemption
in connection therewith. The Proposed Amendments did not affect any rights of
the Company's Common Stock.
The Company received the written consent to the Proposed Amendment of
stockholders representing (i) more than 50% of the total voting power of the
Company, (ii) 62.4% of the voting power associated with the Common Stock of the
Company and (iii) 57.2% of the voting power associated with the 5% Preferred
Stock, and the Proposed Amendment was adopted.
22
ITEM 4a. EXECUTIVE OFFICERS
The following persons are the executive officers of the Company.
NAME AGE POSITION(S) WITH COMPANY
- ----------------------------- --- ------------------------------------------------------------------------
David Margolese.............. 40 Chairman and Chief Executive Officer
Robert D. Briskman........... 65 Executive Vice President, Engineering and Operations
Andrew J. Greenebaum......... 35 Executive Vice President and Chief Financial Officer
Keno V. Thomas............... 40 Executive Vice President, Marketing
Joseph S. Capobianco......... 48 Executive Vice President, Content
Lawrence F. Gilberti......... 47 Secretary
Set forth below is certain information with respect to the executive
officers of the Company.
DAVID MARGOLESE. Mr. Margolese has served as the Company's Chairman
since August 1993, as Chief Executive Officer since November 1992 and as a
director since August 1991. Prior to his involvement with the Company,
Mr. Margolese proposed and co-founded Cantel Inc., Canada's national
cellular telephone carrier, and Canadian Telecom Inc., a radio paging company.
He served as a Vice President of Cantel from 1982 to 1984 and as President of
Canadian Telecom from 1980 until its sale in 1987. Cantel was acquired by
Rogers Communications Inc. in 1989.
ROBERT D. BRISKMAN. Mr. Briskman is CD Radio's co-founder and has served as
Executive Vice President, Engineering and Operations and as a director since
October 1991. Mr. Briskman is one of the world's leading satellite engineering
authorities, and has overseen the design, development and launch of numerous
major satellite systems. During his twenty-two year career at COMSAT, he was
responsible for the engineering and implementation of satellite systems for both
COMSAT and various nations (PALAPA, ITALSAT, MORELOS, ARABSAT, CHINASAT, among
others) that contracted with COMSAT for turnkey satellite programs. Mr. Briskman
was one of the early engineers hired at NASA in 1959, and received the APOLLO
Achievement Award for the design and implementation of the Unified S-Band
System. He is a past chairman of the IEEE Standards Board, past president of the
Aerospace and Electronics Systems Society and served on the industry advisory
council to NASA. He is the Telecommunications Editor of McGraw Hill's
Encyclopedia of Science and Technology and is a recipient of the IEEE Centennial
Medal.
ANDREW J. GREENEBAUM. Mr. Greenebaum has served as Executive Vice President
and Chief Financial Officer of the Company since August 1997. From August 1989
to August 1997, he held a variety of senior management positions with The Walt
Disney Company. From March 1996 to August 1997, Mr. Greenebaum was Vice
President, Corporate Finance in charge of corporate and project finance. From
May 1995 to March 1996, he was Director, Strategic Planning. From October 1992
to May 1995, he was Director, Corporate Finance and from April 1991 to October
1992, he was Manager, Corporate Finance. From August 1989 to April 1991, he was
a Senior Treasury Analyst. Prior to Disney, Mr. Greenebaum was an investment
banker with L.F. Rothschild.
KENO V. THOMAS. Mr. Thomas has served as Executive Vice President,
Marketing of the Company since April 1997. From July 1995 to April 1997, he was
an independent management consultant to the media and entertainment industry.
From January 1994 to July 1995, Mr. Thomas was Executive Vice President,
Marketing at DMX Inc., a cable radio company. From February 1992 to January
1994, he served as Vice President of Programming at DIRECTV, a satellite
television company. From December 1986 to February 1992, he held senior
management positions, including Vice President, International at ESPN
Enterprises, Inc., a cable television sports network. From May 1982 to December
1986, he held senior management positions, including Vice President, Marketing
at Times Mirror Cable, an operator of cable televisions systems and a subsidiary
of the Times Mirror Company.
JOSEPH S. CAPOBIANCO. Mr. Capobianco has served as Executive Vice
President, Content of the Company since April 1997. From 1981 to April 1997, he
was an independent consultant providing programming, production, marketing and
strategic planning consulting services to media and entertainment companies,
including Home Box Office, a cable television service and a subsidiary of
23
Time Warner Entertainment Company, L.P., and the ABC Radio Networks. From May
1990 to February 1995, he served as Vice President of Programming at Music
Choice, which operates a 40-channel music service available to subscribers to
DIRECTV, and is partially owned by Warner Music Group Inc., Sony Entertainment
Inc. and EMI.
LAWRENCE F. GILBERTI. Mr. Gilberti was elected Secretary of the Company in
November 1992 and has served as a director since September 1993. Since December
1992, he has been the Secretary and sole director of, and from December 1992 to
September 1994 was the President of, Satellite CD Radio, Inc. Mr. Gilberti has
been a partner in the law firm of Fischbein Badillo Wagner Harding since August
1994, and has provided legal services to the Company since 1992. From 1987 to
August 1994, Mr. Gilberti was an attorney with the law firm of Goodman Phillips
& Vineberg.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK MATTERS
The Common Stock began trading on the Nasdaq SmallCap Market on September
13, 1994. Since October 24, 1997 the Company's Common Stock has traded on the
Nasdaq National Market under the symbol 'CDRD'. The following table sets forth
the high and low closing bid price for the Common Stock, as reported by Nasdaq,
for the periods indicated below. The prices set forth below for periods prior to
October 24, 1997 reflect interdealer quotations, without retail markups,
markdowns, fees or commissions and do not necessarily reflect actual
transactions.
HIGH LOW
---- ---
Year Ended December 31, 1997
First Quarter....................................................................... 8 3 9/16
Second Quarter...................................................................... 20 1/4 10 3/4
Third Quarter....................................................................... 20 14
Fourth Quarter...................................................................... 24 5/8 16 5/8
Year Ended December 31, 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
On March 2, 1998, the closing bid price of the Company's Common Stock on
Nasdaq was $15 7/8 per share. On March 2, 1998, there were approximately 133
record holders and approximately 4,855 beneficial owners of the Company's Common
Stock. The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future. The
AEF Agreements and the Indenture contain provisions that limit the Company's
ability to pay dividends on the Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the Company set forth below
with respect to the statements of operations for the years ended December 31,
1995, 1996 and 1997 and with respect to the balance sheets at December 31, 1996
and 1997 are derived from the consolidated financial statements of the Company,
audited by Coopers & Lybrand L.L.P., independent accountants, included in Item 8
of this report. The selected consolidated financial data for the Company with
respect to the balance sheets at December 31, 1993, 1994, and 1995 and with
respect to the statement of operations data for the years ended December 31,
1993 and 1994, are derived from audited consolidated financial statements of the
Company, which are not included herein. The selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included in Item 8 of this report and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations'
included in Item 7 of this Annual Report on Form 10-K.
STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating revenues..................................... $ -- $ -- $ -- $ -- $ --
Net loss............................................... $(6,568) $ (4,065) $ (2,107) $ (2,831) $ (4,737)
Net loss per share (basic and diluted)................. $ (.79) $ (.48) $ (.23) $ (.29) $ (.41)
Weighted average common shares (basic and diluted)
outstanding.......................................... 8,284 8,398 9,224 9,642 11,626
25
BALANCE SHEET DATA
DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
Cash and cash equivalents.............................. $ 777 $ 3,400 $ 1,800 $ 4,584 $170,381
Working capital (deficit).............................. $ (250) $ 2,908 $ 1,741 $ 4,442 $170,894
Total assets........................................... $ 1,663 $ 3,971 $ 2,334 $ 5,065 $323,807
Deficit accumulated during the development stage....... $(9,533) $(13,598) $(15,705) $(18,536) $(23,273)
Stockholders' equity(1)................................ $ 505 $ 3,431 $ 1,991 $ 4,898 $ 79,430
- ------------
(1) No cash dividends were declared or paid in any of the periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the federal securities laws. Actual results and the timing
of certain events could differ materially from those projected in the
forward-looking statements due to a number of factors, including those set forth
under 'Business -- Risk Factors' and elsewhere herein. See 'Special Note
Regarding Forward-Looking Statements.'
OVERVIEW
The Company was organized in May 1990 and is in its development stage. The
Company's principal activities to date have included technology development,
obtaining regulatory approval for the CD Radio service, commencement of
construction of three 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 cashflow from operations will not be
generated until late 2000 at the earliest. In addition, the Company will require
substantial additional capital to complete development and commence commercial
operations of CD Radio. There can be no assurance that CD Radio will ever
commence operations, that the Company will attain any particular level of
revenues or that the Company will 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 approximately $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
providers of sports, news and talk programming for providing national
distribution of their programming to CD Radio subscribers or from directly
selling or bartering advertising time on the Company's sports, news and talk
channels. To receive CD Radio, subscribers will need to purchase a radio card or
S-band radio together with the associated miniature satellite dish antenna. The
Company does not intend to manufacture these products and thus will not receive
any revenues from their sale. Although the Company holds patents covering
certain technology to be used in the radio cards, S-band radios and miniature
satellite dish antennas, the Company expects to license its technology to
manufacturers at no charge.
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 of employees, rent and other administrative expenses. The Company
expects that the number of its employees will increase from 14 to approximately
130 by the time it commences commercial operations.
In addition to funding initial operating losses, the Company will require
funds for working capital, interest and financing costs on borrowings and
capital expenditures. The Company's interest expense
26
will increase significantly as a result of the public offering of Units (the
'Units') consisting of the Company's Notes and warrants (the 'Warrants') to
purchase additional Notes. However, a substantial portion of this indebtedness
will not require cash payments of interest and principal for some time.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
The Company recorded net losses of $4,737,000 ($.41 per share) and
$2,831,000 ($.29 per share) for the years ended December 31, 1997 and 1996,
respectively. The Company's total operating expenses were $6,865,000 and
$2,930,000 for the years ended December 31, 1997 and 1996, respectively.
Legal, consulting and regulatory fees increased for the year ended December
31, 1997 to $3,236,000 from $1,582,000 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 and the Exchange Offer.
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 $3,572,000 from $1,231,000 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 $4,074,000 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
$1,946,000 from $13,000 for the year ended December 31, 1996. The increase is
the result of the issuance of the Units in November 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
The Company recorded net losses of $2,831,000 ($.29 per share) and
$2,107,000 ($.23 per share) for the years ended December 31, 1996 and 1995,
respectively. The Company's total operating expenses were $2,930,000 in 1996
compared to $2,230,000 in 1995.
Legal, consulting and regulatory fees increased in 1996 to $1,582,000 from
$1,046,000 in 1995, as the result of increased efforts to obtain the FCC
License.
Research and development costs were $117,000 in 1996, compared with
$122,000 in 1995. Non-recurring costs associated with the design and development
of the CD Radio demonstration system were substantially completed in 1993. Costs
incurred in subsequent years relate to the operations of the demonstration
system, including leasing satellite time, taking transmission measurements, and
testing multipath fading.
Other general and administrative expenses increased in 1996 to $1,231,000
from $1,062,000 in 1995. The increase is due to the Company requiring general
administrative support for the effort to obtain the FCC License.
Interest income decreased to $113,000 in 1996 from $143,000 in 1995 as a
result of the Company having a higher average cash balance in 1995. Proceeds
relating to the exercise of stock warrants were not received until late 1996
and, therefore, did not generate a significant amount of interest income.
Interest expense decreased from $20,000 in 1995 to $13,000 in 1996 as a result
of the Company repaying a promissory note due to an officer of the Company in
1996.
27
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millenium (year 2000) approaches. The 'year
2000' problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to
'00.' The issue is whether the computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company is in the process of working with its suppliers to identify,
modify or upgrade relevant systems which are not currently year 2000-compliant
and to ensure that systems under development will be year 2000 compliant. The
Company believes that the cost of completing the modifications necessary to
become year 2000-compliant will not be material. There can be no assurance,
however, that the Company will be able to identify all aspects of its business
that are subject to year 2000 problems, or identify year 2000 problems of
suppliers that affect the Company's business. There can be no assurance that the
Company's estimate of the cost of systems preparation for year 2000 compliance
ultimately will prove to be accurate.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of approximately
$171,039,000 compared to $4,442,000 at December 31, 1996. The increase in
working capital was primarily the result of remaining cash proceeds from several
debt and equity offerings in 1997.
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 $648.5 million to develop and commence
commercial operation of CD Radio by the end of 1999. Of this amount, the Company
has raised approximately $446.4 million, leaving anticipated additional cash
needs of approximately $202.1 million to fund its operations through 1999. The
Company anticipates additional cash requirements of approximately $100.0 million
to fund its operations through the year 2000. The Company expects to finance the
remainder of its funding requirements through the issuance of debt or equity
securities, or a combination thereof. Furthermore, if the Company were to
exercise its option under the Loral Satellite Contract to purchase and deploy an
additional satellite, substantial additional funds would be required.
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.
To build and launch the satellites necessary for the operations of CD
Radio, the Company has entered into the Loral Satellite Contract and the
Arianespace Launch Service Agreement. The Loral Satellite Contract provides for
Loral to construct for the Company three satellites, two of which the Company
intends to launch and the third of which will be kept in reserve as a spare, and
for an option to be granted to the Company to purchase a fourth satellite. Under
the Arianespace Launch Service Agreement, Arianespace has agreed to launch two
of the Company's satellites into orbit. The Company is committed to make
aggregate payments of $275.8 million under the Loral Satellite Contract and of
$176.0 million under the Arianespace Launch Service Agreement. As of December
31, 1997 the Company has made aggregate payments of $49.4 million to Loral.
Under the Loral Satellite Contract, with the exception of a payment made at the
time of the signing of the Loral Satellite Contract in March 1993, payments are
to be made in 22 installments commencing in April 1997 and ending in November
2000, the expected delivery date for the third satellite. Approximately half of
these payments are contingent on Loral meeting specified milestones in the
manufacture of the three satellites. In addition, Loral has agreed to defer a
total of $20.4 million of the contract price, which is to be paid in four equal
installments of $5.1 million commencing November 2001 until March 2003, subject
to the completion of certain milestones. Amounts due under the Arianespace
Launch Service Agreement, except for payments made for each of the two launches
prior to the execution of the Arianespace
28
Launch Service Agreement, are payable on various dates between November 1997 and
July 1999 for the first launch, and, for the second launch, are payable on
various dates between February 1998 and the earlier of October 1999 or ten days
prior to the second launch. As of December 31, 1997, the Company had made
payments of $6.4 million to Arianespace.
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, a substantial portion of its planned indebtedness will
not require cash payments of interest and principal for some time. The Notes do
not require cash payments until June 2003. Interest on funds borrowed by the
Company under the AEF Agreements is deferred until repayment of such amounts.
The Company believes that its working capital at December 31, 1997 is sufficient
to fund planned operations and construction of its satellite system through the
first quarter of 1999.
SOURCES OF FUNDING
To date the Company has funded its capital needs through the issuance of
debt and equity. As of December 31, 1997, the Company had received a total of
$221.5 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 5% Preferred Stock and 4,955,488 shares of Common Stock resulting in
net proceeds of $120.5 and $70.8 respectively. 1,905,488 shares of Common Stock
were sold to Loral 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
1,846,799 shares of its newly issued 10 1/2% Series C Convertible Preferred
Stock for all of the outstanding shares of 5% Preferred Stock. The Company
received no proceeds from the Exchange Offer.
In November 1997, the Company received net proceeds of $116,335,045 from
the issuance of 12,910 Units, each Unit consisting of $20,000 aggregate
principal amount at maturity of Notes and a Warrant to purchase additional Notes
with an aggregate principal amount at maturity of $3,000. All warrants were
exercised in 1997. The aggregate value at maturity of the Notes originally
issued and Notes resulting from the exercise of Warrants is $258,200,000 and
$38,730,000, respectively. The Notes mature on November 15, 2007 with the first
cash interest payment due in June 2003. The Indenture under which the Notes were
issued contains certain limitations on the Company's ability to incur additional
indebtedness. The 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.
On July 22, 1997, the Company entered into two loan agreements
(collectively, the 'AEF Agreements') with AEF, a subsidiary of Arianespace, to
finance approximately $105 million of the estimated $176 million price of the
launch services to be provided by Arianespace. Under these agreements, the
Company is able to borrow funds to meet the progress payments due to Arianespace
for the construction of each launch vehicle and other launch costs (the 'Tranche
A Loans'). The Company has the opportunity, upon satisfying a variety of
conditions specified in the AEF Agreements, to convert up to $80 million of the
Tranche A loans into term loans (the 'Tranche B Loans'). If not converted, or
the Company is unable to comply with the terms and covenants of the Tranche B
Loans, the Company will be required to repay the loans in full, together with
accrued interest and all fees and other amounts due, approximately three months
before the applicable launch date, which will be prior to the time CD Radio
commences commercial operations. There can be no assurance that the Company will
have sufficient funds to make such repayment. As of December 31, 1997, the
Company had borrowed approximately $4.5 million under the AEF Agreements.
The AEF Agreements impose certain restrictions on the Company's ability to
incur additional indebtedness, make investments or permit liens on certain
assets of the Company, other than liens in favor of AEF. If AEF determines that
the Tranche A Loans are eligible for conversion into Tranche B Loans, the
Company will also be subject to provisions restricting its ability to change its
capital structure or organizational documents or to merge, consolidate or
combine with another entity. If the Tranche A Loans are converted, the Company's
obligations to AEF will be secured by a lien on specified assets of the Company,
including the satellites and, to the extent permitted by applicable law, the FCC
License.
29
In addition, the Indenture permits indebtedness under the AEF Agreements to be
secured on a pari passu basis with the Notes by a first priority security
interest in the stock (the 'Pledged Stock') of Satellite CD Radio, Inc.
Pursuant to a Multiparty Agreement among the Company, AEF and Arianespace
in connection with the AEF Agreements, if the Company is unable to obtain
sufficient financing to complete the construction and launch of the satellites,
or if the Company terminates the Arianespace Launch Service Agreement, the
Company will be required to pay Arianespace a termination fee ranging from 5% to
40% of the launch services price, based on the proximity of the date of
termination to the scheduled launch date. The termination fee will be payable
prior to the time the Company commences commercial operations and there can be
no assurance that the Company will have sufficient funds to pay this fee.
The Loral Satellite Contract provides for payments to be made in
installments commencing in April 1997 and ending in November 2000, subject to
achievement by Loral of certain milestones in the manufacture of the satellites.
Loral has agreed to defer payment of $20.4 million from two milestone payments
due in June and September of 1998. The deferred amount will be paid in four
installments of $5.1 million, with the first payment to be made 27 months after
the delivery of the first satellite, the second payment to be made 27 months
after delivery of the second satellite, the third payment to be made one year
after the first payment date and the fourth payment to be one year after the
second payment date.
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 a
satellite into ground storage, rather than having it shipped to the launch site,
the full deferred amount for the affected satellite will become due within 60
days of such election.
As a condition to the deferred payments, the Company has agreed to provide
Loral a security interest in properties and assets of the Company and its
subsidiaries, of substantially the same nature and quality, and of substantially
equivalent value relative to the amount of the secured obligations, and on the
same terms and conditions, as the Company has provided or may provide to any
other party under any and all of its loan, credit and other similar agreements.
There currently is no such security interest. The Indenture permits indebtedness
under the Loral Satellite Contract to be secured on a pari passu basis with the
Notes by a first priority security interest in the Pledged Stock.
The Company expects it will require an additional $202.1 million in
financing through 1999. However, there can be no assurance that the Company's
actual cash requirements will not increase. Potential sources of additional
financing include the sale of debt or equity securities in the public or private
markets. There can be no assurance that the Company will be able to obtain
additional financing on favorable terms, or at all, or that it will be able to
do so in a timely fashion. The AEF Agreements and the Indenture contain, and
documents governing any indebtedness incurred in the future are expected to
contain, provisions limiting the ability of the Company to incur additional
indebtedness. The issuance by the Company of additional equity securities could
cause substantial dilution of the interest in the Company of 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 increased 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
subsequent to commencing service, costs of financing and the possibility of
unanticipated costs. Additional funds would be required in the event of delay,
cost overruns, launch failure, launch services or satellite system change
orders, or any shortfalls in estimated levels of operating cash flow or to meet
unanticipated expenses.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants............................................................................ 32
Consolidated Balance Sheets as of December 31, 1996 and 1997................................................. 33
Consolidated Statements of Operations 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....................................... 34
Consolidated Statements of Stockholders' Equity 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.............................. 35
Consolidated Statements of Cash Flows 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....................................... 37
Notes to Consolidated Financial Statements................................................................... 38
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
CD RADIO INC.
We have audited the accompanying consolidated balance sheets of CD Radio
Inc. and subsidiary (A Development Stage Enterprise) as of December 31, 1996 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997 and for the period May 17, 1990 (date of inception) to December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CD Radio Inc.
and subsidiary as of December 31, 1996 and 1997, and the consolidated results of
their operations and their cash flows 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 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
McLean, VA
March 3, 1998
32
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 4,583,562 $170,381,220
Prepaid expense and other................................................... 9,368 928,068
------------ ------------
Total current assets................................................... 4,592,930 171,309,288
------------ ------------
Property and equipment, at cost:
Satellite construction in process........................................... -- 49,400,000
Launch construction in process.............................................. -- 10,884,804
Technical equipment......................................................... 254,200 254,200
Office equipment and other.................................................. 89,220 96,345
Demonstration equipment..................................................... 38,664 38,664
------------ ------------
382,084 60,674,013
Less accumulated depreciation............................................... (213,344) (243,031)
------------ ------------
168,740 60,430,982
Other Assets:
FCC license................................................................. -- 83,346,000
Debt issue cost, net........................................................ -- 8,617,398
Deposits.................................................................... 303,793 103,793
------------ ------------
Total other assets..................................................... 303,793 92,067,191
------------ ------------
Total assets........................................................... $ 5,065,463 $323,807,461
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................................... $ 131,118 $ 401,147
Other....................................................................... 20,174 14,356
------------ ------------
Total current liabilities.............................................. 151,292 415,503
Notes payable and accrued interest............................................... -- 131,364,073
Dividends payable................................................................ -- 2,337,592
Deferred rent and accrued interest............................................... 15,795 22,537
------------ ------------
Total liabilities...................................................... 167,087 134,139,705
------------ ------------
Commitments and contingencies:
10.5% Series C Convertible Preferred Stock, no par value: 2,000,000 shares
authorized, 1,846,799 shares issued and outstanding at December 31, 1997
(liquidation preference of $184,679,900), at net carrying value................ -- 110,237,336
Stockholders' equity:
Preferred stock, $0.001 par value, 50,000,000 shares authorized; 8,000,000
shares designated as 5% Delayed Convertible Preferred Stock; none issued
or outstanding............................................................ -- --
Common stock, $0.001 par value; 200,000,000 shares authorized; 10,300,391
and 16,048,691 shares issued and outstanding as of December 31, 1996 and
1997, respectively........................................................ 10,300 16,049
Additional paid-in capital.................................................. 23,423,936 102,687,033
Deficit accumulated during the development stage............................ (18,535,860) (23,272,662)
------------ ------------
Total stockholders' equity............................................. 4,898,376 79,430,420
------------ ------------
Total liabilities and stockholders' equity............................. $ 5,065,463 $323,807,461
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
33
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE FOR
THE PERIOD
MAY 17, 1990
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
------------------------------------------ TO DECEMBER 31,
1995 1996 1997 1997
----------- ----------- ------------ -------------------
Revenue........................................ $ -- $ -- $ -- $ --
Expenses:
Legal, consulting and regulatory fees..... 1,045,562 1,582,091 3,236,444 10,485,408
Other general and administrative.......... 1,062,343 1,230,748 3,571,578 11,104,341
Research and development.................. 122,210 117,299 56,626 1,972,981
Write-off of investment in Sky-Highway
Radio Corp. ............................ -- -- -- 2,000,000
----------- ----------- ------------ -------------------
Total expenses....................... 2,230,115 2,930,138 6,864,648 25,562,730
----------- ----------- ------------ -------------------
Other income (expense)
Interest income........................... 142,549 112,811 4,073,809 4,402,481
Interest expense.......................... (19,783) (13,268) (1,945,963) (2,112,413)
----------- ----------- ------------ -------------------
122,766 99,543 2,127,846 2,290,068
----------- ----------- ------------ -------------------
Net loss....................................... (2,107,349) (2,830,595) (4,736,802) (23,272,662)
----------- ----------- ------------ -------------------
Preferred stock dividend....................... -- -- (2,337,592) (2,337,592)
Preferred stock deemed dividend................ -- -- (51,975,000) (51,975,000)
----------- ----------- ------------ -------------------
Net loss applicable to common stockholders..... $(2,107,349) $(2,830,595) $(59,049,394) $ (77,585,254)
----------- ----------- ------------ -------------------
----------- ----------- ------------ -------------------
Per common share (basic and diluted):
Net loss before preferred stock dividend
requirements............................ $(0.23) $(0.29) $(0.41)
Preferred stock dividend requirements..... -- -- (4.67)
----------- ----------- ------------
Net loss applicable to common stockholders..... $(0.23) $(0.29) $(5.08)
----------- ----------- ------------
----------- ----------- ------------
Weighted average common shares outstanding
(basic and diluted).......................... 9,224,431 9,642,048 11,625,834
----------- ----------- ------------
----------- ----------- ------------
The accompanying notes are an integral part of these financial statements.
34
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
--------------------------------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- --------- ---------- -----------
Initial Sale of no par value common
stock, $5.00 per share, May 17, 1990... 11,080 $ 55,400 -- $ -- -- $ --
Initial issuance of common stock in
satisfaction of amount due to related
party, $5.00 per share................. 28,920 144,600 -- -- -- --
Conversion of no par value common stock
to Class A and Class B no par value
common stock........................... (40,000) (200,000) 2,000,000 169,492 360,000 30,580
Sale of Class B common stock, $0.4165
per share.............................. -- -- -- -- 442,000 184,101
Issuance of Class B common stock in
satisfaction of due related party
$0.4165 per share...................... -- -- -- -- 24,000 10,000
Net loss................................ -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1990.............. -- -- 2,000,000 169,492 826,000 224,609
Sale of Class B common stock, $0.50 per
share.................................. -- -- -- -- 610,000 305,000
Issuance of Class B common stock in
satisfaction of due to related party,
$0.50 per share........................ -- -- -- -- 300,000 150,000
Net loss................................ -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1991.............. -- -- 2,000,000 169,492 1,736,000 679,609
Sale of Class B common stock, $0.50 per
share.................................. -- -- -- -- 200,000 100,000
Issuance of Class B common stock in
satisfaction of due to related party,
$0.50 per share........................ -- -- -- -- 209,580 104,790
Conversion of note payable to related
party to Class B common stock,
$0.4165................................ -- -- -- -- 303,440 126,380
Conversion of Class A and Class B common
stock to no par value common stock..... 4,449,020 1,180,271 (2,000,000) (169,492) (2,449,020) (1,010,779)
Sale of no par value common stock, $1.25
per share.............................. 1,600,000 2,000,000 -- -- -- --
Conversion of no par value common stock
to $.001 par value common stock........ -- (3,174,222) -- -- -- --
Sale of $.001 par value common stock,
$5.00 per share........................ 315,000 315 -- -- -- --
Net loss................................ -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1992.............. 6,364,020 6,364 -- -- -- --
Sale of $.001 per value common stock,
$5.00 per share, net of commissions.... 1,029,000 1,029 -- -- -- --
Compensation expense in connection with
issuance of stock options.............. -- -- -- -- -- --
Common stock issued in connection with
conversion of note payable at $5.00 per
share.................................. 60,000 60 -- -- -- --
Common stock issued in satisfaction of
commissions payable, $5.00 per share... 4,000 4 -- -- -- --
Net loss................................ -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1993.............. 7,457,020 7,457 -- -- -- --
Sales of $.001 par value common stock,
$5.00 per share, net of commissions.... 250,000 250 -- -- -- --
Initial public offering of Units,
consisting of two shares of $.001 par
value common stock and one warrant,
$10.00 per Unit, net of expenses....... 1,491,940 1,492 -- -- -- --
Deferred compensation on stock options
granted................................ -- -- -- -- -- --
Forfeiture of stock options by Company
officer................................ -- -- -- -- -- --
Compensation expense in connection with
issuance of stock options.............. -- -- -- -- -- --
Amortization of deferred compensation... -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1994.............. 9,198,960 9,199 -- -- -- --
(continued)
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
ADDITIONAL DURING THE ON STOCK
PAID-IN DEVELOPMENT OPTIONS
CAPITAL STAGE GRANTED TOTAL
------------ ------------ ------------ ------------
Initial Sale of no par value common
stock, $5.00 per share, May 17, 1990... $ -- $ -- $ -- $ 55,400
Initial issuance of common stock in
satisfaction of amount due to related
party, $5.00 per share................. -- -- -- 144,600
Conversion of no par value common stock
to Class A and Class B no par value
common stock........................... -- -- -- --
Sale of Class B common stock, $0.4165
per share.............................. -- -- -- 184,101
Issuance of Class B common stock in
satisfaction of due related party
$0.4165 per share...................... -- -- -- 10,000
Net loss................................ -- (838,911 ) -- (838,911)
------------ ------------ ------------ ------------
Balance, December 31, 1990.............. -- (838,911 ) -- (444,810)
Sale of Class B common stock, $0.50 per
share.................................. -- -- -- 305,000
Issuance of Class B common stock in
satisfaction of due to related party,
$0.50 per share........................ -- -- -- 150,000
Net loss................................ -- (574,963 ) -- (574,963)
------------ ------------ ------------ ------------
Balance, December 31, 1991.............. -- (1,413,874 ) -- (564,773)
Sale of Class B common stock, $0.50 per
share.................................. -- -- -- 100,000
Issuance of Class B common stock in
satisfaction of due to related party,
$0.50 per share........................ -- -- -- 104,790
Conversion of note payable to related
party to Class B common stock,
$0.4165................................ -- -- -- 126,380
Conversion of Class A and Class B common
stock to no par value common stock..... -- -- -- --
Sale of no par value common stock, $1.25
per share.............................. -- -- -- 2,000,000
Conversion of no par value common stock
to $.001 par value common stock........ 3,174,222 -- -- --
Sale of $.001 par value common stock,
$5.00 per share........................ 1,574,685 -- -- 1,575,000
Net loss................................ -- (1,550,802 ) -- (1,550,802)
------------ ------------ ------------ ------------
Balance, December 31, 1992.............. 4,748,907 (2,964,676 ) -- 1,790,595
Sale of $.001 per value common stock,
$5.00 per share, net of commissions.... 4,882,163 -- -- 4,883,192
Compensation expense in connection with
issuance of stock options.............. 80,000 -- -- 80,000
Common stock issued in connection with
conversion of note payable at $5.00 per
share.................................. 299,940 -- -- 300,000
Common stock issued in satisfaction of
commissions payable, $5.00 per share... 19,996 -- -- 20,000
Net loss................................ -- (6,568,473 ) -- (6,568,473)
------------ ------------ ------------ ------------
Balance, December 31, 1993.............. 10,031,006 (9,533,149 ) -- 505,314
Sales of $.001 par value common stock,
$5.00 per share, net of commissions.... 1,159,125 -- -- 1,159,375
Initial public offering of Units,
consisting of two shares of $.001 par
value common stock and one warrant,
$10.00 per Unit, net of expenses....... 4,833,922 -- -- 4,835,414
Deferred compensation on stock options
granted................................ 1,730,000 -- (1,730,000 ) --
Forfeiture of stock options by Company
officer................................ (207,000) -- 207,000 --
Compensation expense in connection with
issuance of stock options.............. 112,500 -- -- 112,500
Amortization of deferred compensation... -- -- 883,000 883,000
Net loss................................ -- (4,064,767 ) -- (4,064,767)
------------ ------------ ------------ ------------
Balance, December 31, 1994.............. 17,659,553 (13,597,916 ) (640,000 ) 3,430,836
35
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
--------------------------------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- --------- ---------- -----------
Common stock issued for services
rendered, between $3.028 and $3,916 per
share.................................. 107,000 107 -- -- -- --
Amortization of deferred compensation... -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1995.............. 9,305,960 9,306 -- -- -- --
Exercise of stock warrants at $6.00 per
share.................................. 791,931 792 -- -- -- --
Exercise of stock options by Company
officers, between $1.00 and $5.00 per
share.................................. 135,000 135 -- -- -- --
Common stock issued for services
rendered, between $5.76 and $12.26 per
share.................................. 67,500 67 -- -- -- --
Common stock options granted for
services rendered, to purchase 60,000
shares at $4.50 a share................ -- -- -- -- -- --
Amortization of deferred compensation... -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1996.............. 10,300,391 10,300 -- -- -- --
Exercise of stock options between $1.00
and $2.00 per share.................... 43,000 43 -- -- -- --
Value of beneficial conversion feature
on 5% Preferred Stock.................. -- -- -- -- -- --
Accretion of deemed dividend............ -- -- -- -- -- --
Sale of $.001 par value common stock,
$13.12, net of expenses................ 1,905,488 1,905 -- -- -- --
Conversion of 5% Preferred Stock into
$.001 par value common stock........... 749,812 750 -- -- -- --
Public offering of $.001 per value
common stock at $18.00 per share, net
of expenses............................ 3,050,000 3,050 -- -- -- --
Dividend on 10.5% Preferred Stock....... -- -- -- -- -- --
Issuance of fully vested in the money
stock options at $8.56 per share....... -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- -----------
Balance, December 31, 1997.............. 16,048,691 $ 16,049 -- $ -- -- $ --
---------- ----------- ---------- --------- ---------- -----------
---------- ----------- ---------- --------- ---------- -----------
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
ADDITIONAL DURING THE ON STOCK
PAID-IN DEVELOPMENT OPTIONS
CAPITAL STAGE GRANTED TOTAL
------------ ------------ ------------ ------------
Common stock issued for services
rendered, between $3.028 and $3,916 per
share.................................. 347,176 -- -- 347,283
Amortization of deferred compensation... -- -- 320,000 320,000
Net loss................................ -- (2,107,349 ) -- (2,107,349)
------------ ------------ ------------ ------------
Balance, December 31, 1995.............. 18,006,729 (15,705,265 ) (320,000 ) 1,990,770
Exercise of stock warrants at $6.00 per
share.................................. 4,588,296 -- -- 4,589,088
Exercise of stock options by Company
officers, between $1.00 and $5.00 per
share.................................. 154,865 -- -- 155,000
Common stock issued for services
rendered, between $5.76 and $12.26 per
share.................................. 554,226 -- -- 554,293
Common stock options granted for
services rendered, to purchase 60,000
shares at $4.50 a share................ 119,820 -- -- 119,820
Amortization of deferred compensation... -- -- 320,000 320,000
Net loss................................ -- (2,830,595 ) -- (2,830,595)
------------ ------------ ------------ ------------
Balance, December 31, 1996.............. 23,423,936 (18,535,860 ) -- 4,898,376
Exercise of stock options between $1.00
and $2.00 per share.................... 55,957 -- -- 56,000
Value of beneficial conversion feature
on 5% Preferred Stock.................. 51,975,000 -- -- 51,975,000
Accretion of deemed dividend............ (51,975,000) -- -- (51,975,000)
Sale of $.001 par value common stock,
$13.12, net of expenses................ 24,393,095 -- -- 24,395,001
Conversion of 5% Preferred Stock into
$.001 par value common stock........... 10,279,725 -- -- 10,280,475
Public offering of $.001 per value
common stock at $18.00 per share, net
of expenses............................ 46,423,787 -- -- 46,426,837
Dividend on 10.5% Preferred Stock....... (2,337,592) -- -- (2,337,592)
Issuance of fully vested in the money
stock options at $8.56 per share....... 448,125 448,125
Net loss................................ -- (4,736,802 ) -- (4,736,802)
------------ ------------ ------------ ------------
Balance, December 31, 1997.............. $102,687,033 $(23,272,662) $ -- $ 79,430,420
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated statements.
36
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FOR
THE PERIOD
MAY 17, 1990
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
------------------------------------------- TO DECEMBER 31,
1995 1996 1997 1997
----------- ----------- ------------- -------------------
Cash flows from development stage
activities:
Deficit accumulated during the
development stage................. $(2,107,349) $(2,830,595) $ (4,736,802) $ (23,272,662)
Adjustments to reconcile deficit
acumulated during the development
stage to net cash used in
development stage activities:
Depreciation expense.............. 57,593 52,846 29,687 253,730
Amortization of debt issue
costs........................... -- -- 73,161 73,161
Write off of investment in
Sky-Highway Radio Corp. ........ -- -- -- 2,000,000
Accretion of note payable charged
as interest expense............. -- -- 1,867,816 1,867,816
Compensation expense in connection
with issuance of stock options.. 320,000 320,000 448,125 2,163,625
Common stock issued for services
rendered........................ 347,283 554,293 -- 901,576
Common stock options granted for
services rendered............... -- 19,820 -- 119,820
Increase (decrease) in cash and cash
equivalents resulting from changes
in assets and liabilities:
Prepaid expense and other......... (7,465) (587) (918,700) (928,068)
Due to related party.............. -- -- -- 350,531
Deposits.......................... -- -- -- (303,793)
Accounts payable and accrued
expenses........................ (189,755) 84,597 270,029 476,386
Accrued executive compensation.... -- -- -- --
Other liabilities................. (6,930) (20,714) (21,613) 14,356
----------- ----------- ------------- -------------------
Net cash used in development
stage activities.............. (1,586,623) (1,720,340) (2,988,297) (16,283,522)
----------- ----------- ------------- -------------------
Cash flows from investing activities:
Purchase of FCC license............. -- -- (83,346,000) (83,346,000)
Payments for satellite
construction...................... -- -- (49,300,000) (49,300,000)
Advance payments for launch
services.......................... -- -- (6,291,614) (6,291,614)
Capital expenditures................ (13,824) -- (7,125) (399,308)
Acquisition of Sky-Highway Radio
Corp. ............................ -- -- -- (2,000,000)
----------- ----------- ------------- -------------------
Net cash used in investing
activities.................... (13,824) -- (138,944,739) (141,336,922)
----------- ----------- ------------- -------------------
Cash flows from financing activities:
Proceeds from issuance of Common
Stock, net........................ -- -- 70,821,838 85,379,320
Proceeds from issuance of 5%
Preferred Stock, net.............. -- -- 120,517,811 120,517,811
Proceeds from exercise of stock
options........................... -- 155,000 56,000 211,000
Proceeds from exercise of stock
warrants.......................... -- 4,589,088 4,589,088
Proceeds from issuance of promissory
note and Units.................... -- -- 116,335,045 116,535,045
Proceeds from issuance of promissory
notes to related parties.......... -- -- 2,965,000
Repayment of promissory note........ -- -- -- (200,000)
Repayment of promissory notes to
related parties................... -- (240,000) (2,435,000)
Loan from officer................... -- -- -- 440,000
----------- ----------- ------------- -------------------
Net cash provided by financing
activities.................... -- 4,504,088 307,730,694 328,002,264
----------- ----------- ------------- -------------------
Net increase (decrease) in cash and cash
equivalents........................... (1,600,447) 2,783,748 165,797,658 170,381,220
Cash and cash equivalents at the
beginning of period................... 3,400,261 1,799,814 4,583,562 --
----------- ----------- ------------- -------------------
Cash and cash equivalents at the end of
period................................ $ 1,799,814 $ 4,583,562 $ 170,381,220 $ 170,381,220
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest.......................... $ -- $ 42,666 $ -- $ 82,729
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
Supplemental disclosure of non-cash
investing activities:
Borrowings under the AEF
Agreements........................ -- -- $ 4,470,653 $4,470,653
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
Supplemental disclosure of non-cash
financing activities:
Common stock issued in satisfaction
of notes payable to related
parties, including accrued
interest.......................... $ -- $ -- $ -- $ 998,452
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
Common stock issued for services
rendered.......................... $ 347,176 $ 554,226 $ -- $ 901,402
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
Common stock options granted for
services rendered................. $ -- $ 119,820 $ -- $ 119,820
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
Issuance of fully vested in the
money stock options............... $ -- $ -- $ 448,125 $ 448,125
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
Deferred compensation in connection
with stock options granted........ $ 320,000 $ 320,000 $ -- $ 640,000
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
Common stock issued in satisfaction
of amount due to related parties
including accrued interest........ $ -- $ -- $ -- $ 409,390
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
Exchange of 5% Preferred Stock
for 10.5% Series C Preferred
Stock............................. $ -- $ -- $ 110,237,336 $ 110,237,336
----------- ----------- ------------- -------------------
----------- ----------- ------------- -------------------
The accompanying notes are an intergral part of these consolidated financial
statements.
37
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND FINANCING
BUSINESS
CD Radio Inc. (the 'Company') was originally incorporated in the State of
Delaware on May 17, 1990, under the name Satellite CD Radio, Inc. On December 7,
1992, the Company changed its name to CD Radio Inc. The Company shortly
thereafter formed a wholly-owned subsidiary, Satellite CD Radio, Inc. ('SCDR')
which was capitalized with nominal assets. On April 29, 1993, the Company
acquired all of the outstanding shares of stock of Sky-Highway Radio Corp., a
Colorado corporation ('SHRC'), and on December 23, 1994, SHRC was liquidated and
dissolved. SCDR and SHRC were formed primarily to apply for certain Federal
Communications Commission (the 'FCC') licenses. CD Radio Inc., SCDR, and SHRC
are hereinafter collectively referred to as the 'Company.'
The Company is a pioneer in the development of a service for broadcasting
digital quality music programming via satellites to subscribers' vehicles
('satellite radio'). The Company intends to focus exclusively on providing a
consumer service, and anticipates that the equipment required to receive its
broadcasting will be manufactured by consumer electronics manufacturers.
In April 1997, the Company was the winning bidder in an FCC auction for one
of two national satellite radio broadcast licenses with a winning bid of $83.3
million, of which $16.7 million was paid as a deposit. The Company paid the
balance due the FCC in October 1997 and was awarded the FCC License on October
10, 1997.
FINANCING REQUIREMENTS
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.
Prior to commencing CD Radio broadcast, the Company estimates that it will
require approximately $202.1 million of additional funds in order to finance the
remaining construction of its satellite system, to plan and implement its
service, to provide working capital and to sustain its operations until it
generates positive cash flows from operations. Failure to obtain the additional
required funding would prevent the Company from realizing its objective of
providing satellite radio. Management intends to fund operations and capital
expansion through the sale of additional debt and equity securities. The Company
believes that its working capital at December 31, 1997 is sufficient to fund
planned operations and construction of its satellite system through the first
quarter of 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of CD Radio Inc.
and its wholly-owned subsidiaries, SCDR and SHRC (through the date of SHRC's
dissolution, December 23, 1994). Intercompany transactions are eliminated in
consolidation. The Company's principal activities to date have included
technology development, obtaining regulatory approval for the CD Radio service,
commencement of construction of two 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. Accordingly, the Company's financial statements are presented as
those of a development stage enterprise, as prescribed by Statement of Financial
Accounting Standards ('SFAS') No. 7, 'Accounting and Reporting by Development
Stage Enterprises.'
38
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of expenses during the
reported period. The estimates involve judgments with respect to, among other
things, various future factors which are difficult to predict and are beyond the
control of the Company. Therefore, actual amounts could differ from these
estimates.
DEPRECIATION
Depreciation of office equipment is computed on the straight-line method
over three to five years based upon estimated useful lives. Depreciation of
technical equipment, primarily satellite communications equipment, is computed
on the straight-line method based on an estimated useful life of ten years.
Depreciation of demonstration equipment, primarily an automobile used in a
prototype system, is computed on the straight-line method based on an estimated
useful life of four years. All costs incurred related to activities necessary to
prepare the CD Radio satellite system for use are capitalized. To date, such
costs consist of satellite construction in process, launch construction in
process and the cost to acquire the FCC license at auction. Charges to
operations for depreciation and amortization will begin upon commencement of
commercial broadcasting which is projected to be in late 1999. The Company
anticipates that it will depreciate satellite and launch costs over 15 years and
amortize the FCC license costs over 40 years.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company has invested its excess cash in U.S. Treasury Obligations. The
Company has not experienced any losses on its investments.
LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets, utilizing
qualitative and quantative factors. At such time as an impairment in value is
identified, the impairment, will be quantatively measured in accordance with
SFAS No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be disposed of,' and charged to operations. No such
impairment losses have been recognized to date.
FAIR VALUE INFORMATION
The carrying amount of current assets and current liabilities approximates
fair value because of the short maturity of these investments. The fair value of
fixed-rate long-term debt and redeemable preferred stock is estimated using
quoted marked prices where applicable or by discounting remaining cash flows at
the current market rate. As of December 31, 1997, carrying amount of these
financial instruments approximates fair value. The carrying amount of
variable-rate long-term debt approximates fair value.
39
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the sum of tax payable for the period and the change
during the period in deferred tax assets and liabilities.
NET LOSS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, 'Earnings
Per Share,' which requires the presentation of basic earnings per share and
diluted earnings per share. Basic earnings per share is based on the weighted
average number of outstanding shares of common stock. Diluted earnings per share
adjusts the weighted average for the potential dilution that could occur if
stock options, warrants or other convertible securities were exercised or
converted into common stock. Diluted earnings per share is the same as basic
earnings per share because the effects of such items were anti-dilutive.
Differences between historical quarterly earnings per share amounts, reported on
primary earnings per share basis, and amounts now reported as basic are not
material. Earnings per share for all periods presented conform to SFAS No. 128.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued two new standards which
become effective for reporting periods beginning after December 15, 1997. SFAS
No. 130, 'Reporting Comprehensive Income,' requires additional disclosures with
respect to certain changes in assets and liabilities that previously were not
required to be reported as results of operations for the period. The Company
will begin making the additional disclosures required by SFAS No. 130 in the
first quarter of 1998. SFAS No. 131, 'Disclosures about Segments of an
Enterprise and Related Information,' requires financial and descriptive
information with respect to 'operating segments' of an entity based on the way
management disaggregates the entity for making internal operating decisions. The
Company will begin making the disclosures required by SFAS No. 131 with
financial statements for the period ending December 31, 1998.
3. NOTES PAYABLE
In November 1997, the Company received net proceeds of $116,335,045 from
the issuance of 12,910 units consisting of $20,000 principal amount at maturity
of 15% Senior Secured Discount Notes (the 'Notes') and a warrant to purchase an
additional $3,000 principal amount at maturity of Notes for no additional
consideration to the holder. All of the warrants were exercised in 1997. The
aggregate maturity value of the Notes including Notes issued upon the exercise
of the warrants is $296,930,000. The Notes mature on December 1, 2007 and the
first cash interest payment is deferred until June 2003. The Indenture under
which the Notes were issued contains various restrictive covenants, including a
limitation on the amount of additional indebtedness that may be incurred by the
Company. As of December 31, 1997 the Company had accrued $1,867,816 of interest
relating to the Notes. The Notes are redeemable, at the option of the Company,
in whole or in part, at any time on or after December 1, 2002, at specified
redemption prices plus accrued interest, if any, to the date of redemption. The
Notes are senior obligations of the Company and are collaterized by a first
priority perfected security interest in all of the issued and outstanding common
stock of SCDR. SCDR conducts no business activities and its only asset is the
FCC license.
40
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company incurred $8,690,559 in costs in connection with the issuance of
the Notes. Debt issuance costs are capitalized and amortized over the 10 year
life of the Notes. Accumulated amortization of debt issuance costs was $73,161
at December 31, 1997.
On July 22, 1997, the Company entered into two loan agreements
(collectively the 'AEF Agreements') with Arianespace Finance S.A. ('AEF'), a
subsidiary of Arianespace S.A. ('Arianespace'), to finance approximately $105
million of the estimated $176 million price of the launch services to be
provided by Arianespace. Under these agreements, the Company is able to borrow
funds to meet the progress payments due to Arianespace for the construction of
each launch vehicle and other launch costs (the 'Loans'). Interest on the loans
currently accrues at the rate of 3% per annum above LIBOR and is capitalized.
The Company has the opportunity upon satisfying a variety of conditions
specified in the AEF Agreements to extend the term of the Loans. If not
extended, or the Company is unable to comply with the terms and covenants of
such extended loans, the Company will be required to repay the Loans in full,
together with accrued interest and all fees and other amounts due, approximately
three months before the applicable launch date, which will be prior to the time
CD Radio commences commercial operations, which is anticipated to be in late
1999. The AEF Agreements impose restrictions on the Company's ability to incur
additional indebtedness, make investments or permit liens on certain assets of
the Company. As of December 31, 1997, the Company had borrowed approximately
$4.4 million under the AEF Agreements. For the year ended December 31, 1997, the
Company capitalized $22,537 in interest related to the Loans.
4. CAPITAL STOCK
COMMON STOCK, PAR VALUE $.001 PER SHARE
On September 29, 1994 the Company completed its initial public offering in
connection with which the Company received net proceeds of $4.8 million and
issued 1,491,940 shares of Common Stock.
On August 5, 1997 the Company sold approximately 1.9 million shares of
Common Stock to Loral Space & Communication Ltd. ('Loral Space') for net
proceeds of approximately $24.4 million.
In November 1997, the Company issued 2.8 million shares of Common Stock for
net proceeds of $42.2 million in connection with a public offering. In December
1997, the Company issued an additional 250,000 shares, in connection with the
partial exercise of an option granted to the underwriters of the public offering
solely to cover overallotments, for net proceeds of $4.2 million.
PREFERRED STOCK
In April 1997, the Company completed a private placement of its 5% Delayed
Convertible Preferred Stock (the '5% Preferred Stock'). The Company sold a total
of 5.4 million shares of the 5% Preferred Stock for an aggregate sales price of
$135 million and net proceeds of $120.5 million. The 5% Preferred Stock was
convertible at a discount to the market and accordingly, based on SEC
guidelines, the Company recorded approximately $52 million as a deemed
dividend in net loss attributable to common stockholders.
In November 1997, the Company exchanged 1,846,799 shares of 10 1/2% Series
C Convertible Preferred Stock (the '10 1/2% Preferred Stock') for all
outstanding shares of its 5% Preferred Stock. Each share of 10 1/2% Preferred
Stock is convertible into a number of shares of Common Stock calculated by
dividing the $100 per share liquidation preference (the 'Liquidation
Preference') by a conversion price of $18.00. This conversion price is subject
to adjustment for certain corporate events. Any shareholder who converts the
10 1/2% Preferred Stock into Common Stock prior to November 15, 2002 will
forfeit the right to any accrued and unpaid dividends. Dividends on the 10 1/2%
Preferred Stock are cumulative from the date of issuance and payable, if
declared by the Board of Directors, on a quarterly basis commencing on November
15, 2002. Dividends can be paid with cash or Common Stock at the option of the
Company. Commencing November 15, 1999, the Company may redeem the 10 1/2%
41
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock at the Liquidation Preference plus any accrued and unpaid
dividends, provided the price of Company's Common Stock is at least $31.50 per
share during a specified period. After November 15, 2002, the Company's right to
redeem the 10 1/2% Preferred Stock is not restricted by the market price of its
Common Stock. The Company is required to redeem all outstanding shares of
10 1/2% Preferred Stock on November 15, 2012 at a price equal to the Liquidation
Preference plus any accrued and unpaid dividends. As of December 31, 1997 the
Company accrued a dividend payable relating to the 10 1/2% Preferred Stock of
$2,337,592.
WARRANTS
In connection with the Company's initial public offering in 1994, and the
partial exercise of the underwriters' over-allotment option in connection
therewith the Company issued warrants to purchase 745,970 shares of the
Company's Common Stock. Additionally, the Company issued to the underwriters as
consideration warrants to purchase 123,560 shares of the Company's Common Stock.
Each warrant originally entitled the holder to purchase one share of Common
Stock at a purchase price of $5.00 per share until March 20, 1995 and at a
purchase price of $6.00 per share during the six-month period thereafter. In
September 1995, the Company extended the expiration date of the warrants to
March 20, 1996, and, in March 1996, extended the expiration date of these
warrants to September 20, 1996, in each case at a purchase price of $6.00 per
share. In September 1996, the Company received proceeds of $4,589,088 relating
to the exercise of 864,848 warrants and the remaining 4,682 warrants expired
unexercised. Of the warrants exercised, 764,848 shares of Common Stock were
issued in exchange for cash and 27,083 shares of Common Stock were issued in a
cashless exercise of 100,000 warrants held by the underwriters.
In connection with the April 1997 issuance of 5% Preferred Stock, the
Company agreed to grant a warrant to an investment advisor to purchase 486,000
shares of the 5% Preferred Stock with an exercise price of $25.00 per share. In
connection with the November 1997 issuance of the 10 1/2% Preferred Stock, the
Company agreed to grant to its investment advisor and certain related persons,
in lieu of a warrant to purchase shares of 5% Preferred Stock, warrants to
purchase an aggregate of 177,178 shares of 10 1/2% Preferred Stock at an initial
exercise price of $68.47 per share. The exercise price of the warrants declines
by approximately $0.12 per month to $60.24 per share on and after April 1, 2002.
In 1995, the Company adopted the 1995 Stock Compensation Plan
('Compensation Plan') from which up to 175,000 shares of the Company's Common
Stock could be issued in lieu of cash compensation to employees and or
consultants. During 1995 and 1996, respectively, 107,000 and 67,500 shares of
the Company's Common Stock were issued pursuant to this Compensation Plan.
STOCK OPTION PLANS
In February 1994, the Company adopted its 1994 Stock Option Plan (the '1994
Plan') and its 1994 Directors' Nonqualified Stock Option Plan (the 'Directors'
Plan'), under which the Company was authorized to grant up to 1,250,000 options
in the aggregate Options granted under the 1994 Plan generally vest over a
four-year period and generally are exercisable for a period of ten years from
the date of grant. In 1996, the Board of Directors voted to increase the number
of shares of Common Stock available for issuance pursuant to the 1994 Plan and
the Directors' Plan by 350,000 shares to 1,600,000 shares. As of December 31,
1997 the Company has granted 187,500 options subject to approval by the
stockholders of amendments to the Company's 1994 Plan and Directors' Plan to
increase the number of options that may be granted thereunder.
42
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option activity under the 1994 Plan, the Directors' Plan, and of
all other option activity follows:
1994 PLAN DIRECTORS' PLAN OTHER
--------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTION PRICE PER OPTION PRICE PER OPTION PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
--------- --------- ------- --------- -------- ---------
Outstanding at January 1, 1994................. -- -- 410,000 $4.33
--------- ------- --------
Granted................................... 702,500 $ 3.82 20,000 $ 4.25 --
Exercised................................. -- --
Cancelled................................. (90,000) $ 5.00 -- --
--------- ------- --------
Outstanding at December 31, 1994............... 612,500 $ 3.64 20,000 $ 4.25 410,000 $4.33
--------- ------- --------
Granted................................... 25,000 2.88 85,000 $ 3.18 --
Exercised................................. -- -- --
Cancelled................................. -- -- (60,000) $6.25
--------- ------- --------
Outstanding at December 31, 1995............... 637,500 $ 3.61 105,000 $ 3.39 350,000 $4.00
--------- ------- --------
Granted................................... 545,000 $ 8.10 40,000 $ 6.875 --
Exercised................................. (60,000) $ 1.00 (5,000) $ 1.00 (120,000) $1.00
Cancelled................................. -- -- --
--------- ------- --------
Outstanding at December 31, 1996............... 1,122,500 $ 5.93 140,000 $ 4.47 230,000 $5.57
--------- ------- --------
--------- ------- --------
Granted................................... 515,000 $ 14.52 -- --
Exercised................................. (13,000) $ 2.00 -- (30,000) $1.00
Cancelled................................. (55,000) $ 5.98 -- --
--------- ------- --------
Outstanding at December 31, 1997............... 1,569,500 $ 8.73 140,000 $ 4.47 200,000 $6.25
--------- ------- --------
--------- ------- --------
As of December 31, 1997:
1994 PLAN DIRECTORS' PLAN OTHER
----------------- ---------------- ----------------
Range of exercise prices.......................................... $1.00 - $17.63 $1.00 - $6.88 $1.00 - $6.25
Weighted average remaining contractual life for options
outstanding (years)............................................. 9.53 7.72 5.39
The weighted average fair value of options granted during 1996 and 1997 was
$8.56 and $4.37, respectively.
No shares of Common Stock remain available for grant pursuant to either the
1994 Plan or the Directors' Plan. The Company has reserved a total of 1,909,500
shares of Common Stock issuable upon the exercise of outstanding options and
options available for issuance pursuant to the Company's stock option plans. As
of December 31, 1997, 187,500 options were issued and subject to replenishment
of the stock options plan.
As a result of certain option grants at exercise prices below fair market
value, the Company recorded deferred compensation which is amortized over the
vesting period of the related options. Deferred compensation related to options
that were forfeited has been charged to additional paid-in capital. For the
years ended December 31, 1995, 1996 and 1997, and for the period May 17, 1990
(date of inception) to December 31, 1997, the Company recognized non-cash
compensation expense in connection with stock option issuances of $320,000,
$439,820, $448,125 and $2,283,445, respectively.
The Company has adopted the disclosure-only provisions of SFAS No. 123 as
they pertain to financial statement recognition of compensation expense
attributable to option grants. If the Company
43
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
had elected to recognize compensation cost for the option grants consistent with
FAS No. 123, the Company's net loss and net loss per share (basic and diluted)
on a pro-forma basis would have been.
1996 1997
----------- -----------
Net loss -- as reported......................................... $(2,830,595) $(4,736,802)
Net loss -- pro-forma........................................... (4,428,995) (6,254,321)
Net loss per share -- as reported............................... (0.29) (.41)
Net loss per share -- pro-forma................................. (0.46) (.54)
The pro-forma expense related to stock options is recognized over the
vesting period, generally four years. The fair value of each option grant was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for each year:
1996 1997
---- ----
Risk-free interest rate....................................................... 6.00% 6.11%
Expected life of options -- years............................................. 2.79 3.11
Expected stock price volatility............................................... 75% 75%
Expected dividend yield....................................................... N/A N/A
5. RELATED PARTIES
Since inception, the Company has relied upon related parties for certain
consulting, legal and management services. Total expenses incurred in
transactions with related parties are as follows:
FOR THE PERIOD MAY
FOR THE YEARS ENDED 17, 1990 (DATE OF
DECEMBER 31, INCEPTION) TO
-------------------------------- DECEMBER 31,
1995 1996 1997 1997
-------- -------- -------- -------------------
Consulting fees.......................................... $ 34,575 $187,820 $137,687 $ 850,897
Legal fees............................................... 74,761 70,582 141,208 868,758
Management fees.......................................... -- -- -- 361,800
Interest expense......................................... 19,783 13,268 -- 113,474
Office space............................................. -- -- -- 40,500
Patent and FCC fees...................................... -- -- -- 56,600
Other.................................................... -- -- -- 26,750
-------- -------- -------- -------------------
$129,119 $271,670 $278,895 $ 2,318,779
-------- -------- -------- -------------------
-------- -------- -------- -------------------
Of the $187,820 in consulting fee expenses for the year ended December 31,
1996, $119,820 relate to issuance of common stock options to a related party for
consulting services performed for the Company.
44
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the period May 17, 1990 (date of inception) to December 31, 1997,
the Company issued Common Stock in lieu of cash in settlement of certain
liabilities and expenses as follows:
FOR THE PERIOD MAY
FOR THE YEARS ENDED 17, 1990 (DATE OF
DECEMBER 31, INCEPTION) TO
-------------------------------- DECEMBER 31,
1995 1996 1997 1997
-------- -------- -------- -------------------
Consulting fees.......................................... $ 36,330 $ 32,550 $ -- $ 168,880
Legal fees............................................... 310,953 521,743 -- 1,028,227
Management fees.......................................... -- -- -- 60,000
Interest expense......................................... -- -- -- 14,259
Patent and FCC fees...................................... -- -- -- 39,600
-------- -------- -------- -------------------
$347,283 $554,293 $ -- $ 1,310,966
-------- -------- -------- -------------------
-------- -------- -------- -------------------
Liabilities settled through the issuance of Common Stock in lieu of cash
are reflected in the statements of stockholders' equity.
6. INCOME TAXES
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax assets and deferred tax liability are as follows:
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
Tax credits..................................................... $ -- $ 114,000
Capitalized start-up costs...................................... 5,377,000 6,887,700
Net operating loss carryforwards................................ 1,511,300 446,600
Deferred compensation........................................... 542,300 542,300
Accrual to cash adjustments..................................... 60,500 313,700
----------- -----------
7,491,100 8,304,300
Valuation allowance............................................. (7,491,100) (8,304,300)
----------- -----------
Net deferred tax asset.......................................... $ -- $ --
----------- -----------
----------- -----------
Realization of the net deferred tax asset at the balance sheet date is
dependent upon future earnings which are uncertain. Accordingly, a full
valuation allowance was recorded against the asset.
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $1,097,300 for federal and state income tax purposes available to
offset future taxable income. The net operating loss carryforwards expire at
various dates beginning 2008. There may be limitations on the annual utilization
of these net operating losses as a result of certain changes in ownership that
have occurred since the Company's inception. In addition, a significant portion
of costs incurred have been capitalized for tax purposes as a result of the
Company's status as a start-up enterprise. Total start-up costs as of December
31, 1997 are $16,703,300. Once the Company begins its active trade or business,
these capitalized costs will be amortized over 60 months. The total deferred tax
asset related to capitalized start-up costs of $7,056,700 include $169,000
which, when realized, would not affect financial statement income but will be
recorded directly to shareholders' equity.
45
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT
In October 1992, the Company entered into a lease with an unaffiliated
property management company for its office space in Washington, D.C. that the
Company previously subleased from a company controlled by a former director and
executive officer of the Company. The lease term extends through October 1998.
The lease provided for the abatement of rental payments for the first three
months of each of the first two years of the lease term. Also, in addition to
the base rental payments, the Company is obligated to pay a monthly allocation
of the building's operating expenses. The Company does not intend to renew this
lease.
Total rent expense for the years ended December 31, 1995, 1996 and 1997 and
the period May 17, 1990 (date of inception) to December 31, 1997 was $274,653,
$301,765, $277,996 and $1,483,004, respectively.
SATELLITE CONSTRUCTION
The Company has entered into an agreement (the 'Construction Contract')
with Space Systems/Loral, Inc. pursuant to which Space Systems/Loral has agreed
to construct three satellites and, at the Company's option, a fourth satellite
in accordance with stipulated specifications. The amount of the Construction
Contract as amended is approximately $275.8 million. The total value of
satellite construction in progress was $49.3 million as of December 31, 1997.
LAUNCH SERVICES
The Company has reserved two launch slots with Arianespace during the
period extending from August 1, 1999 through March 31, 2000. If the Company's
satellites are not available for launch during this period, the Company will
arrange to launch the satellites on the first launch dates available after the
satellites are completed. The amount of the launch services contract is
approximately $176 million. In connection with this agreement, the Company paid
a non-refundable launch date reservation fee of $100,000 which is included in
deposits on the balance sheets as of December 31, 1996. On July 22, 1997, the
Company entered into two loan agreements (collectively, the 'AEF Agreements')
with AEF, a subsidiary of Arianespace, to finance approximately $105 million of
the estimated $176 million price of the launch services to be provided by
Arianespace. Under these agreements, the Company is able to borrow funds to meet
the progress payments due to Arianespace for the construction of each launch
vehicle and other launch costs (the 'Tranche A Loans'). The Company has the
opportunity, upon satisfying a variety of conditions specified in the AEF
Agreements, to extend the term of the Tranche A Loans. If not extended, or the
Company is unable to comply with the terms and covenants of such extended loans,
the Company will be required to repay the Tranche A Loans in full, together with
accrued interest and all fees and other amounts due, approximately three months
before the applicable launch date, which will be prior to the time CD Radio
commences commercial operations. As of December 31, 1997 the Company had paid
Launch Deposits of $6,292,000 and received credit from the AEF Agreements for
$4,470,653.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's definitive proxy statement (the 'Proxy Statement') prepared with
respect to the Annual Meeting of Shareholders to be held on April 20, 1998. The
Proxy Statement will be filed with the Commission at a later date, that is not
more than 120 days after the end of the Company's 1997 fiscal year. The
information with respect to Executive Officers is set forth, pursuant to General
Instruction G of Form 10-K, under Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement prepared with respect to the Annual Meeting
of Shareholders to be held on April 20, 1998. The Proxy Statement will be filed
with the Commission at a later date, that is not more than 120 days after the
end of the Company's 1997 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement prepared with respect to the Annual Meeting
of Shareholders to be held on April 20, 1998. The Proxy Statement will be filed
with the Commission at a later date, that is not more than 120 days after the
end of the Company's 1997 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement prepared with respect to the Annual Meeting
of Shareholders to be held on April 20, 1998. The Proxy Statement will be filed
with the Commission at a later date, that is not more than 120 days after the
end of the Company's 1997 fiscal year.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statement, Financial Statement Schedules and Exhibits
(1) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations 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 Consolidated Statements of
Stockholders' Equity for the period May 17, 1990 (date of inception) to
December 31, 1997
Consolidated Statements of Cash Flows 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
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted since they are either not
applicable or the required information is contained elsewhere in 'Item
8. Financial Statements and Supplementary Data.'
(3) Exhibits
All exhibits listed below are filed with this Annual Report on Form
10-K unless specifically stated to be incorporated by reference to other
documents previously filed with the Securities and Exchange Commission
(the 'Commission').
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
3.1. -- Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (File No. 33-74782) (the 'S-1 Registration Statement')).
3.2 -- Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to the S-1 Registration
Statement).
3.3 -- Certificate of Designations of 5% Delayed Convertible Preferred Stock (incorporated by reference to
Exhibit 10.24 to the Form 10-K/A for the year ended December 31, 1996 (the '1996 Form 10-K')).
3.4 -- 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 Form 8-A, filed with the Commission on
October 30, 1997 (the 'Form 8-A')).
3.5.1 -- 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) (the 'S-4 Registration Statement')).
3.5.2 -- Certificate of Correction of the Series C Certificate of Designations.
3.6 -- Certificate of Designations of Series D Convertible Preferred Stock (incorporated by reference to
Exhibit 4.2 to the S-4 Registration Statement).
4.1 -- Form of Certificate for Shares of Common Stock (incorporated by reference to Exhibit 4.3 to the S-1
Registration Statement).
4.2 -- Form of Certificate for Shares of 10 1/2% Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 4.4 to the S-4 Registration Statement).
4.3 -- Form of Certificate for Shares of Series D Convertible Preferred Stock (incorporated by reference to
Exhibit 4.5 to the S-4 Registration Statement).
4.4 -- 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 Form 8-A).
4.5 -- Form of Right Certificate (incorporated by reference to Exhibit B to Exhibit 1 to Form 8-A).
48
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
4.6 -- 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 'Units Registration Statement')).
4.7 -- Form of Note (incorporated by reference to Exhibit 4.2 to the Units Registration Statement).
4.8 -- 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 Units
Registration Statement).
4.9 -- Warrant Agreement, dated as of November 26, 1997, between the Company and IBJ Schroder Bank & Trust
Company, as Warrant Agent (incorporated by reference to Exhibit 4.3 to the Units Registration
Statement).
4.10 -- Form of Warrant (incorporated by reference to Exhibit 4.4 to the Units Registration Statement).
4.11 -- Form of Preferred Stock Warrant Agreement, dated as of April 9, 1997, between the Company and each
Warrantholder thereof.
4.12 -- Form of Common Stock Purchase Warrant granted by the Company to Everest Capital Master Fund, L.P. and
to The Ravich Revocable Trust of 1989.
9.1 -- Voting Trust Agreement, dated August 26, 1997, by and among Darlene Friedland, as Grantor, David
Margolese, as Trustee, and the Company (incorporated by reference to Exhibit (c) to the Company's
Issuer Tender Offer Statement on Form 13E-4, filed with the Commission on October 16, 1997).
10.1 -- Lease Agreement, dated October 20, 1992, between 22nd & K Street Office Building Limited Partnership
and the Company (incorporated by reference to Exhibit 10.3 to the S-1 Registration Statement).
10.2.1 -- Engagement Letter Agreement, dated November 18, 1992, between the Company and Batchelder & Partners,
Inc. (incorporated by reference to Exhibit 10.4 to the S-1 Registration Statement).
10.2.2 -- Engagement Termination Letter Agreement, dated December 4, 1997, between the Company and Batchelder &
Partners, Inc.
*10.3.1 -- Proprietary Information and Non-Competition Agreement, dated February 9, 1993, for Robert D. Briskman
(incorporated by reference to Exhibit 10.8.1 to the S-1 Registration Statement).
*10.3.2 -- Amendment No. 1 to Proprietary Information and Non-Competition Agreement between the Company and
Robert D. Briskman (incorporated by reference to Exhibit 10.8.2 to the S-1 Registration Statement).
'D'10.4.1 -- Satellite Construction Agreement, dated March 2, 1993, between Space Systems/Loral, Inc. and the
Company (incorporated by reference to Exhibit 10.9.1 to the S-1 Registration Statement).
'D'10.4.2 -- Amendment No. 1 to Satellite Construction Agreement, effective December 28, 1993, between Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.9.2 to the S-1
Registration Statement).
'D'10.4.3 -- Amendment No. 2 to Satellite Construction Agreement, effective March 8, 1994, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.9.3 to the S-1
Registration Statement).
10.4.4 -- Amendment No. 3 to Satellite Construction Agreement, effective February 12, 1996, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.9.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 (the '1995 Form 10-K')).
10.4.5 -- Amendment No. 4 to Satellite Construction Agreement, effective June 18, 1996, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.8.5 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996).
10.4.6 -- Amendment No. 5 to Satellite Construction Agreement, effective August 26, 1996, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.8.6 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996).
10.4.7 -- Amendment No. 6 to Satellite Construction Agreement, effective August 26, 1996, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.5.7 to the 1996 Form
10-K).
49
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
10.4.8 -- Amendment No. 8 to Satellite Construction Agreement, effective January 29, 1997, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.5.8 to the 1996 Form
10-K).
10.4.9 -- Amendment No. 9 to Satellite Construction Agreement, effective February 26, 1997, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.5.9 to the 1996 Form
10-K).
10.4.10 -- Amendment No. 11 to Satellite Construction Agreement, effective March 24, 1997, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.5.10 to the 1996 Form
10-K).
10.4.11 -- Amendment No. 12 to Satellite Construction Agreement, effective April 25, 1997, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.4.11 to the Company's
Quarterly Report on Form 10-Q/A for the period ended March 31, 1997).
10.4.12 -- Amendment No. 13 to Satellite Construction Agreement, effective April 28, 1997, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.4.12 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1997).
10.4.13 -- Amendment No. 14 to Satellite Construction Agreement, effective June 30, 1997, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.4.13 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1997).
10.4.14 -- Amendment No. 15 to Satellite Construction Agreement, effective July 31, 1997, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K, filed with the Commission on October 7, 1997).
10.4.15 -- Amendment No. 16 to Satellite Construction Agreement, effective August 4, 1997, between the Space
Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K, filed with the Commission on October 7, 1997).
10.5 -- Assignment of Technology Agreement, dated April 15, 1993, between Robert D. Briskman and the Company
(incorporated by reference to Exhibit 10.10 to the S-1 Registration Statement).
*10.6.1 -- Amended and Restated Option Agreement between the Company and Robert D. Briskman (incorporated by
reference to Exhibit 10.13 to the S-1 Registration Statement).
*10.6.2 -- Stock Option Agreement, dated as of October 15, 1997, between the Company and Robert D. Briskman.
10.7.1 -- Launch Reservation Agreement, dated September 20, 1993, between the Company and Arianespace S.A.
(incorporated by reference to Exhibit 10.15.1. to the S-1 Registration Statement).
10.7.2 -- Modification of Launch Reservation Agreement, dated April 1, 1994, between the Company and Arianespace
S.A. (incorporated by reference to Exhibit 10.15.2 to the S-1 Registration Statement).
10.7.3 -- Second Modification of Launch Reservation Agreement, dated August 10, 1994, between the Company and
Arianespace S.A. (incorporated by reference to Exhibit 10.15.3 to the S-1 Registration Statement).
10.7.4 -- Third Modification of Launch Reservation Agreement, dated November 8, 1995, between the Company and
Arianespace S.A. (incorporated by reference to Exhibit 10.14.4 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1996).
10.7.5 -- Fourth Modification of Launch Reservation Agreement, dated August 30, 1996, between the Company and
Arianespace S.A. (incorporated by reference to Exhibit 10.14.5 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1995).
10.7.6 -- Fifth Modification of Launch Reservation Agreement, dated December 10, 1996, between the Company and
Arianespace S.A. (incorporated by reference to Exhibit 10.10.6 to the 1996 Form 10-K).
*10.8.1 -- Employment and Noncompetition Agreement between the Company and David Margolese (incorporated by
reference to Exhibit 10.18.1 to the S-1 Registration Statement).
*10.8.2 -- First Amendment to Employment Agreement between the Company and David Margolese (incorporated by
reference to Exhibit 10.18.2 to the S-1 Registration Statement).
*10.9.1 -- Employment and Noncompetition Agreement between the Company and Robert D. Briskman (incorporated by
reference to Exhibit 10.19.1 to the S-1 Registration Statement).
50
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
*10.9.2 -- First Amendment to Employment Agreement between the Company and Robert D. Briskman (incorporated by
reference to Exhibit 10.19.2 to the S-1 Registration Statement).
*10.9.3 -- Second Amendment to Employment Agreement between the Company and Robert D. Briskman (incorporated by
reference to Exhibit 10.12.3 to the 1996 Form 10-K).
*10.10 -- Employment and Noncompetition Agreement, dated as of July 10, 1997, between the Company and Andrew J.
Greenebaum (incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997).
*10.11 -- Employment and Noncompetition Agreement, dated as of April 16, 1997, between the Company and Joseph S.
Capobianco (incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q/A
for the period ended March 31, 1997).
*10.12 -- Employment and Noncompetition Agreement, dated as of April 28, 1997, between the Company and Keno V.
Thomas (incorporated by reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q/A for
the period ended March 31, 1997).
10.13 -- Registration Agreement, dated January 2, 1994, between the Company and M.A. Rothblatt and B.A.
Rothblatt (incorporated by reference to Exhibit 10.20 to the S-1 Registration Statement).
*10.14 -- 1994 Stock Option Plan (incorporated by reference to Exhibit 10.21 to the S-1 Registration Statement).
*10.15 -- Amended and Restated 1994 Directors' Nonqualified Stock Option Plan (incorporated by reference to
Exhibit 10.22 to the 1995 Form 10-K).
10.16.1 -- Option Agreement, dated as of October 21, 1992, between the Company and Batchelder & Partners, Inc.
(incorporated by reference to Exhibit 10.24 to the S-1 Registration Statement).
10.16.2 -- Form of Option Agreement, dated as of December 29, 1997, between the Company and each Optionee.
10.17 -- Settlement Agreement, dated as of April 1, 1994, among the Company, M.A. Rothblatt, B.A. Rothblatt and
Marcor, Inc. (incorporated by reference to Exhibit 10.27 to the S-1 Registration Statement).
*10.18 -- 1995 Stock Compensation Plan (incorporated by reference to Exhibit 10.37 to the 1995 Form 10-K).
10.19.1 -- Preferred Stock Investment Agreement dated October 23, 1996 between the Company and certain investors
(incorporated by reference to Exhibit 10.24 to the 1996 Form 10-K).
10.19.2 -- First Amendment to Preferred Stock Investment Agreement dated March 7, 1997 between the Company and
certain investors (incorporated by reference to Exhibit 10.24.1 to the 1996 Form 10-K).
10.19.3 -- Second Amendment to Preferred Stock Investment Agreement dated March 14, 1997 between the Company and
certain investors (incorporated by reference to Exhibit 10.24.2 to the 1996 Form 10-K).
10.20 -- Stock Purchase Agreement, dated as of August 5, 1997, between the Company, David Margolese and Loral
Space & Communications Ltd. (incorporated by reference to Exhibit 99.1 to the Company's Current Report
on Form 8-K, filed with the Commission on August 19, 1997).
10.21.1 -- Arianespace Customer Loan Agreement, dated as of July 22, 1997, between the Company and Arianespace
Finance S.A., relating to Launch 1 (the 'Arianespace Loan Agreement 1') (incorporated by reference to
Exhibit 10.11.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30,
1997).
10.21.2 -- Amendment No. 1 and Waiver to Arianespace Loan Agreement 1, dated as of July 22, 1997, between
Arianespace S.A., Arianespace Finance S.A. and the Company (incorporated by reference to Exhibit
10.11.1.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997).
10.22 -- Multiparty Agreement relating to Launch 1, entered into as of July 22, 1997, among Arianespace S.A.,
Arianespace Finance S.A. and the Company (incorporated by reference to Exhibit 10.11.2 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1997).
10.23.1 -- Arianespace Customer Loan Agreement, dated as of July 22, 1997, between the Company and Arianespace
Finance S.A., relating to Launch 2 (the 'Arianespace Loan Agreement 2') (incorporated by reference to
Exhibit 10.12.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30,
1997).
51
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
10.23.2 -- Amendment No. 1 and Waiver to Arianespace Loan Agreement 2, dated as of July 22, 1997, between
Arianespace S.A., Arianespace Finance S.A. and the Company (incorporated by reference to Exhibit
10.12.1.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997).
10.24 -- Multiparty Agreement relating to Launch 2, entered into as of July 22, 1997, among Arianespace S.A.,
Arianespace Finance S.A. and the Company (incorporated by reference to Exhibit 10.12.2 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1997).
10.25 -- Summary Term Sheet/Commitment, dated June 15, 1997, among the Company and Everest Capital
International, Ltd., Everest Capital Fund, L.P. and The Ravich Revocable Trust of 1989 (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, filed with the Commission on
July 8, 1997).
10.26.1 -- Engagement Letter Agreement, dated June 14, 1997, between the Company and Libra Investments, Inc.
10.26.2 -- Engagement Termination Letter Agreement, dated August 6, 1997, between the Company and Libra
Investments, Inc.
10.27 -- Engagement Letter Agreement, dated October 8, 1997, between the Company and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
12.1 -- Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
21.1 -- List of the Company's Subsidiaries.
23.1 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (included on signature page).
27.1 -- Financial Data Schedule.
- ------------
* This document has been identified as a management contract or compensatory
plan or arrangement.
'D' Portions of these exhibits, which are incorporated by reference to the S-1
Registration Statement, have been omitted pursuant to an Application for
Confidential Treatment filed by the Company with the Commission pursuant to
Rule 406 of the Securities Act of 1933, as amended.
(b) Reports on Form 8-K
A report on Form 8-K was filed on October 22, 1997 with the Commission
relating to a dividend distribution and Rights Agreement between the
Company and Continental Stock Transfer & Trust Company, as Rights Agent.
A report on Form 8-K was filed on November 10, 1997 with the
Commission relating to the Company's offer to exchange shares of its new
10 1/2% Series C Convertible Preferred Stock for all outstanding shares of
5% Delayed Convertible Preferred Stock.
As of the date of the filing of this Annual Report on Form 10-K, no proxy
materials have been furnished to security holders. Copies of all proxy materials
will be furnished to the Commission in compliance with its rules.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 19th day of
March, 1998.
CD RADIO INC.
By: /S/ DAVID MARGOLESE
.................................
DAVID MARGOLESE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
We, the undersigned officers and directors of CD Radio Inc., hereby
severally constitute David Margolese and Lawrence F. Gilberti, and each of them
singly, our true and lawful attorneys with full power to them, and each of them
singly, to sign for us and in our names in the capacities indicated below, any
and all reports, with all exhibits thereto and any and all documents in
connection therewith, and generally do all such things in our name and on our
behalf in such capacities to enable CD Radio Inc. to comply with the applicable
provisions of the Securities Exchange Act of 1934, as amended, and all
requirements of the Securities and Exchange Commission, and we hereby ratify and
confirm our signatures as they may be signed by our said attorneys, or either of
them, to any and all such amendments.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
/s/ DAVID MARGOLESE Chairman of the Board and Chief Executive March 19, 1998
......................................... Officer (Principal Executive Officer)
(DAVID MARGOLESE)
/s/ ANDREW J. GREENEBAUM Executive Vice President and Chief Financial March 19, 1998
......................................... Officer (Principal Financial and
(ANDREW J. GREENEBAUM) Accounting Officer)
/s/ ROBERT D. BRISKMAN Director March 19, 1998
.........................................
(ROBERT D. BRISKMAN)
/s/ LAWRENCE F. GILBERTI Director March 19, 1998
.........................................
(LAWRENCE F. GILBERTI)
/s/ PETER K. PITSCH Director March 19, 1998
.........................................
(PETER K. PITSCH)
/s/ JACK Z. RUBINSTEIN Director March 19, 1998
.........................................
(JACK Z. RUBINSTEIN)
/s/ RALPH V. WHITWORTH Director March 19, 1998
.........................................
(RALPH V. WHITWORTH)
53
CD RADIO INC.
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- --------------------------------------------------------------------------------------------- ----------
3.1 -- Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form S-1 (File No. 33-74782) (the 'S-1
Registration Statement')).................................................................
3.2 -- Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to the S-1
Registration Statement)...................................................................
3.3 -- Certificate of Designations of 5% Delayed Convertible Preferred Stock (incorporated by
reference to Exhibit 10.24 to the Form 10-K/A for the year ended December 31, 1996 (the
'1996 Form 10-K'))........................................................................
3.4 -- 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 Form 8-A, filed with
the Commission on October 30, 1997 (the 'Form 8-A'))......................................
3.5.1 -- 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) (the 'S-4 Registration Statement'))............
3.5.2 -- Certificate of Correction of the Series C Certificate of Designations.....................
3.6 -- Certificate of Designations of Series D Convertible Preferred Stock (incorporated by
reference to Exhibit 4.2 to the S-4 Registration Statement)...............................
4.1 -- Form of Certificate for Shares of Common Stock (incorporated by reference to Exhibit 4.3
to the S-1 Registration Statement)........................................................
4.2 -- Form of Certificate for Shares of 10 1/2% Series C Convertible Preferred Stock
(incorporated by reference to Exhibit 4.4 to the S-4 Registration Statement)..............
4.3 -- Form of Certificate for Shares of Series D Convertible Preferred Stock (incorporated by
reference to Exhibit 4.5 to the S-4 Registration Statement)...............................
4.4 -- 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
Form 8-A).................................................................................
4.5 -- Form of Right Certificate (incorporated by reference to Exhibit B to Exhibit 1 to Form
8-A)......................................................................................
4.6 -- 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 'Units Registration
Statement'))..............................................................................
4.7 -- Form of Note (incorporated by reference to Exhibit 4.2 to the Units Registration
Statement)................................................................................
4.8 -- 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 Units Registration Statement)..................................................
4.9 -- Warrant Agreement, dated as of November 26, 1997, between the Company and IBJ Schroder
Bank & Trust Company, as Warrant Agent (incorporated by reference to Exhibit 4.3 to the
Units Registration Statement).............................................................
4.10 -- Form of Warrant (incorporated by reference to Exhibit 4.4 to the Units Registration
Statement)................................................................................
4.11 -- Form of Preferred Stock Warrant Agreement, dated as of April 9, 1997, between the Company
and each Warrantholder thereof............................................................
4.12 -- Common Stock Purchase Warrant granted by the Company to Everest Capital Master Fund, L.P.
and to The Ravich Revocable Trust of 1989.................................................
9.1 -- Voting Trust Agreement, dated August 26, 1997, by and among Darlene Friedland, as Grantor,
David Margolese, as Trustee, and the Company (incorporated by reference to Exhibit (c) to
the Company's Issuer Tender Offer Statement on Form 13E-4, filed with the Commission on
October 16, 1997).........................................................................
10.1 -- Lease Agreement, dated October 20, 1992, between 22nd & K Street Office Building Limited
Partnership and the Company (incorporated by reference to Exhibit 10.3 to the S-1
Registration Statement)...................................................................
54
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- --------------------------------------------------------------------------------------------- ----------
10.2.1 -- Engagement Letter Agreement, dated November 18, 1992, between the Company and Batchelder &
Partners, Inc. (incorporated by reference to Exhibit 10.4 to the S-1 Registration
Statement).................................................................................
10.2.2 -- Engagement Termination Letter Agreement, dated December 4, 1997, between the Company and
Batchelder & Partners, Inc. ...............................................................
*10.3.1 -- Proprietary Information and Non-Competition Agreement, dated February 9, 1993, for Robert
D. Briskman (incorporated by reference to Exhibit 10.8.1 to the S-1 Registration
Statement).................................................................................
*10.3.2 -- Amendment No. 1 to Proprietary Information and Non-Competition Agreement between the
Company and Robert D. Briskman (incorporated by reference to Exhibit 10.8.2 to the S-1
Registration Statement)....................................................................
'D'10.4.1 -- Satellite Construction Agreement, dated March 2, 1993, between Space Systems/Loral, Inc.
and the Company (incorporated by reference to Exhibit 10.9.1 to the S-1 Registration
Statement).................................................................................
'D'10.4.2 -- Amendment No. 1 to Satellite Construction Agreement, effective December 28, 1993, between
Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.9.2 to
the S-1 Registration Statement)............................................................
'D'10.4.3 -- Amendment No. 2 to Satellite Construction Agreement, effective March 8, 1994, between the
Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.9.3 to
the S-1 Registration Statement)............................................................
10.4.4 -- Amendment No. 3 to Satellite Construction Agreement, effective February 12, 1996, between
the Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.9.4
to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the '1995
Form 10-K'))...............................................................................
10.4.5 -- Amendment No. 4 to Satellite Construction Agreement, effective June 18, 1996, between the
Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.8.5 to
the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996).......
10.4.6 -- Amendment No. 5 to Satellite Construction Agreement, effective August 26, 1996, between
the Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.8.6
to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996)....
10.4.7 -- Amendment No. 6 to Satellite Construction Agreement, effective August 26, 1996, between
the Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.5.7
to the 1996 Form 10-K).....................................................................
10.4.8 -- Amendment No. 8 to Satellite Construction Agreement, effective January 29, 1997, between
the Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.5.8
to the 1996 Form 10-K).....................................................................
10.4.9 -- Amendment No. 9 to Satellite Construction Agreement, effective February 26, 1997, between
the Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.5.9
to the 1996 Form 10-K).....................................................................
10.4.10 -- Amendment No. 11 to Satellite Construction Agreement, effective March 24, 1997, between
the Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.5.10
to the 1996 Form 10-K).....................................................................
10.4.11 -- Amendment No. 12 to Satellite Construction Agreement, effective April 25, 1997, between
the Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.4.11
to the Company's Quarterly Report on Form 10-Q/A for the period ended March 31, 1997)......
10.4.12 -- Amendment No. 13 to Satellite Construction Agreement, effective April 28, 1997, between
the Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.4.12
to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997).........
10.4.13 -- Amendment No. 14 to Satellite Construction Agreement, effective June 30, 1997, between the
Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 10.4.13 to
the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997)............
55
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- --------------------------------------------------------------------------------------------- ----------
10.4.14 -- Amendment No. 15 to Satellite Construction Agreement, effective July 31, 1997, between the
Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K, filed with the Commission on October 7, 1997)........
10.4.15 -- Amendment No. 16 to Satellite Construction Agreement, effective August 4, 1997, between
the Space Systems/Loral, Inc. and the Company (incorporated by reference to Exhibit 99.2 to
the Company's Current Report on Form 8-K, filed with the Commission on October 7, 1997)....
10.5 -- Assignment of Technology Agreement, dated April 15, 1993, between Robert D. Briskman and
the Company (incorporated by reference to Exhibit 10.10 to the S-1 Registration
Statement).................................................................................
*10.6.1 -- Amended and Restated Option Agreement between the Company and Robert D. Briskman
(incorporated by reference to Exhibit 10.13 to the S-1 Registration Statement).............
*10.6.2 -- Stock Option Agreement, dated as of October 15, 1997, between the Company and Robert D.
Briskman...................................................................................
10.7.1 -- Launch Reservation Agreement, dated September 20, 1993, between the Company and
Arianespace S.A. (incorporated by reference to Exhibit 10.15.1 to the S-1 Registration
Statement).................................................................................
10.7.2 -- Modification of Launch Reservation Agreement, dated April 1, 1994, between the Company and
Arianespace S.A. (incorporated by reference to Exhibit 10.15.2 to the S-1 Registration
Statement).................................................................................
10.7.3 -- Second Modification of Launch Reservation Agreement, dated August 10, 1994, between the
Company and Arianespace S.A. (incorporated by reference to Exhibit 10.15.3 to the S-1
Registration Statement)....................................................................
10.7.4 -- Third Modification of Launch Reservation Agreement, dated November 8, 1995, between the
Company and Arianespace S.A. (incorporated by reference to Exhibit 10.14.4 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996).....................
10.7.5 -- Fourth Modification of Launch Reservation Agreement, dated August 30, 1996, between the
Company and Arianespace S.A. (incorporated by reference to Exhibit 10.14.5 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1995).....................
10.7.6 -- Fifth Modification of Launch Reservation Agreement, dated December 10, 1996, between the
Company and Arianespace S.A. (incorporated by reference to Exhibit 10.10.6 to the 1996 Form
10-K)......................................................................................
*10.8.1 -- Employment and Noncompetition Agreement between the Company and David Margolese
(incorporated by reference to Exhibit 10.18.1 to the S-1 Registration Statement)...........
*10.8.2 -- First Amendment to Employment Agreement between the Company and David Margolese
(incorporated by reference to Exhibit 10.18.2 to the S-1 Registration Statement)...........
*10.9.1 -- Employment and Noncompetition Agreement between the Company and Robert D. Briskman
(incorporated by reference to Exhibit 10.19.1 to the S-1 Registration Statement)...........
*10.9.2 -- First Amendment to Employment Agreement between the Company and Robert D. Briskman
(incorporated by reference to Exhibit 10.19.2 to the S-1 Registration Statement)...........
*10.9.3 -- Second Amendment to Employment Agreement between the Company and Robert D. Briskman
(incorporated by reference to Exhibit 10.12.3 to the 1996 Form 10-K).......................
*10.10 -- Employment and Noncompetition Agreement, dated as of July 10, 1997, between the Company
and Andrew J. Greenebaum (incorporated by reference to Exhibit 10.10 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1997).....................
*10.11 -- Employment and Noncompetition Agreement, dated as of April 16, 1997, between the Company
and Joseph S. Capobianco (incorporated by reference to Exhibit 10.17 to the Company's
Quarterly Report on Form 10-Q/A for the period ended March 31, 1997).......................
56
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- --------------------------------------------------------------------------------------------- ----------
*10.12 -- Employment and Noncompetition Agreement, dated as of April 28, 1997, between the Company
and Keno V. Thomas (incorporated by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q/A for the period ended March 31, 1997).................................
10.13 -- Registration Agreement, dated January 2, 1994, between the Company and M.A. Rothblatt and
B.A. Rothblatt (incorporated by reference to Exhibit 10.20 to the S-1 Registration
Statement).................................................................................
*10.14 -- 1994 Stock Option Plan (incorporated by reference to Exhibit 10.21 to the S-1 Registration
Statement).................................................................................
*10.15 -- Amended and Restated 1994 Directors' Nonqualified Stock Option Plan (incorporated by
reference to Exhibit 10.22 to the 1995 Form 10-K)..........................................
10.16.1 -- Option Agreement, dated as of October 21, 1992, between the Company and Batchelder &
Partners, Inc. (incorporated by reference to Exhibit 10.24 to the S-1 Registration
Statement).................................................................................
10.16.2 -- Form of Option Agreement, dated as of December 29, 1997, between the Company and each
Optionee...................................................................................
10.17 -- Settlement Agreement, dated as of April 1, 1994, among the Company, M.A. Rothblatt, B.A.
Rothblatt and Marcor, Inc. (incorporated by reference to Exhibit 10.27 to the S-1
Registration Statement)....................................................................
*10.18 -- 1995 Stock Compensation Plan (incorporated by reference to Exhibit 10.37 to the 1995 Form
10-K)......................................................................................
10.19.1 -- Preferred Stock Investment Agreement dated October 23, 1996 between the Company and
certain investors (incorporated by reference to Exhibit 10.24 to the 1996 Form 10-K).......
10.19.2 -- First Amendment to Preferred Stock Investment Agreement dated March 7, 1997 between the
Company and certain investors (incorporated by reference to Exhibit 10.24.1 to the 1996
Form 10-K).................................................................................
10.19.3 -- Second Amendment to Preferred Stock Investment Agreement dated March 14, 1997 between the
Company and certain investors (incorporated by reference to Exhibit 10.24.2 to the 1996
Form 10-K).................................................................................
10.20 -- Stock Purchase Agreement, dated as of August 5, 1997, between the Company, David Margolese
and Loral Space & Communications Ltd. (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K, filed with the Commission on August 19, 1997)........
10.21.1 -- Arianespace Customer Loan Agreement, dated as of July 22, 1997, between the Company and
Arianespace Finance S.A., relating to Launch 1 (the 'Arianespace Loan Agreement 1')
(incorporated by reference to Exhibit 10.11.1 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997)..............................................
10.21.2 -- Amendment No. 1 and Waiver to Arianespace Loan Agreement 1, dated as of July 22, 1997,
between Arianespace S.A., Arianespace Finance S.A. and the Company (incorporated by
reference to Exhibit 10.11.1.1 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997)...........................................................
10.22 -- Multiparty Agreement relating to Launch 1, entered into as of July 22, 1997, among
Arianespace S.A., Arianespace Finance S.A. and the Company (incorporated by reference to
Exhibit 10.11.2 to the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997)........................................................................
10.23.1 -- Arianespace Customer Loan Agreement, dated as of July 22, 1997, between the Company and
Arianespace Finance S.A., relating to Launch 2 (the 'Arianespace Loan Agreement 2')
(incorporated by reference to Exhibit 10.12.1 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997)..............................................
10.23.2 -- Amendment No. 1 and Waiver to Arianespace Loan Agreement 2, dated as of July 22, 1997,
between Arianespace S.A., Arianespace Finance S.A. and the Company (incorporated by
reference to Exhibit 10.12.1.1 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997)...........................................................
57
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- --------------------------------------------------------------------------------------------- ----------
10.24 -- Multiparty Agreement relating to Launch 2, entered into as of July 22, 1997, among
Arianespace S.A., Arianespace Finance S.A. and the Company (incorporated by reference to
Exhibit 10.12.2 to the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997)........................................................................
10.25 -- Summary Term Sheet/Commitment, dated June 15, 1997, among the Company and Everest Capital
International, Ltd., Everest Capital Fund, L.P. and The Ravich Revocable Trust of 1989
(incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K,
filed with the Commission on July 8, 1997).................................................
10.26.1 -- Engagement Letter Agreement, dated June 14, 1997, between the Company and Libra
Investments, Inc. .........................................................................
10.26.2 -- Engagement Termination Letter Agreement, dated August 6, 1997, between the Company and
Libra Investments, Inc. ...................................................................
10.27 -- Engagement Letter Agreement, dated October 8, 1997, between the Company and Merrill Lynch,
Pierce, Fenner & Smith Incorporated........................................................
12.1 -- Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends..................................................................................
21.1 -- List of the Company's Subsidiaries........................................................
23.1 -- Consent of Coopers & Lybrand L.L.P........................................................
24.1 -- Power of Attorney (included on signature page)............................................
27.1 -- Financial Data Schedule...................................................................
- ------------
* This document has been identified as a management contract or compensatory
plan or arrangement.
'D' Portions of these exhibits, which are incorporated by reference to
Registration No. 33-74782, have been omitted pursuant to an Application for
Confidential Treatment filed by the Company with the Commission pursuant to
Rule 406 of the Securities Act of 1933, as amended.
58
STATEMENT OF DIFFERENCES
------------------------
The degree symbol shall be expressed as.................................... [d]
The dagger symbol shall be expressed as ................................... 'D'