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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24710
CD RADIO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1700207
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SIXTH FLOOR, 1001 22ND STREET, N.W. WASHINGTON, 20037
D.C.
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 296-6192
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
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]
Aggregate market value of the Registrant's Common Stock held by
non-affiliate as of March 12, 1997 was approximately $39,867,376. The number of
shares of the Registrant's Common Stock outstanding as of March 12, 1997, was
10,300,391.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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P A R T I
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. For example, the Company's service, CD Radio, is
in the planning and development stage and the descriptions set forth herein as
to how the Company plans to implement, market and operate the service are
forward-looking statements, and are subject to change based on future
developments, the Company's experience, and involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or developments in the Company's industry, to
differ materially from the anticipated results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to: risk of not receiving an FCC License in the scheduled
auction; potential risk of delay; increased costs of construction and launch of
necessary satellites; dependence on satellite construction and launch
contractors; risk of launch failure; unproven market acceptance of the Company's
services; the continuing losses of the Company; reliance on unproven technology;
need for substantial additional financing and other risks and uncertainties
described under "Business -- Risk Factors" in Part I of this Annual Report on
Form 10-K. Certain of the forward-looking statements contained in this Annual
Report are identified with cross references to this section and/or to specific
risks identified under "Business -- Risk Factors."
ITEM 1. BUSINESS
The Company is a pioneer in the emerging satellite-to-car broadcasting
industry ("satellite radio"). The Company is engaged in the development of a
subscription based satellite radio system for the nationwide broadcast of 30
channels of commercial-free, compact disc quality music programming and up to 20
channels of all-news, all-sports, and all-talk programming. The Company's
primary market is expected to be operators of cars and trucks throughout the
continental United States. Government statistics indicate that there will be
approximately 192 million registered vehicles in the United States in 1999,
rising to approximately 200 million vehicles by 2004. The Company plans to
broadcast its service, to be called CD Radio, via its own custom designed and
built satellite system utilizing technology developed by the Company.
CD Radio is designed to offer:
(i) A programming selection of finely focused formats. In most markets
radio broadcasters target their programming at broad audience segments, and
even in the largest metropolitan markets, station formats are limited.
(ii) Widespread signal coverage throughout the continental United
States. Terrestrial radio signal availability, in contrast, is generally
limited to distances of approximately 30 miles before fading and loss
occur.
(iii) Commercial-free music programming. Almost all radio stations are
advertiser supported and contain significant amounts of commercial
interruptions to programming.
(iv) CD quality stereo audio.
Upon commencing CD Radio service, the Company anticipates that it will
offer CD Radio to subscribers for a monthly subscription fee of $10 or less,
which would entitle the subscriber to receive all channels.
CD Radio is designed to be broadcast via satellites over a new radio band,
the S-band, which will augment the traditional AM/FM radio bands. In order to
receive CD Radio, subscribers will need satellite band radios which are not
currently commercially available. The Company anticipates that satellite radios
will be manufactured by existing manufacturers of consumer electronics and
automakers, and when manufactured in quantity will be somewhat more expensive
than today's car radios. See "Forward-Looking Statements." The Company expects
that satellite car radios will be similar in size and appearance to today's
AM/FM car radios, and will include the AM/FM bands, as well as the satellite
band. In addition, the Company expects these radios to include a digital display
capable of showing the CD Radio channel number, music format, song
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title, recording artist and album title. See "Forward-Looking Statements." Each
satellite radio will require a satellite dish antenna in order to receive the
satellite signal. The Company has developed what it believes is the world's
smallest satellite dish, which measures approximately 1/8 inch thick and 2
inches in diameter (approximately the size and shape of a silver dollar) and can
fit unobtrusively in a variety of locations on a vehicle. Although the Company
does not intend to manufacture or distribute satellite radios or dish antennas,
it intends to foster their development by communicating to such manufacturers
the specifications needed for the reception of CD Radio.
In order to provide CD Radio, the Company will need to build and launch
into geosynchronous orbit two fully dedicated satellites designed to operate at
special frequencies. The Company has entered into an agreement with Space
Systems/Loral, pursuant to which Space Systems/Loral has agreed to construct the
two satellites and, at the Company's option, a third spare satellite. The
Company has reserved launches with Arianespace for its two satellites during the
period extending from November 1, 1999 through April 30, 2000.
The Company has applied to the FCC for a license (the "FCC License") to
permit it to build, launch and operate its satellites to provide a satellite
radio service. The period for filing such applications expired in December 1992
and the Company is one of four remaining applicants. The FCC is scheduled to
auction two satellite radio licenses among the four applicants on April 1, 1997.
There can be no assurance that the Company will be a winning bidder in the
auction.
Since its formation in 1990, the Company has concentrated its activities on
pursuit of necessary regulatory approvals, strategic planning, technology
development and market research. The Company plans to continue these activities
and to work cooperatively with consumer electronics manufacturers and automakers
in order to foster the development of satellite radios. Once the Company obtains
its FCC License, it intends to begin construction of its satellites and
currently has targeted the second half of 1999 for launch of its two satellites
and commencement of operations. The Company's ability to meet that objective
will depend on several factors, including the timely receipt of necessary
governmental approvals, the successful financing, construction and launch into
orbit of two geosynchronous satellites, the rapid creation of an organization
and management of growth. See "Forward-Looking Statements."
THE RADIO MARKET
The potential market for CD Radio includes the owners of approximately 192
million motor vehicles expected to be registered in the United States in 1999,
rising to approximately 200 million vehicles by 2004. Other potential markets
include owners of portable, walkman, and home radios.
Broadcasting industry sources indicate that American adults listen to an
average of three hours of radio per day. In addition, such sources estimate that
automobile commuters spend 97% of their drivetime listening to the radio.
Music programming dominates the radio airwaves, with FM radio stations
exceeding AM stations in listenership. According to broadcasting industry
sources, in 1996, approximately 79% of total radio listening was to FM stations.
FM stations primarily concentrate on music programming, while AM stations have
an increased proportion of their programming devoted to talk and news.
CD Radio will be available in automobiles only to persons who install
satellite radios in their vehicles or purchase automobiles with factory
installed satellite radios. Accordingly, to assess potential initial demand for
CD Radio, the Company has examined data concerning consumer purchases of
aftermarket and new car autosound equipment and the commitment of consumers to
receiving high quality audio entertainment in their vehicles. According to
industry sources, U.S. consumers spend approximately $2.3 billion on aftermarket
autosound equipment for installation in their vehicles annually, which includes
approximately 5 million AM/FM radios. Additionally, automotive industry sources
report that over 14 million new cars and light trucks were sold in the United
States in 1996, almost all of which contained radios.
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THE CD RADIO SERVICE
The Company intends to offer 30 channels of commercial-free, all-music
programming and up to 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 specific format, intended to cater
to a finely segmented subscriber taste. It is anticipated that upon commencement
of CD Radio the monthly subscription fee for the receipt of all CD Radio
channels will be $10 or less.
CD Radio will offer (i) multichannel "narrowcast" programming formats; (ii)
widespread signal coverage; (iii) commercial-free music programming; and (iv)
compact disc quality stereo audio.
In most markets, radio broadcasters target their programming at broad
audience segments. The Company's multichannel narrowcast programming is designed
to provide focused formats generally available only in major metropolitan areas,
and in many cases, unavailable even in these areas.
Regardless of area, terrestrial radio reception is limited to short
distances of approximately 30 miles, after which reception fades and is lost.
Additionally, terrestrial radio reception is subject to a fluctuating, broad
range of quality.
The Company's preliminary market research indicates that the principal
complaint of commuters interviewed about radio is commercials. When in the car,
many listeners attempt to avoid commercial interruptions by switching stations
at the outset of a string of commercials. The amount of radio advertising varies
with the time of day, station format and market size, but a broadcasting
industry source indicates that, on average, every hour of music programming
during morning and evening commutes is interrupted by 10 to 12 minutes of
commercials.
While terrestrial radio stations currently do not broadcast compact disc
quality stereo sound, the Company believes that FM radio stations may be in a
position to do so before the time the Company's service becomes operational.
Consumers would be unable to receive these new broadcasts on existing radios and
would require new digital radios to do so. The Company does not believe that
such a sound upgrade to digital broadcasting would affect conventional
broadcasters' ability to address the other advantages of CD Radio.
Programming will be managed by the Company's staff, with guidance from
continuous market research. The Company intends to recruit program managers from
the recording, broadcasting and entertainment industries to manage the
development of daily programming for each channel. Music programming will be
produced from the Company's music library and will be sourced from compact
discs. It is contemplated that this music library will consist of an extremely
broad range of recorded music, and will be updated as new recordings are
released. See "Forward-Looking Statements" and "Risk Factors -- Music Royalty
Payments."
The Company believes that CD Radio represents an opportunity for the
recording industry to expose, research, and promote new releases and artists to
targeted listener groups nationwide. The Company plans to solicit promotional
copies of new recordings, and contemplates showcasing these releases as part of
a service to be developed for record companies. The Company's intends to work
with the recording industry and performing artists to develop programming of
mutual benefit.
The Company believes that compact discs and cassettes 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.
Compact discs and cassettes lack the convenience of radio, as well as the
spontaneity and freshness that characterizes radio programming. According to
Arbitron, commuters spend 97% of their drivetime listening to radio.
Accordingly, the Company does not view its service as directly competitive with
these media.
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The following channel list (which employs terminology common to the music
industry) has been prepared by the Company to illustrate the manner in which the
Company's narrowcast programming might be marketed. The Company intends to vary
channel formats from time-to-time to reflect changing subscriber tastes.
1. Symphonic
Music from the masters, Bach, Mozart and Handel. The world's greatest
classical composers broadcast in brilliant CD fidelity.
2. Chamber Music
Elegant music performed by small ensembles of solo instruments such as the
cello, violin and woodwind.
3. Opera
Experience the drama and speqctacle of the greats. Verdi, Puccini and
Wagner.
4. Today's Country
The down home sounds of today's country stars including Vince Gill, Alan
Jackson, Wynonna Judd and Garth Brooks.
5. Traditional Country
All of your favorite country & western legends are here. Stars like George
Strait, Loretta Lynn, Hank Williams, Jr. and George Jones.
6. Contemporary Jazz
The syncopated rhythms of today's jazz music. The cool sounds of Kenny G,
The Yellowjackets and David Sanborn.
7. Classical Jazz
Listen as musicians like Duke Ellington, Miles Davis and John Coltrane
experiment and expand the sounds of jazz.
8. Blues
The foundation of rock. B.B. King, Muddy Waters and Robert Cray.
9. Big Band/Swing
Relive the memories with the sounds of Tommy Dorsey, Glenn Miller and Artie
Shaw.
10. Top of the Charts
Today's hits from recording artists such as Whitney Houston, Mariah Carey
and Boyz II Men.
11. Classic Rock
The greatest hits from the 60's and 70's -- an entire generation of great
rock music. The Who, Rolling Stones and Eric Clapton.
12. 50's Oldies
Tune in and experience the 50's all over again with Chuck Berry, Little
Richard and Elvis Presley.
13. 60's Oldies
The great pop sounds of Motown, the British Invasion and Surfer Rock.
14. Folk Rock
Thoughtful, inspired melodies from performers like Joni Mitchell, James
Taylor and Joan Baez.
15. Latin Ballads
The romantic sounds of Latino vocalists. Julio Iglesias, Nino Bravo and
Roberto Carlos.
16. Latin Rhythms
Move to the music of Latino superstars such as Sergio Mendes, Juan Luis
Guerra and the legendary Tito Puente.
17. Reggae
Pulsating rhythm from the musically prolific island of Jamaica, from the
Skatelites through Bob Marley and Shabba Ranks.
18. Hip-Hop & Rap
The forefront of contemporary music. RUN-DMC, Cypress Hill and Dr. Dre.
19. Dance
Music by today's hottest artists, including Madonna, Janet Jackson and
George Michael.
20. Songs of Love
Romantic ballads and music from some of the world's most popular artists.
21. Singers & Strings
Legends like Frank Sinatra, Barbra Streisand and Nat King Cole.
22. Beautiful Instruments
Memorable melodies of contemporary music orchestrated with a full, lush and
easy sound.
23. Heavy Metal
Driving, hard charging rock-and-roll by bands such as Guns N' Roses,
Metallica and Danzig.
24. Album Rock
The best songs from today's top rock artists. Pearl Jam, U2 and John
Mellencamp.
25. Alternative Rock
Modern rock from such diverse bands as the Red Hot Chili Peppers, Midnight
Oil and Smashing Pumpkins.
26. New Age
Soft and soothing acoustics. Enjoy the relaxing music of Yanni, Kitaro and
Brian Eno.
27. Broadway's Best
Hits from the Great White Way. Rodgers and Hammerstein, Marvin Hamlisch and
Andrew Lloyd Webber.
28. Gospel
Soulful gospel sounds of joy. Mahalia Jackson, Al Green and the Winans.
29. Children's Entertainment
Songs and storytelling at their most magical. Disney classics and Sesame
Street.
30. World Beat
The Beat goes on . . all over the world. Follow the sun with the music of
Lucky Dube, Mahotella Queens and Outback.
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MARKETING STRATEGY
The Company plans to engage in extensive marketing, advertising and
promotional activities to increase consumer awareness of satellite radio and CD
Radio programming, to promote the sale of satellite radios and to generate
subscriptions to CD Radio.
The Company's market research program will assist the Company in refining
the design of its service, programming formats and content, and advertising and
promotional programs. Initial market research efforts will focus on further
defining the attitudes of different categories of consumers toward the various
attributes of CD Radio.
The Company plans to work closely with radio manufacturers, radio
retailers, and automakers to market CD Radio. Upon satellite launch, the Company
intends to commence a nationwide media campaign to advertise and promote CD
Radio and to implement a cooperative media campaign with satellite radio
manufacturers.
Some of the Company's promotional plans include: (i) extensive use of radio
commercial advertising; (ii) print advertisements; (iii) outdoor billboards;
(iv) cooperative radio and print advertising; (v) CD Radio service in rental
cars equipped with satellite radios; (vi) tie-ins with the recording industry
targeting compact disc purchasers of niche music categories; (vii) demonstration
kiosks in retail locations; and (viii) training programs and sales literature
developed for retail personnel. See "Forward-Looking Statements" and "Risk
Factors -- Unavailability of Satellite Radios."
As was the case with cellular telephone service in its early years, the
Company believes that satellite radio service will be symbolized by its antenna.
The Company believes that the proliferation of satellite radio dishes on cars
will create a significant amount of consumer awareness of satellite radio.
THE CD RADIO DELIVERY SYSTEM
The Company has designed the CD Radio delivery system to transmit an
identical signal from two satellites to address the problem of signal blockage
caused by variations in terrain, buildings and other obstructions. The system is
designed to permit CD Radio to be received by motorists in nearly all outdoor
locations where the vehicle is on an unobstructed line-of-sight with one or both
of the Company's satellites. In certain areas with high concentrations of tall
buildings such as Manhattan, or in tunnels, signals from both satellites will be
blocked and reception will be adversely affected. In such cases, the Company may
implement terrestrial repeating transmitters. See "Risk Factors -- Reliance on
Unproven Technology."
The CD Radio delivery system will consist of three principal components:
(i) satellite radios; (ii) the satellites; and (iii) the national broadcast
studio.
SATELLITE RADIOS
In order to receive CD Radio, subscribers will need to obtain a new
generation of radios capable of receiving the satellite band. The Company
anticipates that these radios will initially be manufactured by existing radio
manufacturers and sold by consumer electronics outlets for automotive
aftermarket installation and later will be manufactured and installed in new
cars and trucks by automakers. See "Forward-Looking Statements." Although the
Company will not manufacture or distribute satellite band radios or their dish
antennas, it intends to communicate the required specifications to such
manufacturers and automakers. The availability and pricing of satellite radios
will be an important factor in determining the success of CD Radio. See "Risk
Factors -- Unavailability of Satellite Radios."
The Company anticipates that radios capable of receiving CD Radio will be
similar to conventional AM/FM radios in size and appearance, but will have the
added capability of receiving digital satellite transmissions as well as AM and
FM signals. In order to accommodate subscription satellite radio services, each
radio will contain a security circuit with an electronically encoded
identification number. Upon verification of subscriber billing information, the
Company will transmit a digital signal to activate the radio's
5
satellite band operation. This feature will enable the Company to protect
against piracy of CD Radio and to discontinue the service to subscribers who are
delinquent in paying the monthly subscription fee. The Company expects that
these radios will include a digital display, which when tuned to the satellite
band, will indicate the channel and format the listener has selected, as well as
the title, recording artist and album title of the song being played. As is the
case currently, a number of these radios may also incorporate cassette or
compact disc players. See "Forward-Looking Statements."
Because less than 10% of the U.S. vehicle fleet turns over annually, the
Company expects aftermarket availability of satellite radios to be of prime
importance to the Company's market penetration for the first several years
following introduction of CD Radio. Representatives of the Company have held
discussions with a number of major radio manufacturers that have expressed an
interest in participating with the Company in planning and evaluating the
Company's further market research. The Company will endeavor to synchronize the
development of satellite radios with the Company's business planning so that
satellite radios will be available at the time the Company commences operations.
Failure of manufacturers to develop and market satellite radios at affordable
prices, or to develop and market such radios in advance of the date the Company
proposes to commence CD Radio service, would have a materially adverse effect on
the Company's business. The Company intends to license radio manufacturers to
use CD Radio design technology in their radios.
The Company also plans to work with automakers to support the development
of factory installed satellite radios in new cars. Representatives of the
Company have held discussions with a number of major automakers that have
expressed an interest in participating with the Company in planning and
evaluating the Company's further market research.
Each satellite radio will require a satellite dish antenna in order to
receive the satellite signal. The Company has developed what it believes is the
world's smallest satellite dish. The dish is approximately the size and shape of
a silver dollar, measuring 2" in diameter and 1/8" thick. The Company's dish
design is "non-directional" -- it does not need to be pointed directly at a
satellite in order to receive a satellite signal. All that is required is that
the dish be positioned upward on an unobstructed line-of-sight with the
Company's satellites. In the case of factory installed satellite radios in new
cars, the Company believes the dish can be integrated into the roof panel.
For aftermarket installations, the dish can be attached to a vehicle's rear
window in the same manner as a cellular antenna. In the event that a subscriber
already has a cellular antenna on the rear window of a car, the cellular antenna
could be unscrewed and the dish screwed on in its place. The dish then would
serve as both a cellular and satellite radio antenna so that only the dish on
the car is needed.
THE SATELLITES
The satellites to be used in the CD Radio system are scheduled to be built
by Space Systems/Loral, one of the largest satellite manufacturers in the world.
Although the satellites will be equipped with custom designed communications
equipment, the Company believes that the construction and development of its
satellites does not require the development of new technology.
Satellite control will be performed from the Company's national broadcast
studio. Uplink frequencies are currently planned to be located in X-band.
Downlink frequencies are planned to be in S-band. Each satellite will broadcast
a signal covering the entire continental United States from a single antenna in
a single beam. The expected life of each satellite is approximately 15 years.
Satellite Construction. The Company has entered into an agreement (the
"Construction Contract") with Space Systems/Loral pursuant to which Space
Systems/Loral has agreed to construct two satellites and, at the Company's
option, a third satellite in accordance with stipulated specifications.
Amendments to the Construction Contract are necessary to reflect technical
changes and other developments since the contract was originally entered into in
1993. The Company has extended the Construction Contract on a monthly basis
through April 30, 1997 while it negotiates with Space Systems/Loral to amend the
contract's technical specifications, pricing and delivery terms. The Company may
negotiate with Space Systems/Loral to extend
6
the Construction Contract further or it may permit the contract to expire. The
Company believes it will be able to negotiate a favorable contract with Space
Systems/Loral for the construction of the satellites, although there can be no
assurance that the Company will be able to do so.
Under the Construction Contract, Space Systems/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 each satellite is to
pass to the Company at the time of launch. The Company has agreed to indemnify
Space Systems/Loral for all costs and losses resulting from claims based upon
Space System/Loral's alleged responsibility or liability for loss of, or damage
to, the satellites occurring after launch, regardless of the cause. In the event
of any delay in the construction of the satellites that is caused by the
Company, the Construction Contract provides that the terms of the contract will
be equitably adjusted.
Upon delivery of the satellites to the launch site, Space Systems/Loral is
required to perform inspection and verification testing to insure that no damage
occurred in shipment. After such inspection and testing, the Company will
provide final acceptance of the satellites. Following their launch, Space
Systems/Loral will conduct in-orbit checks of both satellites. In the event that
such testing shows that a satellite is operating less than satisfactorily, Space
Systems/Loral and the Company will negotiate a reasonable reduction in the
amount paid by the Company. See "Forward-Looking Statements."
Launch Services. The Company has reserved two launch slots with
Arianespace during the period extending from November 1, 1999 through April 30,
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. See "Forward-Looking
Statements." While the Company has been able to reschedule launch dates with
Arianespace in the past, there can be no assurance that it will be able to do so
in the future. In order to maintain its launch slots, the Company will need to
enter into a definitive agreement with Arianespace by May 31, 1997, providing
for the launch of its satellites. The final terms and conditions of any launch
agreement are subject to negotiations between the Company and Arianespace.
Satellite launches are subject to significant risks, including satellite
destruction or damage during launch or failure to achieve proper orbital
placement. According to industry sources, approximately 15% of insured
commercial satellite launches by all launch contractors since 1965 have resulted
in total loss. Launch failure rates vary from period to period and from
contractor to contractor. Arianespace is one of the world's leading commercial
satellite launch service companies. Arianespace has advised the Company that as
of March 18, 1997 it has successfully completed 81 of 86 launches (approximately
94%), since beginning commercial operations in 1984. See "Risk
Factors -- Dependence upon Satellites and Contractors; Risk of Launch Failure."
Risk Management and Insurance. Two custom-designed, fully dedicated
satellites are required to broadcast CD Radio. A single satellite is incapable
of delivering the service. 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 Company intends to obtain launch insurance for each launch vehicle from its
launch vehicle provider. The Construction Contract provides for the construction
of a spare satellite, to be used in the event of loss of one of its two
operational satellites. 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 and Contractors; Risk of Launch Failure."
Once properly deployed and operational, the historical risk of premature
total satellite failure has been less than one percent for U.S. geosynchronous
commercial satellites. Insurance against in-orbit failure is presently available
and is typically purchased after the satellite is checked out 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.
Satellites are designed to minimize the adverse effects of transmission
component failure through the incorporation of redundant components which
activate automatically or by ground command upon failure. If
7
multiple component failures occur as the satellite ages, and the supply of
redundant components is exhausted, the satellite generally will continue to
operate at reduced capacity. In that event, signal quality may be preserved by
reducing the number of channels broadcast until a replacement satellite could be
launched.
NATIONAL BROADCAST STUDIO
The Company intends to establish its national broadcast studio to provide
origination and transmission of programming; transmission of commands to
activate/deactivate service of subscriber radios; and tracking, telemetry, and
control of the in-orbit satellites. The facility will incorporate redundant
electronics and backup power generators.
TESTS AND DEMONSTRATIONS
The Company conducted a series of tests and demonstrations from May through
December 1994, involving the transmission of S-band signals to a prototype
satellite radio installed in a car to simulate certain transmission techniques
the Company intends to employ. Since there are currently no commercial
satellites in orbit capable of transmitting S-band frequencies to the United
States, the Company constructed a terrestrial emulation of its planned system.
For this purpose, the Company selected a test range covering several kilometers
in suburban 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 satellite transmissions to be used for its proposed service. The Company also
modified the standard factory installed sound system of a Lincoln Mark VIII
automobile to create a three-band radio covering AM, FM and S-band, and
integrated the Company's satellite dish into the car roof. The demonstrations
included the reception of 30 channels of CD quality stereo music by the
prototype radio while the car was driven throughout the range. The Company
believes that the results of these tests validated the technically significant
portions of the CD Radio system. Prior to testing with orbiting satellites and
satellite radios suitable for commercial production, however, there can be no
assurance that the CD Radio system will function as intended. See "Risk
Factors -- Reliance on Unproven Technology."
COMPETITION
The Company's satellite radio service will face competition from two
principal sources: (i) terrestrial AM/FM radio broadcasting, including, when
available, terrestrial digital radio broadcasting; and (ii) another satellite
radio broadcaster.
The AM/FM radio broadcasting industry is very competitive, and certain of
the Company's competitors in this industry have substantially greater financial,
management and technical resources than the Company. Unlike the Company, the
radio industry has a well established market for its services and generally
offers "free" reception paid for by commercial advertising rather than a
subscription fee. In addition, certain AM and FM stations, such as National
Public Radio, offer programming without commercial interruption. Many radio
stations also offer information programming of a local nature, such as local
news or traffic, which the Company will be unable to offer. CD Radio will
compete with conventional radio stations on the basis of the variety and focus
of its programming, its commercial-free formats, signal coverage throughout the
continental United States, and digital CD stereo sound quality.
Currently, radio stations broadcast by means of analog signals, as opposed
to digital transmission. The Company believes, however, that prior to the
commencement of CD Radio, broadcasters may be in a position to implement
technology that permits simultaneous transmission of both analog and digital
signals on the AM and FM bands that will permit digital AM broadcasts to achieve
monaural FM sound quality, and digital FM broadcasts to approach compact disc
stereo sound quality. See "Forward-Looking Statements." In order to receive
these digital AM/FM broadcasts, listeners would need to purchase new digital
radios which are not currently commercially available. As a result, 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
8
digital broadcasting as a positive force that would be likely to accelerate
radio replacement and thereby facilitate the proliferation of satellite radios.
Existing communications satellite operators are not capable of delivering
satellite radio for reception on tiny, non-directional automobile dishes.
Specially designed satellites operating at different frequencies are needed.
The Company expects to compete directly with one other satellite radio
broadcaster. Four applicants, including the Company, have applied for two FCC
licenses to operate a national satellite radio service. See
"Business -- Government Regulation." At least one of the applicants, a
subsidiary of American Mobile Satellite Corporation, which is principally owned
by the Hughes division of General Motors, has financial, management and
technical resources that greatly exceed those of the Company. In their license
applications to the FCC, two of the other applicants have stated an intention to
offer a satellite radio service based, at least in part, on subscription fees
and the remaining applicant intends to offer an advertiser supported "free"
service. The Company believes that at present its technical and business
planning is further advanced than the other applicants. There can be no
assurance, however, that this will permit the Company to initiate a satellite
radio service in advance of its competition. See "Risk Factors -- Competition."
The original satellite radio spectrum allocation internationally agreed
upon by the United States and other nations would have accommodated four
satellite radio licenses in the United States. The FCC subsequently allocated
only half of this spectrum specifically for satellite radio, thereby
accommodating only two licenses. The other half of the allocation is scheduled
to be auctioned on April 15, 1997 and may be used to provide a broad range of
services, including but not limited to satellite radio. The Company believes
this spectrum is unlikely to be used for satellite radio, although no assurance
can be made that this will be the case.
TECHNOLOGY, PATENTS AND TRADEMARKS
The Company has been granted certain U.S. patents on various types of
satellite radio technology. There can be no assurance, however, that any U.S.
patent issued to the Company will not be circumvented or infringed by others, or
that if challenged would be held to be valid. The Company has filed patent
applications covering CD Radio system technology in Argentina, Australia,
Brazil, Canada, China, France, Germany, India, Italy, Japan, South Korea,
Mexico, the Netherlands, Spain, Switzerland and the United Kingdom. There can be
no assurance that foreign patents will be awarded by all of such countries to
the Company or, if any such patents are granted, that the laws of foreign
countries will protect the Company's proprietary rights to its technology to the
same extent as the laws of the United States. Although the Company believes that
obtaining patent protection may provide benefits to the Company, the Company
does not believe that its business is dependent on obtaining patent protection
or successfully defending any such patents that may be obtained against
infringement by others.
Certain of the Company's know-how and technology are not the subject of
U.S. patents. To protect its rights, the Company requires certain employees,
consultants, advisors and collaborators to enter into confidentiality
agreements. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure. In
addition, the Company's business may be adversely affected by competitors who
independently develop competing technologies.
The Company's proprietary technology was developed by Robert D. Briskman,
the Company's Chief Technical Officer, and assigned to the Company. The Company
believes that Mr. Briskman independently developed the technology covered by the
Company's issued patents and that it does not violate the proprietary rights of
any person. There can be no assurance, however, that third parties will not
bring suit against the Company for patent infringement or for declaratory
judgment to have any patents which may be issued to the Company declared
invalid.
If a dispute arises concerning the Company's technology, litigation might
be necessary to enforce the Company's patents, to protect the Company's trade
secrets or know-how or to determine the scope of the proprietary rights of
others. Any such litigation could result in substantial cost to, and diversion
of effort by,
9
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.
In May 1994, the Company received a letter claiming that the Company's logo
is confusingly similar to the registered trademark of a company engaged in the
sale of pre-recorded music, and that the Company's continued use of its logo may
constitute infringement of such mark. See "Business -- Legal Proceedings."
GOVERNMENT REGULATION
Communications Laws
As a proposed operator of a privately owned satellite system, the Company
is subject to the regulatory authority of the FCC under the Communications Act
of 1934 (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
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 the FCC License. This application was opposed by
the National Association of Broadcasters, an industry trade group that seeks to
promote the interests of the television and AM/FM broadcast industries.
In the fall of 1992, the FCC called for license applications from any
parties other than the Company who might be interested in being licensed to
provide a satellite radio service. The cutoff date for these applications was
December 15, 1992. Five other applicants filed applications by that deadline,
two of which have subsequently been withdrawn, leaving the Company and three
other applicants. Petitions have been filed on behalf of third parties to deny
the applications filed by the Company and the three other applicants.
On March 3, 1997, the FCC adopted satellite radio licensing rules (the
"Licensing Rules") and implemented a spectrum plan that will accommodate only
two national satellite radio licenses, both of which are scheduled to be
auctioned among the Company and the other three applicants on April 1, 1997.
There can be no assurance that the Company will be successful in obtaining one
of the two licenses or that the cost of obtaining it would not be material to
the Company's operations. See "Risk Factors -- Government Regulation; No
Assurance of FCC License."
Pursuant to the Licensing Rules, the auction is scheduled to be held among
the four existing applicants on April 1, 1997. Prior to the commencement of the
auction each applicant must deposit $3 million with the FCC. The minimum opening
bid for each FCC License is $8 million. The bidding will continue until only two
bidders remain. Within 10 business days following the announcement of winning
bidders, each auction winner must deposit with the FCC twenty percent of its
winning bid. The $3 million initial deposit will be applied toward the twenty
percent down payment. The winning bidders will also be required to supplement
their applications on file with the FCC within 30 days after the close of
bidding. After the FCC has confirmed receipt of each winning bidder's twenty
percent payment and acceptance of each winning bidder's application, the FCC
will accept petitions to deny the winning bidders' applications. There can be no
assurance that the FCC will dismiss these and previously filed petitions. If the
FCC dismisses these petitions and previously filed petitions, the winning
bidders will have 10 business days to submit payment of the balance of their
winning bids.
Pursuant to the Licensing Rules, the winning bidder that receives an FCC
License will be required to meet certain progress milestones. Licensees would be
required to begin satellite construction within one year; to launch and begin
operating their first satellite within four years; and to begin operating their
entire system within six years. Failure to meet those milestones could result in
revocation of the FCC License. On March 27, 1997, a third party requested
reconsideration of the Licensing Rules, seeking, among other things, that the
time period allotted for these milestones be shortened.
10
On July 30, 1991, the Company filed a request for a Pioneer's Preference
and on January 23, 1992 and June 2, 1993, filed supplements to that request. A
Pioneer's Preference would have given the Company an exclusive right to an FCC
License without having to bid in an auction, although the Company would still
have had to pay for its license. In November 1996, an FCC appointed panel
recommended that no Pioneer's Preference be granted. The Company subsequently
withdrew its application for a Pioneer's Preference.
Satellite orbit locations are registered internationally for each country.
To the Company's knowledge, no other nations in the Western Hemisphere are
seeking to use the S-band for satellite radio, and the Company does not
anticipate any difficulty in obtaining international registration, or renewing
or extending such registrations. See "Forward-Looking Statements." However,
there can be no assurance that such registrations will be obtained.
The spectrum allocated for satellite radio is used in Canada and Mexico for
terrestrial microwave links, mobile telemetry, and other purposes. The United
States government must coordinate 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 Licensing Rules require that
the licensees complete detailed frequency coordination with existing operations
in Canada and Mexico. There can be no assurance that the United States, Canadian
and Mexican governments can coordinate the use of this spectrum or will 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 at
this time, if the Company obtains the FCC License, the Company would not expect
difficulties in obtaining a feeder link frequency and ground station approval in
the ordinary course.
The issuance by the Company of the Common Stock pursuant to the Company's
initial public offering, considered together with other transactions in the
stock of the Company since the cutoff date established by the FCC for satellite
radio service applications, could have resulted in the ownership of 50 percent
or more of the voting stock of the Company by parties who were not stockholders
on the cutoff date. Consequently, such stock issuance may have required the
filing of a "major amendment" to the Company's license application. As a result,
the Company requested and obtained from the FCC an exemption from the previously
established cutoff date, in order to avoid the assignment of a new file number
and the consequent loss of entitlement to processing concurrently with the other
three remaining applications that were filed on or before the cutoff date
("cut-off protection"). On June 8, 1994, the FCC released an order granting the
requested exemption conditioned on the current stockholders and officers of the
Company remaining in actual control of Satellite CD Radio, Inc. Additional
equity financings and sales of common stock by persons who were shareholders on
the cutoff date could require the Company to obtain an exemption from the FCC to
permit the Company's license application to be processed concurrently with those
of the other three applicants. If such an exemption were required and not
granted, the Company's application would not be considered concurrently with
those of the other three remaining applicants and could be dismissed.
The Communications Act prohibits the issuance of a license to a foreign
government or a representative thereof, and contains limitations on the
ownership of common carrier, broadcast, and certain other radio licenses by
non-U.S. citizens. Pursuant to the Licensing Rules, the licensees will be
permitted to choose whether they wish to be classified as broadcasters, common
carriers or private carriers. As a private carrier, the Company would not be
subject to the current provisions of the Communications Act restricting
ownership in the Company by non-U.S. private citizens or organizations. Further,
as a private carrier, the Company would be free to set its own prices and serve
customers according to its own business judgment, without economic regulation.
The foregoing discussion reflects the application of current communications
law, FCC regulations and international agreements to the Company's proposed
service in the United States. Changes in law, regulations or international
agreements relating to communications policy generally or to matters affecting
specifically the services proposed by the Company could adversely affect the
Company's ability to obtain its FCC License or
11
the manner in which its proposed service would be regulated. Further, actions of
the FCC are subject to judicial review and there can be no assurance that if
challenged, such actions would be upheld.
Other Regulatory Matters
The Company's business operations as presently 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 December 31, 1996, the Company had three employees, of whom one was
involved in technology development, one in business development and one in
administration. In addition, the Company relies upon a number of consultants and
other advisors. After receipt of the FCC License, the Company expects to
increase the number of its employees to approximately twenty-five, of whom nine
are expected to be involved in technical development, ten in business
development and six in administration. See "Forward-Looking Statements." 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 are represented by a labor union, and the Company
believes that its relationship with its employees is good.
FINANCIAL CONSULTANTS
Pursuant to an agreement dated October 21, 1992 (the "Agreement"), the
Company retained the services of Batchelder & Partners, Inc., a financial
advisory firm ("Batchelder"), to provide certain financial consulting services
to the Company. The Agreement provides, among other things, for the payment in
cash to Batchelder of (i) $25,000 per month during the term of the Agreement and
(ii) fees equal to (A) two percent (2%) of the gross proceeds from each equity
financing (other than equity financings to existing shareholders of the Company
on the date of the Agreement and certain equity financings before December 15,
1992) and (B) one percent (1%) of the gross proceeds from each debt financing,
during the term of the Agreement and for a period of two years following
termination of the Agreement by the Company. During the three-month period
ending December 31, 1994, Batchelder agreed to waive all financial consulting
fees payable under the Agreement. In addition, pursuant to the Agreement, the
Company has granted an option to Batchelder to purchase 260,000 shares of Common
Stock at a price of $6.25 per share as follows: 60,000 shares upon execution of
the Agreement and four 50,000 share increments upon the successful completion of
equity and/or debt financings of certain specified amounts during the term of
the Agreement and for a period of two years following termination of the
Agreement by the Company. Each option expires three years from the date such
option becomes exercisable. The option to purchase 60,000 shares granted to
Batchelder upon execution of the Agreement expired unexercised on October 21,
1995. The Agreement is terminable by either the Company or Batchelder upon
notice to the other party. Since inception of the Agreement, Batchelder has
earned $1,178,063 in consulting fees. Additionally, Batchelder has earned equity
financing fees of $149,400 in connection with private placements of 1,494,000
shares of Common Stock of the Company at an aggregate offering price of
$7,470,000, fees of $129,194 in connection with the Company's public offering of
units in 1994 and fees of $92,261 in 1996 in connection with the exercise of
warrants to purchase the Company's Common Stock. No additional options to
purchase shares of Common Stock became exercisable by Batchelder on the closing
of the Company Offering. Batchelder purchased 200,000 shares in the Company's
initial public offering at the initial public offering price.
The foregoing is a summary of the principal terms of the agreement
described above and does not purport to be complete. Reference is made to the
copies of such agreement, which is filed as an exhibit hereto.
RISK FACTORS
Prospective investors should consider carefully the following factors, as
well as all of the other information set forth herein, in evaluating an
investment in the Company's Common Stock.
12
Development Stage Company; Continuing Losses
The Company's proposed service, CD Radio, is in its initial stage of
development. Since its inception, the Company's activities have been
concentrated on applying for necessary licenses, technology development,
strategic planning, and market research. The Company has incurred aggregate net
losses of approximately $18,535,860, from its inception on May 17, 1990 through
December 31, 1996, including net losses of approximately $2,830,595 or $0.29 per
share, during the year ended December 31, 1996. The Company anticipates that it
will not achieve any revenue from operations until the second half of 1999 at
the earliest, and that revenue from operations, if and when achieved, will not
be sufficient to cover operating expenses until the second half of 2000 at the
earliest. The ability of the Company to begin to achieve profitability will
depend upon a number of factors, including timely receipt of all necessary FCC
authorizations, successful and timely construction and deployment of its
satellite system, the development and manufacture of satellite radios by
consumer electronics manufacturers and the successful marketing of CD Radio.
There can be no assurance that any of the foregoing will be accomplished, that
CD Radio will be placed in operation, that the Company will attain a
satisfactory market share or that the Company will achieve profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Need for Substantial Additional Financing
The FCC has scheduled an auction among the four existing applicants to
auction two FCC Licenses on April 1, 1997. The Company believes it has
sufficient working capital to fund its planned operations through the receipt of
the FCC License. From the date the FCC License is received, approximately $500
million or more will be required to complete the construction and launch of the
Company's satellite system and to fund its first full year of operations,
assuming the FCC License is received in the first half of 1997. See "Forward-
Looking Statements." The amount does not include the amount to be paid by the
Company for the FCC License in the auction. Additional funds, however, would be
required in the event of delay, cost overruns, launch failure or other adverse
developments. The Company anticipates funding its projected cash requirements
through the completion of additional public or private equity and debt
financings. The Company does not have financing commitments in place sufficient
to fund the implementation of CD Radio service, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Failure to secure 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
in operation, could cause the Company to default on its commitments to its
satellite construction or launch contractors or others, could render the Company
unable to put CD Radio in operation and could force the Company to discontinue
operations or seek a purchaser. See "-- Risk of Delay; Effect of Delay on
Financing Requirements." The issuance by the Company of additional equity
securities could cause substantial dilution of the existing stockholders'
interest in the Company.
Risk of Delay; Effect of Delay on Financing Requirements
The Company is currently targeting the second half of 1999 for the
commencement of CD Radio. The Company's ability to meet that objective will
depend on several factors, including receipt of the FCC License by the first
half of 1997. There can be no assurance as to whether or at what date the FCC
License will be received. A significant delay in the timely development,
construction, launch and commencement of operation of CD Radio could have a
material adverse effect on the Company. Delay could result from a variety of
causes, including delays associated with FCC authorizations, inability to obtain
necessary financing in a timely manner, delays in 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 satellite radios, failure of the Company's vendors to
perform as anticipated or a delayed or unsuccessful satellite launch. 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 that could materially increase the
aggregate amount of funding required to complete the
13
preparations necessary to permit the Company to commence operating CD Radio.
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 competitors who succeed in beginning operations
earlier than the Company, or prevent the Company from putting CD Radio into
service.
Government Regulation; No Assurance of FCC License
The receipt of an FCC License to construct, launch and operate its
satellites is a prerequisite to the Company's ability to offer CD Radio. The
Company must bid in an auction for the FCC License and there is no assurance
that the Company will be successful in the auction or that the cost of the FCC
License will not be material.
Changes in ownership of the Company's stock since the cutoff date for
satellite radio license applications, including the sale of the shares of Common
Stock in the Company's initial public offering, required the Company to obtain
an exemption from the FCC to permit the Company's license application to be
processed concurrently with those of the other three applicants. The Company
applied for such an exemption on February 2, 1994, and the FCC released a ruling
granting the request on June 8, 1994, conditioned on the current stockholders
and officers of the Company remaining in actual control of Satellite CD Radio,
Inc. Additional equity financings and sales of common stock by persons who were
shareholders on the cutoff date could also result in further changes in
ownership of the Company's stock and could require the Company to obtain an
exemption from the FCC to permit the Company's license application to be
processed concurrently with those of the other three applicants. If such an
exemption were required and not granted, the Company's application would not be
considered concurrently with those of the other three remaining applicants and
could be dismissed.
In addition to its general authority over satellite operations, the FCC
regulates two types of satellite communications activities: common carriage and
broadcasting. Common carriers offer their customers the ability to transmit
messages of the customer's own choosing and are subject to economic regulation
and alien ownership rules. Broadcasters are not subject to economic regulation,
but are subject to certain content, reporting and alien ownership rules.
Pursuant to the Licensing Rules, the licensees will be permitted to choose
whether they wish to be classified as broadcasters, common carriers or private
carriers. As a private carrier, the current provisions of the Communications Act
restricting ownership in the Company by non-U.S. private citizens or
organizations would not apply to the Company, and the Company would not be
subject to economic regulation.
Changes in law, FCC regulations or international agreements relating to
communications policy generally or to matters relating specifically to the
services proposed by the Company could affect the Company's ability to obtain
its FCC License or the manner in which its proposed service would be regulated.
See "Business -- Government Regulation."
Proposed 5% Delayed Convertible Preferred Stock
The Company's Board of Directors has authorized the sale of 5% Delayed
Convertible Preferred Stock ("5% Preferred Stock") and the Company has received
commitments to purchase a substantial amount of 5% Preferred Stock, subject to
certain conditions, including conditions involving the results of the auction
for the FCC license. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The terms of the 5% Preferred Stock
provide that it is convertible to Common Stock at discounts from future market
prices of the Common Stock, which could result in substantial dilution to
holders of Common Stock. The terms of issuance of the 5% Preferred Stock also
require payments in the amount of 3% of the aggregate liquidation preference per
month if the Company fails within certain prescribed periods, to increase the
number of authorized shares of Common Stock; to reserve a number of shares of
Common Stock for issuance upon conversion of the 5% Preferred Stock equal to 1.5
times the number of shares into which the 5% Preferred Stock is convertible from
time to time; to obtain any governmental approvals necessary for the conversion
of 5% Preferred Stock; or to maintain an effective registration statement under
the Securities Act of 1933 with respect to the resale of Common Stock issuable
upon conversion of the 5% Preferred Stock. The
14
terms of the 5% Preferred Stock also require the Company to repurchase some or
all of the 5% Preferred Stock upon the occurrence of certain specified events.
If payment or repurchase obligations were to arise under the terms of the 5%
Preferred Stock, the Company's financial condition could be materially adversely
affected.
Reliance on Unproven Technology
The CD Radio system is designed to use two satellites in geosynchronous
orbit that transmit identical signals to a new generation of satellite radios in
cars and trucks. The Company has conducted satellite simulation testing and
demonstrations of CD Radio with a prototype satellite receiver installed in an
automobile. The satellite system and other aspects of the CD Radio service,
however, will use certain technology that has yet to be tested using orbiting
satellites or a satellite radio suitable for commercial production. While
management believes that the technology developed by the Company will allow the
service to operate as planned, there can be no assurance that the CD Radio
system will function as currently contemplated. See "Business -- Satellite
Radios" "Business -- The Satellites" and "Business -- Technology Trademarks and
Patents."
Dependence upon Satellites and Contractors; Risk of Launch Failure
The Company's business will depend upon the successful construction and
launch of its satellites which will be used to transmit CD Radio. The Company
will rely upon its satellite vendor, Space Systems/Loral, for the timely
delivery of its satellites. Failure of Space Systems/Loral to deliver
functioning satellites in a timely manner could materially adversely affect the
Company's business.
The Company is also dependent on its satellite launch vendor, Arianespace,
for the construction of launch vehicles and the successful launch of its
satellites. Satellite launches are subject to significant risks, including
satellite destruction or damage during launch or failure to achieve proper
orbital placement. According to an insurance industry source, approximately 15%
of insured commercial satellite launches by all launch contractors since 1965
have resulted in total loss. Launch failure rates vary from period to period and
from contractor to contractor. While past experience is not necessarily
indicative of future performance, Arianespace has advised the Company that as of
March 18, 1997 it has successfully completed 81 of 86 launches (approximately
94%) since beginning commercial operations in 1984. See "Business -- The
Satellites." Satellites also could be defective or could be damaged or fail in
orbit. As part of its risk management program, the Company plans to construct a
third (back-up) satellite and to obtain insurance covering failed launch vehicle
replacement. The launch of a replacement satellite would delay the commencement
or continuation of the Company's operations for not less than six months, which
could have an adverse effect on the demand for the Company's services, as well
as the Company's revenues and results of operations. The launch or in-orbit
failure of two of the Company's satellites could delay the commencement or
continuation of the Company's operations for three years or more, which would
have a material adverse effect on the Company.
Uncertain Market Acceptance
There are currently no satellite radio services such as CD Radio in
commercial operation in the United States. As a result, the extent of the
potential demand for such services 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
service to enable the Company to achieve 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 consumers' willingness to pay
subscription fees to obtain satellite radio broadcasts, the cost, availability
and consumer acceptance of satellite radios, marketing and pricing strategies of
competitors, development of alternative technologies and general economic
conditions. See "Business -- The Radio Market" and "Business -- Competition."
Unavailability of Satellite Radios
The Company's business strategy requires that subscribers to CD Radio
purchase satellite radios to receive the service. See "Business -- Satellite
Radios." Satellite radios are not currently commercially
15
available and the Company is unaware of any manufacturer currently developing
such radios for commercial sale. The ultimate success of the Company's service
will therefore depend in significant part on the willingness of at least one
consumer electronics manufacturer to develop and manufacture these radios.
Although the Company intends to foster the development of commercially available
satellite radios, there can be no assurance that a manufacturer will develop
such radios in a timely manner or at all, or that if commercially developed such
radios will be affordable in price. The failure of one or more consumer
electronics manufacturers to develop satellite radios for commercial sale in a
timely manner would have a material adverse effect on the Company's business.
See "Business -- Satellite Radios" and "Business -- Technology Patents and
Trademarks".
Music Royalty Payments
In connection with its proposed music programming, the Company will be
required to negotiate and enter into royalty arrangements with copyright owners
of sound recordings and with performing rights societies, such as the American
Society of Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc.
("BMI"), SESAC, Inc. ("SESAC"), and with recording owners under the Digital
Recordings Act of 1995. The amount of these royalties is yet to be negotiated
and there can be no assurance that any royalty arrangements negotiated by the
Company will be on terms favorable to the Company. See "Business -- The CD Radio
Service."
Development of Business and Management of Growth
The Company has not yet commenced CD Radio service. To operate
successfully, the Company must develop and implement systems for operational and
financial management, programming, marketing, subscriber registration and
management, billing and collection of subscriber fees and other functions, and
must hire and train personnel to perform these functions. 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 service. Growth is likely to place a substantial
strain on the Company's management, operational, financial and accounting
resources. Failure to develop and implement effective systems 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 failure to
manage growth effectively, would have a material adverse effect on the Company's
business.
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 rely on subscription fees for their operations. Many
radio stations also offer information programming of a local nature such as
local news or traffic which the Company will be unable to offer. The Company
also expects to compete directly with one other satellite radio operator. See
"Forward-Looking Statements." A total of four proposed satellite radio
operators, including the Company, have applied to be licensed by the FCC. See
"Business -- Government Regulation." At least one of these prospective satellite
radio operators, American Mobile Satellite Corporation, which is principally
owned by the Hughes division of General Motors has financial, management and
technical resources which greatly exceed those of the Company. See
"Business -- Competition."
Dependence on Chief Executive Officer
The Company is highly dependent during its development phase 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 during the development stage of the Company could have
a material adverse effect upon the business and prospects of the Company. See
"Business -- Government Regulation" and "Directors and Executive Officers of the
Company."
16
Proposed Business Dependent Upon Regulatory Approval
The Company has concentrated its efforts on the development and preparation
of its proposed service, CD Radio. The timely receipt of an FCC License to
construct, launch and operate its satellites is a prerequisite to the Company's
ability to offer CD Radio. If the Company is not a winning bidder in the
auction, the Company would be forced to identify an alternative business plan
and use for any remaining capital resources. Such an alternative plan could
involve a change in focus to a related or unrelated business activity, or
dissolution of the Company. No consideration has been given to any alternative
activity or use of funds. There can be no assurance that the Company would be
able to identify or effectively pursue any such alternative in a manner that
would benefit the Company or its stockholders.
Uncertain Patent Protection
The Company has been granted certain U.S. patents covering various types of
satellite radio technology. There can be no assurance, however, that the
Company's U.S. patents will not be challenged, invalidated or circumvented by
others. Litigation, which could result in substantial cost to the Company, may
be necessary to enforce the Company's patents or to determine the scope and
validity of other parties' proprietary rights, and there can be no assurance of
success in any such litigation.
Although the Company believes that 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 against
infringement by others.
Limited Prior Public Market; Potential Volatility of Stock Price
The Company's Common Stock has been traded on the NASDAQ Small Cap Market
since September 13, 1994. There can be no assurance that an active public market
will continue for the Common Stock, or that the market price for the Common
Stock will not decline below its current price. Such price may be influenced by
many factors, including, but not limited to, investor perception of the Company
and its industry and general economic and market conditions. The trading price
of the Common Stock could be subject to wide fluctuations in response to
announcements of business and technical developments by the Company or its
competitors, quarterly variations in operating results, and other events or
factors. In addition, stock markets have experienced extreme price volatility in
recent years. This volatility has had a substantial effect on the market prices
of development stage companies, at times for reasons unrelated to their
operating performance. Such broad market fluctuations may adversely affect the
price of the Common Stock.
Possible Delisting of Common Stock from NASDAQ; Possible Adverse Effect on
Trading Market
The Common Stock is quoted on the NASDAQ Small Cap Market. There are a
number of continuing requirements that must be met in order for the Common Stock
to remain eligible for quotation on the NASDAQ Small Cap Market. In order to
continue to be quoted on NASDAQ, a company must maintain $2 million in total
assets, a $200,000 market value of the public float and $1 million in total
capital and surplus. In addition, continued quotation requires two marketmakers
and a minimum bid price of $1.00 per share; provided, however, that if a company
falls below such a minimum bid, it will remain eligible for continued quotation
on NASDAQ if the market value of the public float is at least $3 million and the
company has $2 million in capital and surplus. The failure to meet these
maintenance criteria in the future could result in the delisting of the
Company's Common Stock from NASDAQ. In such event, trading, if any, in the
Common Stock may then continue to be conducted in the non-NASDAQ
over-the-counter market. As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Company's Common Stock. In November 1996, NASDAQ approved changes to its
quantitative and qualitative standards for issuers listing on NASDAQ, subject to
public comment and approval by the Commission. Among the proposed changes are
the elimination of the alternative test for issuers failing to meet the minimum
bid price of $1.00, an increase in the quantitative standards for both the
NASDAQ National Market and the NASDAQ SmallCap Market, and the corporate
governance requirements applicable to the NASDAQ National Market would be
applicable to the NASDAQ SmallCap Market.
17
In addition, if the Common Stock were delisted from trading on NASDAQ and
the trading price of the Common Stock were less than $5.00 per share, trading in
the Common Stock would also be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, which require additional
disclosure by broker dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-NASDAQ equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers may discourage
broker-dealers from effecting transactions in penny stocks, which could reduce
the liquidity of the shares of Common Stock and thereby have a material adverse
effect on the trading market for the securities.
Possible Adverse Effect of State Blue Sky Restrictions on Secondary Trading of
Common Shares
The Company believes that its Common Stock is eligible for sale on a
secondary market basis in most states based on various exemptions to state
qualification requirements. Limitations on, or the absence of those exemptions,
will under certain circumstances restrict the ability of a holder to transfer
the Common Stock to non-institutional buyers in some states. This could
adversely affect the liquidity of the Common Stock.
Anti-takeover Provisions
The Company's Board of Directors has the authority to issue up to
10,000,000 shares of Preferred Stock in one or more series and to determine the
price, rights, preferences and privileges of those shares without any further
vote or action by the stockholders. Any issuance of Preferred Stock with voting
and conversion rights may adversely affect the voting power of the holders of
Common Stock. The Company has received commitments to purchase convertible
preferred stock, convertible into shares of common stock. and such issuance
could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. In addition, the
Company may become subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which could have the effect of delaying or
preventing a change of control of the Company or adversely affect the market
price of the Company's Common Stock. In addition, the severance provisions of
employment agreements with certain members of the Company's management provide
for payments that could discourage an attempted change in control of the
Company.
ITEM 2. PROPERTIES
The Company's executive offices are located at Sixth Floor, 1001 22nd
Street, N.W., Washington, D.C. 20037, and are leased pursuant to a lease
agreement that will expire October 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
In May 1994, the Company received a letter claiming that the Company's logo
is confusingly similar to the registered trademark of a company engaged in the
sale of pre-recorded music, and that the Company's continued use of its logo may
constitute infringement of such mark. No claim of damages has been asserted and
the Company knows of no basis for the assertion of any damages with respect to
the use of its logo. At the present time, the Company does not have sufficient
information to assess the likelihood of success in any action that may arise in
connection with the claim. If the claim is adversely determined, the Company
does not believe that the loss of its logo would have a material adverse effect
on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
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 under the symbol "CDRD" and has been trading there since that time. 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 reflect interdealer quotations, without retail markups, markdowns,
fees or commissions and do not necessarily reflect actual transactions.
HIGH LOW
-------- -------
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
Year Ended December 31, 1995
First Quarter.................................................... 4 5/8 1 7/8
Second Quarter................................................... 3 15/16 2 5/8
Third Quarter.................................................... 4 5/8 2 15/16
Fourth Quarter................................................... 4 3/8 2 15/16
Year Ended December 31, 1994
Third Quarter (commencing September 13, 1994).................... 4 1/2 3 3/4
Fourth Quarter................................................... 3 7/8 1 5/8
On March 12, 1997, the closing bid price of the Company's Common Stock on
NASDAQ was $6.875 per share. At March 12, 1997, there were approximately 102
record holders 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.
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,
1994, 1995 and 1996 and with respect to the balance sheets at December 31, 1995
and 1996 are derived from the consolidated financial statements of the Company,
audited by Coopers & Lybrand L.L.P., independent accountants, included in Item 8
of this filing. The selected consolidated financial data for the Company with
respect to the balance sheets at December 31, 1992, 1993, and 1994 and with
respect to the statement of operations data for the years ended December 31,
1992 and 1993, are derived from audited consolidated financial statements, 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."
19
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
Operating revenues............................. $ -- $ -- $ -- $ -- $ --
Net loss....................................... $(1,551) $(6,568) $(4,065) $(2,107) $(2,831)
Net loss per share............................. $ (.23) $ (.79) $ (.48) $ (.23) $ (.29)
Weighted average common shares and common share
equivalents outstanding...................... 6,715 8,284 8,398 9,224 9,642
BALANCE SHEET DATA
(IN THOUSANDS)
DECEMBER 31
------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
Cash and cash equivalents.................. $ 1,883 $ 777 $ 3,400 $ 1,800 $ 4,584
Working capital (deficit).................. $ 1,399 $ (250) $ 2,908 $ 1,741 $ 4,442
Total assets............................... $ 2,292 $ 1,663 $ 3,971 $ 2,334 $ 5,065
Deficit accumulated during the
development stage........................ $(2,965) $(9,533) $(13,598) $(15,705) $(18,536)
Stockholders' equity (deficit)(1).......... $ 1,791 $ 505 $ 3,431 $ 1,991 $ 4,898
- ---------------
(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
OVERVIEW
The Company was organized in May 1990 and is in its development stage. The
Company's principal activities to date have included technology development,
pursuing regulatory approval for CD Radio, initiation of discussions with radio
manufacturers and automakers, market research, design, development, contract
negotiations with satellite and launch vehicle contractors, technical efforts
with respect to standards and specifications, development of a mobile
demonstration program and securing adequate working capital. The Company has
been unprofitable to date and expects to continue to incur substantial losses
through at least the first full year of CD Radio service. Since its inception,
the Company has not derived any revenues from operations and does not expect to
generate any revenues from operations prior to the commencement of CD Radio,
which is not expected to occur before the second half of 1999 at the earliest.
In order to commence CD Radio service, the Company will require the FCC License
and substantial additional funds to finance 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.
The FCC has scheduled an auction among the four existing applicants to
auction two FCC Licenses on April 1, 1997. The Company believes it has
sufficient working capital to fund its planned operations through the receipt of
the FCC License. Upon receipt of the FCC License in the auction, the Company
will require substantial additional financing in connection with the purchase
price of the FCC License and to complete the construction and launch of its
satellite system and to fund the first full year of CD Radio service.
RESULTS OF OPERATIONS
1996 Compared to 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.
20
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.
1995 Compared to 1994
The Company recorded net loss of $2,107,000 ($.23 per share) and $4,065,000
($.48 per share) for the years ended December 31, 1995 and 1994, respectively.
The Company's total operating expenses were $2,230,000 in 1995 compared to
$4,076,000 in 1994.
Legal, consulting and regulatory fees decreased from $1,245,000 in 1994 to
$1,046,000 in 1995 as the Company continued to reduce costs while awaiting
action by the FCC on the Company's application for an FCC License.
Other general and administrative expenses also decreased from $2,455,000 in
1994 to $1,062,000 in 1995 reflecting a reduction of costs such as payroll, rent
and compensation expense in connection with issuance of stock options.
The Company completed the majority of the research and development
necessary for product development prior to FCC licensing by 1994 which was
reflected in the decrease of research and development costs from $375,000 in
1994 to $122,000 in 1995.
The increase in interest income from $51,000 in 1994 to $143,000 in 1995
was the result of a higher average cash balance in 1995. The cash and cash
equivalents on hand were originally obtained from the Company's initial public
offering in September 1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of approximately
$4,442,000, compared to $1,741,000 at December 31, 1995. The increase in working
capital was primarily the result of proceeds approximating $4.6 million received
from the exercise of common stock warrants in 1996. Should the Company receive
its FCC License, the Company will require substantial additional financing to
complete the construction and launch of its satellite system and to fund the
first full year of CD Radio service.
The Company estimates that upon receipt of the FCC License it will require
cash in the aggregate amount of at least $500 million, plus the cost of the FCC
License, to fund the construction and launch of the Company's satellites and the
commencement of CD Radio and to provide cash reserves for the first year of
service.
The Company believes that its working capital is sufficient to fund planned
operations through the auction for the FCC License. There can be no assurance,
however, that the Company's actual cash requirements will not exceed its
anticipated pre-auction cash requirements, that additional cash requirements
will not arise or that additional financing will not be required prior to the
receipt of the FCC License should the auction be delayed. Upon receipt of the
FCC License, the Company intends to seek additional financing through further
debt and equity financings. However, there can be no assurance that the Company
will be able to raise additional financing on favorable terms, if at all, or
that it will be able to do so on a timely basis. If such 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 commencement of its operations and
increased costs.
21
The Company's estimated cash requirements do not include any amounts that
the Company may be required to pay to receive an FCC License in the auction.
There can be no assurance that the Company will be a successful bidder in the
FCC auction, and the Company is unable to predict the amount that the Company
may be required to pay to receive an FCC License by being a successful bidder in
an auction. The winning bidders in the FCC Auction will be required to deposit
20 percent of the amount of the winning bid within ten business days after the
close of the auction, and to pay the balance of the winning bid after revised
license applications are finalized and assuming petitions to deny the License
are dismissed. See "Business -- Government Regulation." The Company has
submitted a deposit of $3 million to the FCC, which will be applied against the
20 percent deposit requirement if it is a winning bidder, and which will be
returned if it is not a winning bidder.
The Company's estimates of its cash requirements are forward looking
statements that involve a number of risks and uncertainties. Such estimates
assume that the FCC License is received by the first half of 1997, that
operation of CD Radio commences in the second half of 1999 and do not include
the price that the Company will have to pay for the FCC License in the auction.
The Company's actual future cash requirements will depend upon numerous factors,
including the costs associated with the construction and deployment of the
satellite system and the rate of growth of its business subsequent to commencing
service. 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, or to pay the cost of the FCC License in the auction.
The Company anticipates funding its projected cash requirements through the
completion of additional debt and equity financings. There can be no assurance
that the Company will be able to obtain financing on favorable terms, if at all,
or that it will be able to do so on a timely basis.
The Company's Board of Directors has authorized the sale pursuant to a
private placement of 5% Delayed Convertible Preferred Stock, convertible to
common stock at conversion prices based on discounts to future market prices.
The Company announced commitments to purchase $62.5 million in 5% Preferred
Stock in October 1996, and has received additional commitments since that time.
The purpose of the sale is to finance the payment of the purchase price for the
FCC License and for working capital prior to the completion of subsequent
financings if the Company is the winning bidder for the FCC License. There can
be no assurance that the amount of the commitment will be sufficient to permit
the Company to submit the winning bid for the FCC License. Closing the sale of
Preferred Stock is subject to a number of conditions, including conditions
relating to the Company's application for the FCC License, and the agreement
contains limitations on the Company's use of proceeds and other corporate
actions. There can be no assurance that the agreement for this transaction will
not be amended or terminated, or that any of the Preferred Stock will be sold
pursuant thereto. Failure to close the sale of the Preferred Stock could result
in a default by the Company of payment obligations relating to the FCC License.
The Company's Chairman and Chief Executive Officer and a principal
stockholder have from time to time advanced funds to the Company for use as
working capital and to enable the Company to satisfy cash requirements. As of
December 31, 1995, approximately $273,000, was owed to the Company's Chairman
and Chief Executive Officer for a loan made and accrued interest thereon. Such
loan was repaid in 1996.
5% Delayed Convertible Preferred Stock
On March 19, 1997, the Board of Directors authorized the issuance of up to
8,000,000 shares of the 5% Delayed Convertible Preferred Stock (the "5%
Preferred Stock"), and the Company has received substantial commitments from
investors to purchase the 5% Preferred Stock subject to the satisfaction of
certain conditions, but as of March 31, 1997, none has been issued or sold. Set
forth below is a brief description of the 5% Preferred Stock.
Dividends. Each share of the 5% Preferred Stock is entitled to receive
dividends at the rate of $1.25 per annum, payable semi-annually on April 15 and
October 15 of each year, in preference to any payment made on any other shares
of capital stock of the Company. Any dividend payable on the 5% Preferred Stock
may be paid, at the option of the Company, either (i) in cash or (ii) by adding
the amount of such dividend to the Liquidation Preference (as defined below).
Each share of the 5% Preferred Stock is also entitled to a
22
liquidation preference of $25 per share, plus all accrued but unpaid dividends
(the "Liquidation Preference"), in preference to any other class or series of
capital stock of the Company. Other than the consent rights described below with
respect to certain corporate actions, and except as otherwise provided by
applicable law, holders of the 5% Preferred Stock have no voting rights.
Conversion. The 5% Preferred Stock is convertible into shares of Common
Stock at any time, provided that the Company is not obligated to honor any
request for conversion of the 5% Preferred Stock at any time certain
governmental approvals of the issuance of the Common Stock upon such conversion
have not been obtained. If such approvals (other than with respect to a holder
or group of holders holding more than 50% of the voting securities of the
Company) are not obtained by 360 days after the First Closing date, the Company
shall, at the request of any holder, repurchase the shares of the 5% Preferred
Stock held by such holder at a purchase price per share equal to the sum of the
Liquidation Preference plus any other cash payments due to such holder ("Cash
Payments"), divided by 72.125% (the "Maximum Price"). The number of shares of
Common Stock issuable upon conversion of the shares of the 5% Preferred Stock
will equal the Liquidation Preference of the shares being converted plus any
Cash Payments divided by the then-effective conversion price applicable to the
Common Stock (the "Conversion Price"). The Conversion Price, as of any date up
to and including November 15, 1997, is determined in accordance with a formula
based on market prices of the Common Stock or actual prices at which the
converting holder sold the Common Stock, in either case multiplied by an amount
equal to 1 minus the Applicable Percentage. At any date after November 15, 1997,
the Conversion Price is determined in accordance with a formula based on market
prices of the Common Stock between October 15, 1997 and November 15, 1997,
market prices of the Common Stock during the three consecutive trading days
immediately preceding the date of conversion or actual prices at which the
converting holder sold the Common Stock, in any case multiplied by 72.125%. The
Applicable Percentage is as follows:
CONVERSION AFTER THE
FOLLOWING DATE APPLICABLE PERCENTAGE
- -------------------- ---------------------
4/15/97 14.375%
5/15/97 18.125%
6/15/97 19.875%
7/15/97 21.625%
8/15/97 23.250%
9/15/97 24.875%
10/15/97 25.000%
11/15/97 27.875%
The 5% Preferred Stock is at all times subject to adjustment for customary
anti-dilution events such as stock splits, stock dividends, reorganizations and
certain mergers affecting the Common Stock. Three years or more after the date
of original issuance of the 5% Preferred Stock, the Company may require the
holders of the 5% Preferred Stock to convert such shares into Common Stock at
the then applicable Conversion Price and all Cash Payments due on a date
specified in the notice of forced conversion. However, the conversion shall not
occur if the Company has commenced bankruptcy proceedings, ceased operations or
shall be in default for money borrowed in excess of $50 million.
Required Redemption. The Company must also reserve and keep available out
of its authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the 5% Preferred Stock, at least such number of its
Common Stock that is the greater of (i) 10 million shares and (ii) 1.5 times the
number as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the 5% Preferred Stock. The Company has agreed to take
such corporate action necessary to increase its number of authorized shares of
Common Stock to at least 100 million shares on or before the 90th calendar day
after the First Closing. If the Company does not have sufficient shares of
Common Stock reserved to effect such conversion and fails to take such corporate
action necessary to authorize or reserve sufficient shares of Common Stock, then
at any time at the request of any holder of shares of the 5% Preferred Stock,
the Company shall purchase from such holder the number of shares of the 5%
Preferred Stock equal to such holder's pro-rata share of the number of shares of
the 5% Preferred Stock that would not be able to be
23
converted due to an insufficient number of shares of Common Stock reserved for
such purpose at the Maximum Price. In addition, if prior to the earlier of April
21, 1998 or the closing of a Qualifying Offering (as defined below), the FCC
awards more than two licenses permitting the licensee to provide satellite
digital audio radio services and more than two licensees commence or announce an
intention to commence satellite digital audio radio services, then upon the
request of the holders of more than one-third of the outstanding shares of the
5% Preferred Stock, the Company shall purchase one-half of the shares of the 5%
Preferred Stock held by each requesting shareholder at a purchase price per
share equal to the sum of the Liquidation Preference plus any Cash Payments
divided by 1 minus the Applicable Percentage. If a reorganization occurs, each
holder of the 5% Preferred Stock may require the Company to redeem the 5%
Preferred Stock at the Maximum Price. A Reorganization is defined as any
reorganization or any reclassification of the Common Stock or other capital
stock of the Company or any consolidation or merger of the Company with or into
any other corporation or corporations or a sale of all or substantially all of
the assets of the Company. If the holder chooses not to require the Company to
redeem such holder's shares, the shares will be convertible into the number of
shares or other property to which a holder of the number of shares of Common
Stock deliverable upon conversion of such share of 5% Preferred Stock not so
redeemed would have been entitled upon the reorganization.
Redemption. The 5% Preferred Stock may be redeemed in whole but not in
part at the Maximum Price by the Company at any time beginning on the date that
is 10 months after the date of original issuance of the 5% Preferred Stock, plus
one day for each day during which (x) a registration statement has not been
declared effective with respect to the Common Stock issuable upon conversion of
the 5% Preferred Stock by the 90th calendar day after the original issuance of
the 5% Preferred Stock or (y) any such registration statement is suspended or
the related prospectus is not current, complete or otherwise usable. The Company
may not exercise its right of redemption unless (i) the average closing price of
the Common Stock as reported in the Wall Street Journal for the 20 consecutive
trading days prior to the notice of redemption shall equal or exceed $18 per
share (subject to adjustments) and (ii) the shares of Common Stock issuable upon
conversion of the 5% Preferred Stock are registered for resale by an effective
registration under the Securities Act of 1933, as amended. The Company also may
redeem the 5% Preferred Stock in whole but not in part at the Maximum Price if
the Company sells Common Stock for cash in an amount not less than $100 million
in a registered underwritten public offering prior to October 15, 1997
("Qualifying Offering").
Dilution of Common Stock. The exact number of shares issuable upon
conversion of all of the 5% Preferred Stock cannot currently be estimated but,
generally, such issuances of Common Stock will vary inversely with the market
price of the Common Stock. The holders of Common Stock ownership interest will
be materially diluted by conversion of the 5% Preferred Stock, which dilution
will depend on, among other things, the future market price of the Common Stock
and conversion elections made by holders of the 5% Preferred Stock. The terms of
the 5% Preferred Stock do not provide for any limit on the number of shares of
Common Stock which the Company may be required to issue in respect thereof.
Cash Payments. The private placement agreement relating to the sale of the
5% Preferred Stock specifies certain circumstances in which the Company must
make a cash payment to each holder of the 5% Preferred Stock (or underlying
securities issued or issuable upon conversion of the 5% Preferred Stock). The
Company must make a cash payment equal to 3% of the Liquidation Preference per
month to each holder if the Company fails: (i) within 90 days of the date of the
First Closing to increase the number of authorized shares of Common Stock to at
least 100 million shares; (ii) within 90 days of the date of the First Closing
to file and cause to be declared effective a registration statement under the
Securities Act of 1933 with respect to the resale of Common Stock issuable upon
conversion of the 5% Preferred Stock; (iii) within 90 days of the date of the
First Closing to obtain any governmental approvals necessary for the conversion
of the 5% Preferred Stock; (iv) to honor any request for conversion of the 5%
Preferred Stock except as permitted by the terms and conditions of the 5%
Preferred Stock; or (v) to maintain the listing of the Common Stock on Nasdaq,
the New York Stock Exchange or the American Stock Exchange. A similar cash
payment must be made if, after effecting a registration statement with respect
to the resale of Common Stock issuable upon conversion of the 5% Preferred
Stock, the use of the prospectus is suspended for more than 60 cumulative days
in the aggregate in any twelve month period. In addition, if the Company fails
at any time to reserve a sufficient number of shares of Common Stock for
issuance upon conversion of the 5% Preferred Stock, it must
24
make a cash payment equal to 3% of the Liquidation Preference (proportionately
reduced by the amount of shares that are so authorized and reserved) per month
to the holders of the 5% Preferred Stock. The private placement agreement also
provides that prior to the completion of a Qualifying Offering, the Company may
not undertake to conduct any debt or equity financing that is not pari passu or
junior to the 5% Preferred Stock in seniority, structure and maturity.
Consent of the holders of a majority of the 5% Preferred Stock is required
before the Company may take certain corporate actions or pay dividends on Common
Stock and certain other corporate actions taken in connection with a partial
repurchase of 5% Preferred Stock require the consent of all holders of 5%
Preferred Stock.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-3
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1996, and for the period May 17, 1990 (date of inception)
to December 31, 1996................................................................ F-4
Consolidated Statements of Stockholders' Equity for the period May 17, 1990 (date of
inception)
to December 31, 1996................................................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 and for the period May 17, 1990 (date of inception)
to December 31, 1996................................................................ F-7
Notes to Consolidated Financial Statements............................................ F-8
F-1
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, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996 and for the period May 17, 1990 (date of inception) to December 31,
1996. 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, 1995 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 and for the period May 17, 1990 (date of inception) to
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Washington, D.C.
March 26, 1997
F-2
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................... $ 1,799,814 $ 4,583,562
Prepaid expense and other................................... 8,781 9,368
------------ ------------
Total current assets................................... 1,808,595 4,592,930
------------ ------------
Property and equipment, at cost:
Technical equipment......................................... 254,200 254,200
Office equipment and other.................................. 89,220 89,220
Demonstration equipment..................................... 38,664 38,664
------------ ------------
382,084 382,084
Less accumulated depreciation............................... (160,498) (213,344)
------------ ------------
221,586 168,740
Deposits......................................................... 303,793 303,793
------------ ------------
Total assets........................................... $ 2,333,974 $ 5,065,463
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................... $ 46,521 $ 131,118
Other....................................................... 20,716 20,174
------------ ------------
Total current liabilities.............................. 67,237 151,292
Loan from officer................................................ 240,000 --
Deferred rent and other.......................................... 35,967 15,795
------------ ------------
Total liabilities...................................... 343,204 167,087
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized; 4,000,000 shares designated as 5% Delayed
Convertible Preferred Stock; none issued or outstanding... -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized; 9,305,960 and 10,300,391 shares issued and
outstanding as of December 31, 1995 and 1996,
respectively.............................................. 9,306 10,300
Additional paid-in capital.................................. 18,006,729 23,423,936
Deficit accumulated during the development stage............ (15,705,265) (18,535,860)
Deferred compensation on stock options granted.............. (320,000) --
------------ ------------
Total stockholders' equity............................. 1,990,770 4,898,376
------------ ------------
Total liabilities and stockholders' equity............. $ 2,333,974 $ 5,065,463
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE FOR
THE PERIOD
MAY 16, 1986
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
----------------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
----------- ----------- ----------- -------------------
Revenue................................ $ -- $ -- $ -- $ --
Expenses:
Legal, consulting and regulatory
fees............................ 1,245,472 1,045,562 1,582,091 7,248,964
Other general and
administrative.................. 2,455,393 1,062,343 1,230,748 7,532,763
Research and development.......... 374,668 122,210 117,299 1,916,355
Write-off of investment in
Sky-Highway Radio Corp. ........ -- -- -- 2,000,000
----------- ----------- ----------- -------------
Total expenses............... 4,075,533 2,230,115 2,930,138 18,698,082
----------- ----------- ----------- -------------
Other income (expense)
Interest income................... 50,921 142,549 112,811 328,672
Interest expense.................. (40,155) (19,783) (13,268) (166,450)
----------- ----------- ----------- -------------
10,766 122,766 99,543 162,222
----------- ----------- ----------- -------------
Net loss............................... $(4,064,767) $(2,107,349) $(2,830,595) $ (18,535,860)
=========== =========== =========== =============
Net loss per common share.............. $ (0.48) $ (0.23) $ (0.29)
=========== =========== ===========
Weighted average common shares
outstanding.......................... 8,397,668 9,224,431 9,642,048
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STATE 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 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 to 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 -- $ -- -- $ --
DEFICIT
ACCUMULATED DEFERRED
ADDITIONAL DURING THE COMPENSATION
PAID-IN DEVELOPMENT ON STOCK
CAPITAL STAGE OPTIONS 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 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 to 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
(table continues on following page)
The accompanying notes are an integral part of the consolidated statements.
F-5
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STATE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
COMMON STOCK
----------------------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- --------- ---------- -----------
Sale of $.001 par 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
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 -- -- -- --
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 -- $ -- -- $ --
========== =========== ========== ========= ========== ===========
DEFICIT
ACCUMULATED DEFERRED
ADDITIONAL DURING THE COMPENSATION
PAID-IN DEVELOPMENT ON STOCK
CAPITAL STAGE OPTIONS GRANTED TOTAL
------------ ------------ --------------- ---------------
Sale of $.001 par 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
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
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
============ ============ =========== =============
The accompanying notes are an integral part of the consolidated statements.
F-6
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FOR
THE PERIOD
MAY 16, 1986
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
----------------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
----------- ----------- ----------- -------------------
Cash flows from development stage activities:
Deficit accumulated during the development
stage.......................................... $(4,064,767) $(2,107,349) $(2,830,595) $ (18,535,860)
Adjustments to reconcile deficit accumulated
during the development stage to net cash used
in development stage activities:
Depreciation expense........................... 48,847 57,593 52,846 224,043
Write off of investment in Sky-Highway Radio
Corp. ....................................... -- -- -- 2,000,000
Compensation expense in connection with
issuance of stock options.................... 995,500 320,000 320,000 1,715,500
Common stock issued for services rendered...... -- 347,283 554,293 901,576
Common stock options granted for services
rendered..................................... -- -- 119,820 119,820
Increase (decrease) in cash and cash equivalents
resulting from changes in assets and
liabilities:
Prepaid expense and other...................... 56,806 (7,465) (587) (9,368)
Due to related party........................... -- -- -- 350,531
Deposits....................................... 41,456 -- -- (303,793)
Accounts payable and accrued expenses.......... (13,773) (189,755) 84,597 206,357
Accrued executive compensation................. (378,000) -- -- --
Other liabilities.............................. (266,203) (6,930) (20,714) 35,969
----------- ----------- ----------- -------------
Net cash used in development stage
activities................................. (3,580,134) (1,586,623) (1,720,340) (13,295,225)
----------- ----------- ----------- -------------
Cash flows from investing activities:
Capital expenditures............................. (22,228) (13,824) -- (392,783)
Acquisition of Sky-Highway Radio Corp............ -- -- -- (2,000,000)
----------- ----------- ----------- -------------
Net cash used in investing activities........ (22,228) (13,824) -- (2,392,783)
----------- ----------- ----------- -------------
Cash flows from financing activities:
Proceeds from issuance of Units and common stock,
net............................................ 5,434,789 -- -- 14,557,482
Proceeds from exercise of stock options by
company officers............................... -- -- 155,000 155,000
Proceeds from exercise of stock warrants......... -- -- 4,589,088 4,589,088
Proceeds from issuance of promissory note........ 200,000 -- -- 200,000
Proceeds from issuance of promissory notes to
related parties................................ 560,000 -- -- 2,965,000
Repayment of promissory note..................... (200,000) -- -- (200,000)
Repayment of promissory notes to related
parties........................................ (200,000) -- (240,000) (2,435,000)
Loan from officer................................ 240,000 -- -- 440,000
Deferred offering costs.......................... 190,776 -- -- --
----------- ----------- ----------- -------------
Net cash provided by financing activities.... 6,225,565 -- 4,504,088 20,271,570
----------- ----------- ----------- -------------
Net increase (decrease) in cash and cash
equivalents...................................... 2,623,203 (1,600,447) 2,783,748 4,583,562
Cash and cash equivalents at the beginning of
period........................................... 777,058 3,400,261 1,799,814 --
----------- ----------- ----------- -------------
Cash and cash equivalents at the end of period..... $ 3,400,261 $ 1,799,814 $ 4,583,562 $ 4,583,562
=========== =========== =========== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest......... $ 2,559 $ -- $ 42,666 $ 82,729
=========== =========== =========== =============
Supplemental disclosure of non-cash financing
activities:
Common stock issued in satisfaction of notes
payable to related parties, including accrued
interest....................................... $ 572,072 $ -- $ -- $ 998,452
=========== =========== =========== =============
Common stock issued in satisfaction of due to
related parties including accrued interest..... $ -- $ -- $ -- $ 409,390
=========== =========== =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
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 is 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 ("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
compact-disc-quality music programming via satellites to subscribers' motor
vehicle radios, as well as to portable and home receivers. 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 and automakers.
In October 1992, in response to a request from the Company, the FCC voted
unanimously to propose the establishment of satellite digital audio radio
service ("satellite radio"). At that time, the FCC established a December 15,
1992 cutoff date for FCC License applications. The Company has filed an
application to utilize a portion of the frequency spectrum that was allocated
for satellite radio by the FCC in January 1995. Subsequent to its acquisition of
SHRC, the Company caused SHRC to withdraw its pending application. The Company
is currently one of four remaining applicants which have the right to
participate in the auction for spectrum scheduled for April 1, 1997.
Auction of Spectrum
On March 3, 1997, the FCC adopted satellite radio licensing rules (the
"Licensing Rules") and implemented a spectrum plan that will accommodate only
two national satellite radio licenses, both of which are scheduled to be
auctioned to the Company and the other three applicants on April 1, 1997. There
can be no assurance that the Company will be successful in obtaining one of the
two licenses or that the cost of obtaining it would not be material to the
Company's operations.
Pursuant to the Licensing Rules, the auction is scheduled to be held among
the four existing applicants on April 1, 1997. Prior to the commencement of the
auction each applicant must deposit $3 million with the FCC. The minimum opening
bid for each FCC License is $8 million. The bidding will continue until only two
bidders remain. Within 10 business days following the announcement of winning
bidders, each auction winner must deposit with the FCC twenty percent of its
winning bid. The $3 million initial deposit is applied toward the twenty percent
down payment. The winning bidders will also be required to supplement their
applications on file with the FCC within 30 days after the close of bidding.
After the FCC has confirmed receipt of each winning bidder's twenty percent
payment and acceptance of each winning bidder's application, the FCC will accept
petitions to deny the winning bidders' applications. If the FCC dismisses the
petitions, the winning bidders will have 10 business days to submit the balance
of their winning bids.
Pursuant to the Licensing Rules, certain progress milestones would be
required. Licensees would be required to begin satellite construction within one
year; and to launch and begin operating their first satellite within four years
and begin operating their entire system within six years. Failure to meet those
milestones could result in revocation of the FCC License.
F-8
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. BUSINESS AND FINANCING -- (CONTINUED)
The Company is in the process of obtaining monetary commitments to allow it
to be, in the opinion of management, competitive in the auction process. These
commitments include subscriptions to purchase 5% Delayed Convertible Preferred
Stock contingent upon the Company's success in the auction.
Financing requirements
In order to commence CD Radio service, the Company will require, among
other things, an FCC License to construct, launch and operate its satellites
(the "FCC License") and substantial funds, approximately $500 million or more,
to finance 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. The Company will participate in
the auction for spectrum scheduled for April 1, 1997. As noted above, the
minimum opening bid for each license will be $8 million. The Company has not
commenced construction of its satellites and will require substantial additional
financing before it is able to do so. Failure to obtain an FCC License and/or
inability to attract the required long-term financing will prevent the Company
from realizing its objective of providing satellite-delivered radio programming
to vehicular radios. Management's plan to fund operations and capital expansion
includes the additional sale of debt and equity securities through public and
private sources. In absence of the FCC License, the Company believes that its
working capital at December 31, 1996 is sufficient to fund planned operations
through the first quarter of 1998.
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 activities to date principally have been planning
and organization, the process of obtaining an FCC License, initiating research
and development programs, conducting market research and securing adequate
equity capital for the development of its proposed service. Accordingly, the
Company's financial statements are presented as those of a development stage
enterprise, as prescribed by Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development Stage Enterprises".
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.
F-9
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 a money market fund with a
major bank. These investments are collateralized by the underlying assets of the
fund. The fund invests in government securities or short-term interest or
dividend-bearing investment-grade securities. The Company has not experienced
any losses on its investments.
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
Net loss per common share is based on the weighted average number of common
shares and dilutive common share equivalents outstanding during the periods.
Options and warrants granted by the Company have not been included in the
calculation of net loss per share because such items were anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128) to
improve the EPS information provided in financial statements. FAS 128 simplifies
the existing computational guidelines of Accounting Principles Board Opinion No.
15, "Earnings Per Share," revises the disclosure requirements, and increases the
comparability of earnings per share (EPS) data on an international basis. To
simplify the EPS computations, the presentation of primary EPS is eliminated and
replaced with basic EPS, with the principal difference being that common stock
equivalents are not considered in computing basic EPS. In addition, FAS 128
requires dual presentation of basic and diluted EPS regardless of whether they
are same. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997. As long as the Company continues to experience
net losses, there will be no impact to its net loss per share computation since
its common stock equivalents are anti-dilutive and are already not considered in
computing loss per share, as noted above.
3. CAPITAL STOCK
Preferred stock
The Board of Directors has the authority to issue shares of preferred stock
and fix the terms thereof, without any further vote or action by the
stockholders of the Company. In October 1996, in connection with the execution
of the Preferred Stock Investment Agreement, the Board of Directors authorized
the designation of 5% Delayed Convertible Preferred Stock (the "5% Preferred").
The rights and performance of the 5% Preferred include: (a) cumulative dividends
at the rate of $1.25 per share per annum, payable semi-annually, when and as
declared by the Board of Directors; (b) liquidation preference equal to issuance
price
F-10
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITAL STOCK -- (CONTINUED)
plus any accrued but unpaid dividends; (c) certain redemption and lock-up rights
granted to the Company; and (d) certain conversion and registration rights
granted to the holders of 5% Preferred.
Warrants
In connection with the Company's initial public offering and the partial
exercise of the underwriters' over-allotment option, 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, at a purchase price of $6.00
per share. Then, in March 1996, the Company extended the expiration date of
these warrants to September 20, 1996 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. 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.
Stock options and bonuses
Under an amended and restated employment agreement effective June 2, 1992,
the Company, on July 30, 1993, granted an officer options to purchase 20,000
shares of the Company's Common Stock at $1.00 per share, exercisable for 7 years
from date of grant. This officer also transferred to the Company, for nominal
consideration, his rights in connection with certain patent applications.
Additionally, on December 23, 1994, in accordance with this agreement, the
Company granted this officer options to purchase 112,500 shares of its Common
Stock under the terms of the 1994 Stock Option Plan at an exercise price of
$1.00 per share, as a result of the completion of a certain specified milestone.
The Company has recorded salary expense and additional paid-in-capital in the
amount of $112,500, reflecting the difference between the fair market value per
share of Common Stock at the measurement date and the exercise price. These
options were immediately vested and exercisable. In 1996 this officer was
granted options to purchase an additional 60,000 shares of Common Stock under
the terms of the 1994 Stock Option Plan at an exercise price of $8.5625. The
options granted in 1996 vest based on certain milestones which were not met as
of December 31, 1996. If this officer is terminated for any reason other than
cause, as defined in the agreement, the Company is obligated to pay to this
officer an amount equal to 50% of his annual salary and, at this officer's
option, to repurchase all of his shares of Common Stock at a price of $1.25 per
share. In 1996, this officer exercised options to purchase 80,000 shares of the
Company's Common Stock.
During 1996, options to purchase 400,000 shares of common stock at $8.5625
per share were granted to the Company's Chairman and Chief Executive Officer.
These options vest based on a certain milestone which was not met as of December
31, 1996.
In October 1992, the Company entered into a financial consulting services
agreement with a financial advisory firm. Pursuant to this agreement, the
Company has granted the investment advisory firm an option to purchase 260,000
shares of the Company's Common Stock at $6.25 per share as follows -- 60,000
shares upon execution of the agreement and four 50,000 share increments upon the
successful completion of equity and/or debt financing of certain specified
amounts during the term of the agreement and for a period of two years following
termination of the agreement by the Company. Each option expires three years
from the date such option becomes exercisable. As of December 31, 1996 under
this agreement, 60,000 options for shares had expired unexercised and none of
the remaining options were exercisable. Additionally, the agreement provides,
F-11
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITAL STOCK -- (CONTINUED)
among other things, for the payment in cash to this firm of fees equal to (i)
two percent (2%) of the gross proceeds from each equity financing after December
15, 1992 and (ii) one percent (1%) of the gross proceeds from each debt
financing, during the term of the agreement and for a period of two years
following termination of the agreement by the Company.
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, 95,000 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"). 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. As of December 31, 1996 there are an aggregate of
1,600,000 shares of Common Stock authorized for issuance.
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................................ 707,500 $3.81 15,000 $ 5.00 --
Exercised.............................. -- --
Cancelled.............................. (90,000) $5.00 -- --
--------- --------- ---------
Outstanding at December 31, 1994......... 617,500 $3.63 15,000 $ 5.00 410,000 $4.33
--------- --------- ---------
Granted................................ -- 110,000 $ 3.11 --
Exercised.............................. -- -- --
Cancelled.............................. -- -- (60,000) $6.25
--------- --------- ---------
Outstanding at December 31, 1995......... 617,500 $3.63 125,000 $ 3.34 350,000 $4.00
--------- --------- ---------
Granted................................ 545,000 $8.10 40,000 $ 6.875 --
Exercised.............................. (80,000) $1.00 -- (55,000) $1.36
Cancelled.............................. -- -- --
--------- --------- ---------
Outstanding at December 31, 1996......... 1,082,500 $6.08 165,000 $ 4.20 295,000 $4.56
========= ========= =========
1994 PLAN DIRECTORS' PLAN OTHER
-------------- --------------- ------------
As of December 31, 1996:
Range of exercise prices........................ $1.00-$8.5625 $2.125-$6.875 $1.00-$6.25
Weighted average remaining contractual life for
options outstanding (years).................. 8.45 8.67 5.71
The weighted average fair value of options granted during 1995 and 1996 was
$1.383 and $4.366, respectively.
F-12
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITAL STOCK -- (CONTINUED)
An aggregate of 272,500 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 1,815,000 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, 1996, 857,500 options were
vested and exercisable.
As a result of certain option grants in 1994 at exercise prices below fair
market value, the Company recorded deferred compensation, which is reflected as
a component of stockholders' equity on the balance sheets. Deferred compensation
is being 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. As of December 31, 1996 all deferred compensation
relating to the 1994 issuance of stock options had been amortized.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (FAS 123) as they pertain to financial
statement recognition of compensation expense attributable to option grants. If
the Company had elected to recognize compensation cost for the option grants
consistent with FAS 123, the Company's net loss and net loss per share on a
pro-forma basis would have been.
1995 1996
----------- -----------
Net loss -- as reported............................ $(2,107,349) $(2,830,595)
Net loss -- pro-forma.............................. $(2,259,434) $(4,428,995)
Net loss per share -- as reported.................. $ (0.23) $ (0.29)
Net loss per share -- pro-forma.................... $ (0.24) $ (0.46)
The pro-forma expense related to the 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:
1995 1996
------ ------
Risk-free interest rate...................................... 5.81% 6.00%
Expected life of options -- years............................ 2.77 2.79
Expected stock price volatility.............................. 75% 75%
Expected dividend yield...................................... N/A N/A
F-13
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. 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
FOR THE YEARS ENDED MAY 17, 1990
DECEMBER 31, (DATE OF INCEPTION)
-------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
-------- -------- -------- -------------------
Consulting fees............... $ 47,772 $ 34,575 $187,820 $ 713,210
Legal fees.................... 171,523 74,761 70,582 727,550
Management fees............... -- -- -- 361,800
Interest expense.............. 25,361 19,783 13,268 113,474
Office space.................. -- -- -- 40,500
Patent and FCC fees........... -- -- -- 56,600
Other......................... -- -- -- 26,750
-------- -------- -------- -----------
$244,656 $129,119 $271,670 $ 2,039,884
======== ======== ======== ===========
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.
During the period May 17, 1990 (date of inception) to December 31, 1996,
the Company issued Common Stock in lieu of cash in settlement of certain
liabilities and expenses as follows:
FOR THE PERIOD
FOR THE YEARS ENDED MAY 17, 1990
DECEMBER 31, (DATE OF INCEPTION)
-------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
-------- -------- -------- -------------------
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.
In April 1994, an officer loaned the Company $240,000 payable on April 1,
1995 and accruing simple interest at the rate of 8% per annum. This loan and
accrued interest was repaid in 1996. If this officer is terminated for any
reason other than cause, as defined in his amended employment and noncompetition
agreement dated June 8, 1994, the Company is obligated to pay this officer
$300,000 plus any and all amounts then owed to him by the Company. This officer
waived his compensation for the fourth quarter of 1994.
During the second quarter of 1994, a principal stockholder of the Company
loaned the Company $560,000 payable on demand and accruing simple interest at
the rate of 8% per annum. The principal balance
F-14
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTIES -- (CONTINUED)
of this note and accrued interest thereon, totaling $572,000, was exchanged for
57,200 Units in connection with the Company's public offering.
5. 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 and are as follows:
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
Capitalized start-up costs......................... $ 4,312,000 $ 5,377,000
Net operating loss carryforwards................... 1,517,500 1,511,300
Deferred compensation.............................. 509,800 542,300
Accrual to cash adjustments........................ 38,400 60,500
----------- -----------
6,377,700 7,491,100
Valuation allowance................................ (6,377,700) (7,491,100)
----------- -----------
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, 1996, the Company has net operating loss carryforwards of
approximately $3,713,800 for federal and state income tax purposes available to
offset future taxable income. The net operating loss carryforwards expire at
various dates beginning 2005. 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. Once the Company begins it active
trade or business, these capitalized costs will be amortized over 60 months. The
total capitalized start-up costs of $5,546,000 include $169,000 which when
realized would not affect financial statement income but will be recorded
directly to shareholders' equity.
6. COMMITMENTS AND CONTINGENCIES
Lease commitment
In October 1992, the Company entered into a lease with an unaffiliated
property management company for the office space 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 will pay a monthly allocation of the building's operating
expenses. Minimum annual rental commitments under this lease are as follows for
the year ended December 31:
1997.............................................................. $219,000
1998.............................................................. 176,000
--------
$395,000
========
F-15
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Total rent expense for the years ended December 31, 1994, 1995 and 1996 and
the period May 17, 1990 (date of inception) to December 31, 1996 was $325,798,
$274,653, $301,765 and $1,205,008, respectively.
Satellite construction
The Company has entered into an agreement (the "Construction Contract")
with Space Systems/Loral pursuant to which Space Systems/Loral has agreed to
construct two satellites and, at the Company's option, a third satellite in
accordance with stipulated specifications. The Company has extended the
Construction Contract on a monthly basis through April 30, 1997 while it
negotiates with Space Systems/Loral to amend the contract's technical
specifications, pricing and delivery terms. The Company may negotiate with Space
Systems/Loral to extend the Construction Contract further or it may permit the
contract to expire. The Company believes it will be able to negotiate a
favorable contract with Space Systems/Loral for the construction of the
satellites, although there can be no assurance that the Company will be able to
do so. An initial payment of $100,000 was made by the Company at the time the
contract was signed, which is included in Deposits on the balance sheets as of
December 31, 1995 and 1996.
Launch services
The Company has reserved two launch slots with Arianespace during the
period extending from November 1, 1999 through April 30, 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. In order to maintain its launch slots, the Company
will need to enter into a definitive agreement with Arianespace by May 31, 1997,
providing for the launch of its satellites. The final terms and conditions of
any launch agreement are subject to negotiations between the Company and
Arianespace. Satellite launches are subject to significant risks, including
satellite destruction or damage during launch or failure to achieve proper
orbital placement. In connection with this agreement, the Company paid a non-
refundable launch date reservation fee of $100,000. This amount, which is
included in Deposits on the balance sheets as of December 31, 1995 and 1996 will
be credited against the cost of the launch services.
F-16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as to the executive
officers and directors of the Company.
NAME AGE POSITION
-------------------------------- --- -----------------------------------------------------
David Margolese................. 39 Chairman, Chief Executive Officer and Director
Robert D. Briskman.............. 64 Vice President, Chief Technical Officer and Director
Lawrence F. Gilberti............ 46 Director and Secretary
Peter K. Pitsch................. 45 Director
Jack Z. Rubinstein.............. 48 Director
Ralph V. Whitworth.............. 41 Director
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Officers are elected by the
Board of Directors and serve at the discretion of the Board.
DAVID MARGOLESE. Mr. Margolese was elected Chief Executive Officer of the
Company in November 1992 and Chairman in August 1993 and has served as a
director since August 1991. Prior to his involvement with the Company, Mr.
Margolese was a founder of Cantel Inc., Canada's national cellular telephone
company, and of Canadian Telecom Inc., a radio paging company, serving as that
company's President until its sale in 1987. From 1987 until August 1991, Mr.
Margolese was a private investor. In 1991, Mr. Margolese founded a consortium
with AT&T and Hutchison Telecommunications Ltd. to bid for Israel's national
cellular telephone license and served as Chairman of this consortium until June
1993.
ROBERT D. BRISKMAN. Mr. Briskman has served as a director, Vice President
and Chief Technical Officer of the Company since October 1991 and as President
of Satellite CD Radio, Inc., a subsidiary of the Company, since September 1994.
In addition, Mr. Briskman served as Chief Executive Officer from April to
November 1992. From March 1991 to June 1992, Mr. Briskman was President of
Telecommunications Engineering Consultants, which provided engineering and
consulting services to the Company. From March 1986 to March 1991, Mr. Briskman
was Senior Vice President, Engineering and Operations at Geostar Corp.,
responsible for the development, design, implementation and operation of a
nationwide satellite message communication service. Prior to 1986, Mr. Briskman
held senior management positions at Communications Satellite Corporation
("COMSAT"), where he was employed for over 20 years. Prior to joining COMSAT,
Mr. Briskman was a communications specialist with IBM and NASA. Mr. Briskman
holds a bachelors degree in engineering from Princeton and a masters degree in
electrical engineering from the University of Maryland. He has published over 40
technical papers, holds a number of U.S. patents, and is a Fellow of the
Institute of Electrical and Electronics Engineers and the American Institute of
Aeronautics and Astronautics.
LAWRENCE F. GILBERTI. Mr. Gilberti was elected Secretary of the Company in
November 1992 and has served as a director since September 1993. In addition,
since December 1992, he has been the Secretary and sole director of, and from
December 1992 to September 1994 the President of, Satellite CD Radio, Inc. From
1985 to August 1994, Mr. Gilberti was an attorney with the law firm of Goodman
Phillips & Vineberg. Mr. Gilberti is a partner in the law firm of Fischbein
Badillo Wagner Harding and has provided legal services to the Company since
1992. He holds a bachelors degree from Princeton University and a law degree
from New York University.
26
PETER K. PITSCH. Mr. Pitsch became a director of the Company in January
1995. Since September 1989, Mr. Pitsch has been the principal of Pitsch
Communications, a telecommunications law and economic consulting firm that has
rendered legal services to the Company since 1991. From April 1987 to August
1989, he served as Chief of Staff at the Federal Communications Commission. From
November 1981 to April 1987, he served as Chief of the Office of Plans and
Policy at the Federal Communications Commission. He is an adjunct fellow at the
Hudson Institute. Mr. Pitsch holds a bachelor's degree from the University of
Chicago and a law degree from Georgetown University.
JACK Z. RUBINSTEIN. Mr. Rubinstein became a director of the Company in
January 1995. Since May 1991, Mr. Rubinstein has been the General Partner of
Dica Partners, a Hartsdale, N.Y. based hedge fund. From September 1988 to
October 1990, Mr. Rubinstein was a consultant to institutional clients at Morgan
Stanley & Co. From February 1978 to September 1988, he was an Associate Director
at Bear Stearns, Inc., responsible for corporate insider portfolio management.
From December 1971 to November 1977, he was a securities analyst with Shearson
Haydon Stone, Inc. covering the business services industry. Mr. Rubinstein holds
a bachelor's degree from Cornell University and a Masters of Business
Administration from New York University.
RALPH V. WHITWORTH. Mr. Whitworth became a director of the Company in
March 1994. Since 1988, he has been President of Whitworth and Associates, a
Washington, D.C. based consulting firm. In January 1997, Mr. Whitworth became a
partner of Batchelder & Partners, Inc., a financial advisory firm. Mr. Whitworth
was President of United Shareholders Association from its founding in 1986 to
1993. From 1989 to 1992, he served as President of Development of United Thermal
Corporation, the owner of the district heating systems for the cities of
Baltimore, Philadelphia, Boston and St. Louis. Mr. Whitworth holds a bachelor's
degree from the University of Nevada and a law degree from Georgetown
University.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Securities Exchange Act of 1934, as amended, requires the Company's
officers, directors and 10 percent shareholders to file reports of ownership and
changes in ownership with the SEC. Officers, directors and 10 percent
shareholders are required by SEC regulations to furnish the Company with all
Section 16(a) reports they file.
Based on the Company's review of such reports the Company received and
written representations from the Company's officers and directors, the Company
believes that all required reports were timely filed in fiscal 1996.
27
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for services rendered
during the three-year period ending December 31, 1996 for the executive officers
of the Company whose 1996 salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- ------------------------------------- ------ -------- ------- ------------ ------------
David Margolese...................... 1996 $ 95,833 $ -- $ -- 400,000
Chairman of the Board 1995 $100,000 $ -- $ -- --
and Chief Executive Officer 1994 $122,000(1) $ -- $ 26,052(2) 300,000
Robert D. Briskman................... 1996 $106,249 $20,000 $190,938 60,000
Vice President and 1995 $100,000 $ -- $ 1,340 --
Chief Technical Officer 1994 $122,000 $ -- $ -- 192,500
- ---------------
(1) In October 1994, Mr. Margolese waived his base salary payable for the three
month period ended December 31, 1994.
(2) The Company reimbursed Mr. Margolese for the following expenses incurred in
establishing residency in the United States: $18,521 for tax advice, $2,311
for moving expenses and $5,220 for real estate commissions.
COMPENSATION OF DIRECTORS
Commencing in 1994, directors of the Company who are not full time
employees of the Company were entitled to receive a director's fee of $20,000
per year for serving on the Company's Board of Directors. In June 1994, all
directors entitled to receive directors' fees agreed to forego any payments for
their services as directors of the Company. Pursuant to the Company's 1994
Directors' Nonqualified Stock Option Plan (the "Directors' Plan"), each director
who is not a full-time employee of the Company is entitled to an option to
purchase 15,000 shares of Common Stock upon becoming a director (or upon the
effective date of the plan in the case of non-employee directors who become
directors prior to the effective date) and to an automatic annual grant of an
option to purchase 10,000 shares of Common Stock. The exercise price for annual
grants is fair market value of the Company's Common Stock on the date of grant.
Prior to the implementation of the Directors' Plan, the Company from time to
time granted options to certain non-employee directors. See
"Management -- Employee and Director Stock Options." The Company reimburses each
director for reasonable expenses incurred in attending meetings of the Board of
Directors.
The Company has retained Pitsch Communications to provide legal services to
the Company for a monthly retainer of $5,000. The retainer may be terminated by
either party at any time. The principal of Pitsch Communications, Peter K.
Pitsch, is a director of the Company.
The Company has retained Jack Z. Rubinstein to provide consulting services
to the Company for a monthly retainer of $5,000. The retainer may be terminated
by either party at any time. Jack Z. Rubinstein is a director of the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Margolese
and Briskman.
Effective January 1, 1994, the Company entered into an employment agreement
to employ David Margolese as Chairman and Chief Executive Officer of the Company
for a term of five years. The agreement provided for an annual base salary of
$300,000, subject to increase from time to time by the Board of Directors. An
amendment to this agreement, dated as of June 8, 1994, provided for an annual
base salary of
28
$100,000, effective June 8, 1994. Subsequently, Mr. Margolese waived his base
salary payable for the three month period ended December 31, 1994. In January
1997, the Board of Directors increased Mr. Margolese's annual base salary to
$150,000. Under the agreement, the Company granted to Mr. Margolese an option to
purchase 300,000 shares of Common Stock at $5.00 per share, all of which are
fully vested and exercisable. If Mr. Margolese is terminated without "cause," as
defined in the agreement, or if Mr. Margolese resigns for "good reason," as
defined in the agreement, the Company is obligated to pay to Mr. Margolese the
sum of $300,000. In January 1994, Mr. Margolese was paid $162,000 for deferred
salary earned in 1993 and $216,000 in recognition of his service without pay in
1992. The employment agreement restricts Mr. Margolese from engaging in any
business involving the transmission of radio programming in North America for a
period of two years after the termination of his employment.
Effective January 1, 1994, the Company entered into an agreement to employ
Robert Briskman as the Vice President and Chief Technical Officer of the
Company. The agreement provided for an annual base salary of $150,000. An
amendment to this agreement, dated as of June 8, 1994, provided for an annual
base salary of $100,000, effective June 8, 1994. In October 1996, the Board of
Directors increased Mr. Briskman's annual base salary to $150,000 and in January
1997, extended the term of the agreement until January 1, 1998. In addition,
under the agreement the Company granted to Mr. Briskman an option to purchase
80,000 shares of Common Stock at $1.00 per share, all of which are fully vested
and exercisable. The agreement also provides for the grant to Mr. Briskman of
options to purchase 112,500 shares of Common Stock at $1.00 per share upon
completion of certain milestones prior to December 31, 1994. Such options were
granted to Mr. Briskman on December 23, 1994 and were fully vested and
exercisable. In January 1996, Mr. Briskman exercised options to purchase 80,000
shares of the Company's Common Stock. If Mr. Briskman's employment is terminated
for any reason other than "cause," as defined in the agreement, the Company is
obligated to pay to Mr. Briskman a sum equal to 50% of his annual salary and, at
Mr. Briskman's option, to repurchase all of the shares of Common Stock then
owned by Mr. Briskman at a price of $1.25 per share. The Company has also
entered into a proprietary information and non-competition agreement with Mr.
Briskman. Under this agreement, Mr. Briskman may not (i) disclose any
proprietary information of the Company during or after his employment with the
Company or (ii) engage in any business directly competitive with any business of
the Company in North America for a period of one year after termination of his
employment.
EMPLOYEE AND DIRECTOR STOCK OPTIONS AND STOCK GRANTS
In February 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan") and its Directors' Plan. The Director's Plan was amended by the Board of
Directors in December 1994 and January 1995 and approved at the annual meeting
of stockholders on June 27, 1995 to extend the exercise period of the option
after termination for reason other than death or disability and to increase the
initial option grants and annual option grants to non-employee directors.
The 1994 Plan, as amended, provides for options to purchase Common Stock
and is administered by the Plan Administrator, which may be either the Company's
Board of Directors or a committee designated by the Board of Directors. In
accordance with the 1994 Plan, the Plan Administrator determines the employees
to whom options are granted, the number of shares subject to each option, the
exercise price and the vesting schedule of each option. Options generally vest
over a four-year period, but may vest over a different period at the discretion
of the Plan Administrator. Under the 1994 Plan, outstanding options vest, unless
they are assumed by an acquiring entity, upon the occurrence of certain
transactions, including certain mergers and other business combinations
involving the Company. Options granted under the 1994 Plan are exercisable for a
period of 10 years from the date of grant, except that incentive stock options
granted to persons who own more than 10% of the Common Stock terminate after
five years. Vested options terminate 90 days after the optionee's termination of
employment with the Company for any reason other than death or disability, and
one year after termination upon death or disability. Unless otherwise determined
by the Plan Administrator, the exercise price of options granted under the 1994
Plan must be equal to or greater than the fair market value of the Common Stock
on the date of grant. Upon exercise, the aggregate exercise price may be paid to
the Company (i) in cash, (ii) upon approval of the Plan Administrator, by
delivering to the Company shares of
29
Common Stock previously held by such Optionee, or (iii) by complying with any
other payment mechanism approved by the Plan Administrator from time to time.
The Directors' Plan provides that current non-employee directors of the
Company and persons who become non-employee directors of the Company shall be
granted options to purchase 15,000 shares of Common Stock upon becoming
directors (or upon the effective date of the Director's Plan in the case of non-
employee directors who became directors prior to the effective date), and
thereafter shall annually be granted options to purchase 10,000 shares of Common
Stock on the first business day following the Company's annual meeting. The
exercise price for annual grants fair market of the Company's Common Stock on
the date of grant value. Options granted under the Directors' Plan vest
immediately upon grant. Options granted under the Directors' Plan are
exercisable for a period of 10 years from the date of grant. Options terminate
18 months after a director's termination as a director of the Company for any
reason other than death or disability, and one year after termination upon death
or disability. Upon exercise, the exercise price may be paid (i) in cash, (ii)
in shares of Common Stock, or (iii) by the Company withholding that number of
shares of Common Stock with a fair market value on the date of exercise equal to
the aggregate exercise price of the option.
In June 1995, the Company adopted its 1995 Stock Compensation Plan (the
"Stock Compensation Plan"). Pursuant to the terms of the Stock Compensation
Plan, all employees of the Company or a Related Company (as defined in the Stock
Compensation Plan) are eligible to receive awards under the Stock Compensation
Plan. Bonuses granted pursuant to the Stock Compensation Plan are made by a plan
administrator. The plan administrator, in its absolute discretion, determines
the employees to whom, and the time or times at which, Common Stock awards are
granted, the number of shares within each award and all other terms and
conditions of the awards. The terms, conditions and restrictions applicable to
the awards made under the Stock Compensation Plan need not be the same for all
recipients, nor for all awards. The plan administrator may grant to any officer
of the Company the authority to make awards or otherwise administer the Stock
Compensation Plan solely with respect to persons who are not subject to the
reporting and liability provisions of Section 16 of the Exchange Act.
In September 1996, the Stock Compensation Plan was amended to allow the
plan to be administered by the entire Board of Directors, and if so authorized
by the Board of Directors, a committee of at least two non-employee directors.
Prior to this amendment, the plan permitted the administration only by a
committee of the Board of Directors. The purpose of the amendment was to more
readily comply with the new rules under Section 16 of the Securities Act of
1933, as amended, which changed the eligibility requirements for these
committees. The new rules under Section 16 allow either the entire Board of
Directors or a committee composed of two or more "non-employee" directors to act
as Plan Administrator. Amending the Stock Compensation Plan provided more
flexibility for the Company in the administration of the stock Compensation
Plan.
Awards under the Stock Compensation Plan may not exceed 175,000 shares of
Common Stock in the aggregate, subject to certain adjustments. Shares awarded
may be from authorized but unissued shares or from Company treasury shares of
Common Stock. All shares of Common Stock received by employees pursuant to
bonuses under the Stock Compensation Plan (except for shares received by
executive officers or other persons who are subject to the reporting and
liability provisions of Section 16 of the Exchange Act) are freely transferable.
Nevertheless, the shares of Common Stock granted to recipients may be subject to
such terms and conditions as the Committee, in its sole discretion, deems
appropriate. During 1996, 67,500 shares of the Company's Common Stock were
issued pursuant to this Compensation Plan.
An aggregate of 1,600,000 shares of Common Stock were available for
issuance pursuant to the 1994 Plan and the Directors' Plan. As of December 31,
1996, options to purchase an aggregate of 1,327,500 shares of Common Stock have
been granted pursuant to the 1994 Plan and the Directors' Plan and there remains
an aggregate of 272,500 shares of Common Stock available for grant pursuant to
the 1994 Plan and the Directors Plan.
As of December 31, 1996, 162,500 shares of Common Stock have been issued
under the Stock Compensation Plan, and 12,500 shares of Common Stock remain
available for issuance thereunder.
30
STOCK OPTION INFORMATION
In April 1996, the Company granted to David Margolese pursuant to the 1994
Plan a stock option to purchase 400,000 shares of Common Stock which is
exercisable upon the FCC's grant of a license to the Company. In April 1996, the
Company also granted to Robert Briskman pursuant to the 1994 Plan a stock option
to purchase 60,000 shares of Common Stock, 30,000 shares of which are
exercisable upon the FCC's grant of a license to the Company and the remaining
30,000 shares of which are exercisable on September 18, 1997 if as of such date
the FCC has granted a license to the Company and if Mr. Briskman is still
employed by the Company.
The following table sets forth certain information for the fiscal year
ended December 31, 1996, with respect to options granted to the individuals
named in the Summary Compensation table above.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------- VALUE AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK PRICE
NUMBER TOTAL APPRECIATION FOR STOCK
OF OPTIONS GRANTED EXERCISE OR TERM
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ------------------------- --------- --------------- ----------- ---------- ---------- ----------
David Margolese.......... 400,000 87% $8.5625 4/24/06 $2,398,624 $5,848,148
Robert Briskman.......... 60,000 13% $8.5625 4/24/06 $ 359,794 $ 877,222
The following table sets forth certain information with respect to the
number of shares covered by both exercisable and unexercisable stock options
held by the individuals named in the Summary Compensation table above as of the
fiscal year ended December 31, 1996. Also reported are values for "in-the-money"
stock options that represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of the Common
Stock as of December 31, 1996 ($4.125 per share).
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE AT FISCAL YEAR END AT FISCAL YEAR END
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------ ----------- -------- ------------------------- -------------------------
David Margolese............... 0 $ 0 300,000/400,000 $0/$0
Robert Briskman............... 80,000 $202,500 132,500/60,000 $414,063/$0
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
As permitted by the Delaware General Corporation Law, the Company's Amended
and Restated Certificate of Incorporation provides that directors of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derives an improper personal benefit. In addition, the Company's
By-Laws provide that the Company shall indemnify all directors and officers and
may indemnify employees and certain other persons to the full extent and in the
manner permitted by Section 145 of the Delaware General Corporation Law, as
amended from time-to-time. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and, therefore, is
unenforceable.
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 12, 1997 of (i) each
stockholder known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each director of the Company, (iii) each
executive officer of the Company and (iv) all directors and officers as a group.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Common Stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
NUMBER OF SHARES PERCENT OF TOTAL
NAMES AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------------------------------- ------------------ ------------------
Darlene Friedland................................ 2,834,500 27.5%
110 Wolseley Road
Point Piper 2027
Sydney, Australia
David Margolese (2).............................. 1,900,000 17.9%
c/o CD Radio Inc.
Sixth Floor
1001 22nd Street, N.W.
Washington, D.C. 20037
Robert D. Briskman (3)........................... 132,500 1.3%
Jack Z. Rubinstein (4)........................... 227,000 2.2%
Peter K. Pitsch (5).............................. 70,000 *
Lawrence F. Gilberti (6)......................... 35,000 *
Ralph V. Whitworth (7)........................... 35,000 *
All Executive Officers and Directors as a Group
(6 persons) (8)................................ 2,399,500 21.7%
- ---------------
* Less than 1%
(1) This table is based upon information supplied by Directors, officers and
principal stockholders. Percentage of ownership is based on 10,300,391
shares of Common Stock outstanding on March 12, 1997. Unless otherwise
indicated, the address of the Beneficial Owner is the Company.
(2) Includes 300,000 shares issuable pursuant to stock options that are
exercisable within 60 days. Does not include 400,000 shares issuable
pursuant to stock options that are not exercisable within 60 days of such
date.
(3) Includes 132,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Does not include 60,000 shares issuable pursuant
to stock options that are not exercisable within 60 days of such date.
(4) Includes 195,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days and 7,700 shares of Common Stock held in trust
for his daughters. Excludes 40,000 shares held by DICA Partners of which Mr.
Rubinstein is the General Partner.
(5) Includes 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(6) Includes 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(7) Includes 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(8) Includes 732,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Does not include 460,000 shares issuable
pursuant to options that are not exercisable within 60 days of such date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 27, 1995, the Company granted to Peter K. Pitsch pursuant to the
1994 Plan a stock option to purchase 25,000 shares of Common Stock at an
exercise price of $2.875 per share in consideration of legal
32
services rendered to the Company. These options are exercisable for a period of
10 years from the date of grant and terminate 18 months after the termination
for any reason of Mr. Pitsch's service as a consultant to the Company. In 1996,
the Company granted to Mr. Pitsch pursuant to the 1994 Plan a stock option to
purchase 25,000 shares of Common Stock at an exercise price of $8.25 which would
have vested upon a certain milestone. The milestone was not met and consequently
this option did not vest.
In March 1996, the Company granted to Mr. Rubinstein pursuant to the 1994
Plan a stock option to purchase 60,000 shares of Common Stock at an exercise
price or $4.50. The option is exercisable for a period of 10 years from the date
of grant and terminates 18 months after the termination for any reason of Mr.
Rubinstein's service as a consultant to the Company.
Pursuant to an agreement dated October 21, 1992 (the "Batchelder
Agreement"), the Company retained the services of Batchelder & Partners, Inc., a
financial advisory firm ("Batchelder"), to provide the Company with certain
financial consulting services. On September 13, 1995, Batchelder entered into a
separate agreement with Whitworth and Associates (the "Whitworth Agreement"), of
which Ralph V. Whitworth is President, pursuant to which Whitworth is to provide
consulting services to Batchelder for a fee equal to a percentage of the fee
received by Batchelder from the Company under the Batchelder Agreement. In the
fiscal year ended December 31, 1996, Whitworth and Associates received $60,000
from the Whitworth agreement. In January 1997, Mr. Whitworth became a partner in
Batchelder, and the Whitworth Agreement was terminated.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
a) The following documents are filed as a part of this report:
1) Consolidated Financial Statements and Report of Independent
Accountants are included under Item 8, in Part II.
2) Consolidated Financial Statement Schedules and Report of Independent
Public Accountants on those schedules are included as follows:
None.
3) Exhibits: The following exhibits are filed as part of this report.
EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated By-Laws.
4.1 Description of Capital Stock contained in the Amended and Restated Certificate
of Incorporation (see Exhibit 3.1).
4.2 Description of Rights of Security Holders contained in the Amended and Restated
Bylaws (see Exhibit 3.2.).
4.3 Form of Certificate for Shares of Common Stock.
4.4 Form of Common Stock Purchase Warrant Agreement between the Company and
Continental Stock Transfer and Trust Company.
4.5 Form of Common Stock Purchase Warrant Certificate.
4.6 Form of Representatives' Warrant Agreement among the Company, Yorkton Securities
Inc., First Marathon (U.S.A.) Inc., First Marathon Securities Limited and
Continental Stock Transfer and Trust Company.
4.7 Form of Representatives' Warrant Certificate.
10.1 Option Agreement, dated January 23, 1992, between the Company and New World Sky
Media.
33
EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------
10.2 Lease Agreement, dated October 20, 1992, between 22nd & K Street Office Building
Limited Partnership and the Company.
10.3 Letter Agreement, dated November 18, 1992, between the Company and Batchelder &
Partners, Inc.
10.4.1 Proprietary Information and Non-Competition Agreement, dated February 9, 1993,
for Robert Briskman.
10.4.2 Amendment No. 1 to Proprietary Information and Non-Competition Agreement between
the Company and Robert Briskman.
+10.5.1 Satellite Construction Agreement, dated March 2, 1993, between Space
Systems/Loral and the Company.
+10.5.2 Amendment No. 1 to Satellite Construction Agreement, effective December 28,
1993, between Space Systems/Loral and the Company.
+10.5.3 Amendment No. 2 to Satellite Construction Agreement, effective March 8, 1994,
between the Space Systems/Loral and the Company.
10.5.4 Amendment No. 3 to Satellite Construction Agreement, effective February 12,
1996, between the Space Systems/Loral, Inc. and the Company.
10.5.5 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 Form 10-Q for the period ended
September 30, 1996.)
10.5.6 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 Form 10-Q for the period ended
September 30, 1996.)
10.5.7 Amendment No. 6 to Satellite Construction Agreement, effective August 26, 1996,
between the Space Systems/Loral, Inc. and the Company.
10.5.8 Amendment No. 8 to Satellite Construction Agreement, effective January 29, 1997,
between the Space Systems/Loral, Inc. and the Company.
10.5.9 Amendment No. 9 to Satellite Construction Agreement, effective February 26,
1997, between the Space Systems/Loral, Inc. and the Company.
10.5.10 Amendment No. 11 to Satellite Construction Agreement, effective March 24, 1997,
between the Space Systems/Loral, Inc. and the Company.
10.6 Assignment of Technology Agreement, dated April 15, 1993, between Robert
Briskman and the Company.
10.7 Demand Note and Grant of Warrant to Robert Friedland, dated April 28, 1993.
*10.8 Amended and Restated Option Agreement between the Company and Robert Briskman.
10.9 Demand Note and Grant of Warrant to Robert Friedland, dated October 13, 1993.
10.10.1 Launch Reservation Agreement, dated September 20, 1993, between the Company and
Arianespace.
10.10.2 Modification of Launch Reservation Agreement, dated April 1, 1994, between the
Company and Arianespace.
10.10.3 Second Modification of Launch Reservation Agreement, dated August 10, 1994,
between the Company and Arianespace.
10.10.4 Third Modification of Launch Reservation Agreement, dated November 8, 1995,
between the Company and Arianespace (Incorporated by reference to Exhibit 14.4
to the Company's Form 10-Q for the period ended September 30, 1996).
10.10.5 Fourth Modification of Launch Reservation Agreement, dated August 30, 1996,
between the Company and Arianespace (Incorporated by reference to Exhibit 14.5
to the Company's Form 10-Q for the period ended September 30, 1995).
10.10.6 Fifth Modification of Launch Reservation Agreement, dated December 10, 1996,
between the Company and Arianespace.
*10.11.1 Employment and Noncompetition Agreement between the Company and David Margolese.
*10.11.2 First Amendment to Employment Agreement between the Company and David Margolese.
34
EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------
*10.12.1 Employment and Noncompetition Agreement between the Company and Robert Briskman.
*10.12.2 First Amendment to Employment Agreement between the Company and Robert Briskman.
*10.12.3 Second Amendment to Employment Agreement between the Company and Robert
Briskman.
10.13 Registration Agreement, dated January 2, 1994, between the Company and M.A.
Rothblatt and B.A. Rothblatt.
*10.14 1994 Stock Option Plan.
*10.15 Amended and Restated 1994 Directors' Nonqualified Stock Option Plan.
10.16 Form of Lock-Up Agreement executed by certain holders of the Company's Common
Stock.
10.17 Option Agreement, dated as of October 21, 1992, between the Company and
Batchelder & Partners, Inc.
10.18 Settlement Agreement, dated as of April 1, 1994, among the Company, M.A.
Rothblatt, B.A. Rothblatt and Marcor, Inc.
10.19.1 Demand Note, dated April 19, 1994, in favor of David Margolese.
10.19.2 Note, dated June 30, 1994, in favor of David Margolese.
10.20 Demand Note, dated April 19, 1994, between the Company and D. Friedland.
10.21 Form of Underwriting Agreement (Incorporated by reference from Exhibit 1.1 to
the
Registrant's Registration Statement on Form S-1, Commission file No. 33-74782)
10.22 Letter Agreement dated January 13, 1995, between the Company and Brenner
Securities.
*10.23 1995 Stock Compensation Plan
**10.24 Form of Preferred Stock Investment Agreement dated October 23, 1996 between the
Company and certain investors.
**10.24.1 Form of First Amendment to Preferred Stock Investment Agreement dated March 7,
1997 between the Company and certain investors.
**10.24.2 Form of Second Amendment to Preferred Stock Investment Agreement dated March 14,
1997 between the Company and certain investors.
11.1 Statement Re Computation of Historical Net Loss Per Share.
21.1 List of the Company's Subsidiaries.
**23.1 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
- ---------------
* This document has been identified as a management contract or compensatory
plan or arrangement.
** Replaces previously filed exhibit.
+ 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 Securities and Exchange
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 2, 1996 with the Securities
and Exchange Commission relating to the exercise of the Company's
warrants.
A report on Form 8-K was filed on October 16, 1996 with the Securities
and Exchange Commission relating to the Company's Pioneer's Preference
application.
A report on Form 8-K was filed on October 30, 1996 with the Securities
and Exchange Commission relating to the private placement agreement for
the issuance of the 5% Delayed Convertible Preferred Stock.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: May 8, 1997 CD RADIO INC.
/s/ DAVID MARGOLESE
--------------------------------------
David Margolese
Chairman and Chief Executive Officer
36
CD RADIO INC.
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- ---------------------------------------------------------------------- ----------
*3.1 Amended and Restated Certificate of Incorporation.
*3.2 Amended and Restated By-Laws.
*4.1 Description of Capital Stock contained in the Amended and Restated
Certificate of Incorporation (see Exhibit 3.1).
*4.2 Description of Rights of Security Holders contained in the Amended and
Restated Bylaws (see Exhibit 3.2.).
*4.3 Form of Certificate for Shares of Common Stock.
*4.4 Form of Common Stock Purchase Warrant Agreement between the Company
and Continental Stock Transfer and Trust Company.
*4.5 Form of Common Stock Purchase Warrant Certificate.
*4.6 Form of Representatives' Warrant Agreement among the Company, Yorkton
Securities Inc., First Marathon (U.S.A.) Inc., First Marathon
Securities Limited and Continental Stock Transfer and Trust Company.
*4.7 Form of Representatives' Warrant Certificate.
*10.1 Option Agreement, dated January 23, 1992, between the Company and New
World Sky Media.
10.2 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 Company's Registration Statement on
Form S-1 (File No. 33-74782) (the "Registration Statement").
10.3 Letter Agreement, dated November 18, 1992, between the Company and
Batchelder & Partners, Inc. (Incorporated by reference to Exhibit
10.4 to the Registration Statement)
10.4.1 Proprietary Information and Non-Competition Agreement, dated February
9, 1993, for Robert Briskman (Incorporated by reference to Exhibit
10.8.1 to the Registration Statement).
10.4.2 Amendment No. 1 to Proprietary Information and Non-Competition
Agreement between the Company and Robert Briskman (Incorporated by
reference to Exhibit 10.8.2 to the Registration Statement).
+10.5.1 Satellite Construction Agreement, dated March 2, 1993, between Space
Systems/Loral and the Company (Incorporated by reference to Exhibit
10.9.1 to the Registration Statement).
+10.5.2 Amendment No. 1 to Satellite Construction Agreement, effective
December 28, 1993, between Space Systems/Loral and the Company
(Incorporated by reference to Exhibit 10.9.2 to the Registration
Statement).
+10.5.3 Amendment No. 2 to Satellite Construction Agreement, effective March
8, 1994, between the Space Systems/Loral and the Company
(Incorporated by reference to Exhibit 10.9.3 to the Registration
Statement).
10.5.4 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"))
10.5.5 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 Form
10-Q for the period ended September 30, 1996.)
10.5.6 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 Form
10-Q for the period ended September 30, 1996.)
10.5.7 Amendment No. 6 to Satellite Construction Agreement, effective August
26, 1996, between the Space Systems/Loral, Inc. and the Company.
37
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- ---------------------------------------------------------------------- ----------
10.5.8 Amendment No. 8 to Satellite Construction Agreement, effective January
29, 1997, between the Space Systems/Loral, Inc. and the Company.
10.5.9 Amendment No. 9 to Satellite Construction Agreement, effective
February 26, 1997, between the Space Systems/Loral, Inc. and the
Company.
10.5.10 Amendment No. 11 to Satellite Construction Agreement, effective March
24, 1997, between the Space Systems/Loral, Inc. and the Company.
10.6 Assignment of Technology Agreement, dated April 15, 1993, between
Robert Briskman and the Company (Incorporated by reference to
Exhibit 10.10 to the Registration Statement).
10.7 Demand Note and Grant of Warrant to Robert Friedland, dated April 28,
1993 (Incorporated by reference to Exhibit 10.12 to the Registration
Statement).
10.8 Amended and Restated Option Agreement between the Company and Robert
Briskman (Incorporated by reference to Exhibit 10.13 to the
Registration Statement).
10.9 Demand Note and Grant of Warrant to Robert Friedland, dated October
13, 1993 (Incorporated by reference to Exhibit 10.14 to the
Registration Statement).
10.10.1 Launch Reservation Agreement, dated September 20, 1993, between the
Company and Arianespace (Incorporated by reference to Exhibit
10.15.1 to the Registration Statement).
10.10.2 Modification of Launch Reservation Agreement, dated April 1, 1994,
between the Company and Arianespace (Incorporated by reference to
Exhibit 10.15.2 to the Registration Statement).
10.10.3 Second Modification of Launch Reservation Agreement, dated August 10,
1994, between the Company and Arianespace (Incorporated by reference
to Exhibit 10.15.3 to the Registration Statement).
10.10.4 Third Modification of Launch Reservation Agreement, dated November 8,
1995, between the Company and Arianespace (Incorporated by reference
to Exhibit 10.14.4 to the Company's Form 10-Q for the period ended
September 30, 1996).
10.10.5 Fourth Modification of Launch Reservation Agreement, dated August 30,
1996, between the Company and Arianespace (Incorporated by reference
to Exhibit 10.14.5 to the Company's Form 10-Q for the period ended
September 30, 1995).
10.10.6 Fifth Modification of Launch Reservation Agreement, dated December 10,
1996, between the Company and Arianespace.
10.11.1 Employment and Noncompetition Agreement between the Company and David
Margolese (Incorporated by reference to Exhibit 10.18.1 to the
Registration Statement).
10.11.2 First Amendment to Employment Agreement between the Company and David
Margolese (Incorporated by reference to Exhibit 10.18.2 to the
Registration Statement).
10.12.1 Employment and Noncompetition Agreement between the Company and Robert
Briskman (Incorporated by reference to Exhibit 10.19.1 to the
Registration Statement).
10.12.2 First Amendment to Employment Agreement between the Company and Robert
Briskman (Incorporated by reference to Exhibit 10.19.2 to the
Registration Statement).
10.12.3 Second Amendment to Employment Agreement between the Company and
Robert Briskman.
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 Registration Statement).
10.14 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.21 to
the Registration Statement).
38
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- ---------------------------------------------------------------------- ----------
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 Form of Lock-Up Agreement executed by certain holders of the Company's
Common Stock (Incorporated by reference to Exhibit 10.23 to the
Registration Statement).
10.17 Option Agreement, dated as of October 21, 1992, between the Company
and Batchelder & Partners, Inc. (Incorporated by reference to
Exhibit 10.24 to the Registration Statement).
10.18 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 Registration Statement).
10.19.1 Demand Note, dated April 19, 1994, in favor of David Margolese
(Incorporated by reference to Exhibit 10.28.1 to the Registration
Statement).
10.19.2 Note, dated June 30, 1994, in favor of David Margolese (Incorporated
by reference to Exhibit 10.28.2 to the Registration Statement).
10.20 Demand Note, dated April 19, 1994, between the Company and D.
Friedland (Incorporated by reference to Exhibit 10.29 to the
Registration Statement).
10.21 Form of Underwriting Agreement (Incorporated by reference from Exhibit
1.1 to the Registration Statement)
10.22 Letter Agreement dated January 13, 1995, between the Company and
Brenner Securities (Incorporated by reference to Exhibit 10.36 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1994 (the "1994 Form 10-K").
10.23 1995 Stock Compensation Plan (Incorporated by reference to Exhibit
10.37 to the 1995 Form 10-K).
**10.24 Form of Preferred Stock Investment Agreement dated October 23, 1996
between the Company and certain investors.
**10.24.1 Form of First Amendment to Preferred Stock Investment Agreement dated
March 7, 1997 between the Company and certain investors.
**10.24.2 Form of Second Amendment to Preferred Stock Investment Agreement dated
March 14, 1997 between the Company and certain investors.
11.1 Statement Re Computation of Historical Net Loss Per Share.
21.1 List of the Company's Subsidiaries (Incorporated by reference to
Exhibit 21.1 to the 1994 Form 10-K).
**23.1 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
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* Incorporated by reference to the same exhibit number of the Company
Registration Statement on Form S-1, Commission File No. 33-74782.
** Replaces previously filed exhibit.
+ 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 Securities and Exchange
Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.
39