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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24710
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CD RADIO INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
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DELAWARE 52-1700207
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OF ORGANIZATION)
1180 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 899-5000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
- --------------------------------------------------------- ---------------------------------------------------------
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
------------------------
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. [ ]
On March 25, 1999, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, using the closing price
of the Registrant's Common Stock on such date, was $446,324,488.
The number of shares of the Registrant's common stock outstanding as of
March 25, 1999 was 23,227,531.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Part into which incorporated:
Stockholders to be held on June 22, 1999 Part III -- Items 10, 11, 12 and 13
________________________________________________________________________________
CD RADIO INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE
- --------- ---------------------------------------------------------------------------------------------- ----
PART I
Item 1. Business...................................................................................... 2
Item 2. Properties.................................................................................... 28
Item 3. Legal Proceedings............................................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders........................................... 28
Item 4a. Executive Officers of the Registrant.......................................................... 29
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.......................... 31
Item 6. Selected Financial Data....................................................................... 32
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 32
Item 7A. Quantitative and Qualitative Disclosure About Market Risks.................................... 37
Item 8. Financial Statements and Supplementary Data................................................... 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 37
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 38
Item 11. Executive Compensation........................................................................ 38
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 38
Item 13. Certain Relationships and Related Transactions................................................ 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 39
1
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the 'Reform Act'), CD Radio Inc. ('we,' 'us' and
occasionally, the 'Company') is hereby providing cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in forward-looking statements (as such term is
defined in the Reform Act) made in this Annual Report on Form 10-K. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as 'will likely result,' 'are
expected to,' 'will continue,' 'is anticipated,' 'estimated,' 'intends,'
'plans,' 'projection' and 'outlook') are not historical facts and may be
forward-looking. Such statements involve estimates, assumptions and
uncertainties that could cause actual results to differ materially from those
expressed in the forward-looking statements. Accordingly, any such statements
are qualified in their entirety by reference to the factors discussed throughout
this Annual Report on Form 10-K, and particularly the risk factors set forth
herein under 'Business -- Risk Factors' in Part I of this Annual Report on Form
10-K. Among the significant factors that have a direct bearing on our results of
operations are the potential risk of delay in implementing our business plan;
increased costs of construction and launch of necessary satellites; our
dependence on satellite construction and launch contractors; risk of launch
failure; unproven market and unproven applications of technology; our dependence
on Lucent Technologies, Inc.; unavailability of receivers and antennas; and our
need for additional financing. These and other factors are discussed herein
including under 'Business -- Risk Factors' in Part I of this Annual Report on
Form 10-K.
The risk factors described herein could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements made by
or on behalf of us and investors, therefore, should not place undue reliance on
any such forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which such statement is made, and we undertake no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for management to predict all of such factors.
Further, management cannot assess the impact of each such factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
ITEM 1. BUSINESS
We are building a digital quality, 100 channel radio service to be
broadcast directly from satellites to vehicles. We hold one of only two licenses
issued by the Federal Communications Commission (the 'FCC') to build, launch and
operate a national satellite radio broadcast system. Our service will offer 50
channels of commercial-free, digital quality music programming and 50 channels
of news, sports, talk and other programming. CD Radio will be broadcast
throughout the continental United States, over a frequency band, the 'S-band,'
that will augment traditional AM and FM radio bands. Under our FCC license, we
have the exclusive use of a 12.5 megahertz ('MHz') portion of the S-band for
this purpose. We have entered into a contract with Space Systems/Loral, Inc.
('Loral') for the construction, launch and in-orbit delivery of three satellites
beginning in January 2000. We currently expect to commence CD Radio broadcasts
in the fourth quarter of 2000, at a subscription price of $9.95 per month.
As an entertainment company, we intend to design and originate programming
on each of our 50 music channels. Each channel will be operated as a separate
radio station, with a distinct format. Certain music channels will offer
continuous music while others will have program hosts, depending on the type of
music programming. CD Radio will offer the following range of music categories:
Symphonic Soul R&B Oldies
NAC Jazz Ballads Alternative Rock I
Today's Country Traditional Country 60's Hits
Chamber Music Top of the Charts Urban Contemporary
New Age Classic Soul Hits Alternative Rock II
Country Gold Folk Rock 70's Hits
Opera 50's Hits Rap/Hip Hop
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Classic Rock I Merengue Gospel
80's Hits Blues Big Band/Swing
Dance Singers & Songs TexMex Contemporary
Classic Rock II Boleros Classic Jazz
90's Hits Reggae Cumbia
Tropical Album Rock Beautiful Instruments Children's Entertainment
Soft Rock Mexicana Contemporary Jazz
Latin Contemporary World Beat Latin Jazz
Hard Rock/Metal Broadway's Best
Love Songs Rock en Espanol
Programming on our additional 50 non-music channels will be provided by
third parties, and to date we have entered into programming agreements with
content providers for 20 of these channels, including Bloomberg News Radio,
C-SPAN, Sports Byline USA, Classic Radio, Hispanic Radio Network, World Radio
Network, Speedvision Radio and Outdoor Life Radio. A majority of our non-music
channels will contain advertising, which will provide us with additional
revenue. These channels will include news and talk shows and special interest
programming directed to a diverse range of groups, including Hispanic listeners,
truck drivers, farmers and campers.
Our 100 music and non-music channels will be broadcast from our National
Broadcast Studio in Rockefeller Center in New York City. The National Broadcast
Studio will contain our corporate headquarters, our music library, facilities
for programming origination, programming personnel and program hosts, as well as
facilities to transmit programming to the satellites, to activate or deactivate
service to subscribers and to perform the tracking, telemetry and control of the
orbiting satellites.
We have entered into an agreement with Lucent Technologies, Inc. ('Lucent')
for the development and manufacture of integrated circuits (a chip set) that
represent the essential element of consumer electronics devices which are
capable of receiving CD Radio. We expect that the initial delivery of commercial
quantities of chip sets to consumer electronics manufacturers will begin in June
2000.
CD Radio Inc. was incorporated in the state of Delaware as Satellite CD
Radio, Inc. on May 17, 1990. On December 7, 1992, we changed our name to CD
Radio Inc., and we formed a wholly owned subsidiary, Satellite CD Radio, Inc.,
that is the holder of our FCC license.
Our executive offices are located at 1180 Avenue of the Americas, New York,
New York 10036, our telephone number is (212) 899-5000 and the address of our
Web site is www.cdradio.com. In April 1999, our executive offices will be
relocated to 1221 Avenue of the Americas, New York, New York 10020 and our
telephone number will be changed to (212) 584-5100.
THE CD RADIO OPPORTUNITY
Our research indicates that there is a significant market for music and
other radio programming such as news, talk and sports delivered through advanced
radio technology. While television technology has advanced steadily -- from
black and white to color, from broadcast to cable and satellite, and from
ordinary to high-definition television -- the last major advance in radio
technology was the introduction of FM broadcasts. CD Radio will provide a new
generation of radio service, offering a wide variety of music formats available
on demand, 'seamless' signal coverage throughout the continental United States
and commercial-free, digital quality music programming. Our planned multiplicity
of formats currently is not available to motorists in any market within the
United States.
CD Radio is primarily a service for motorists. The Yankee Group, a market
research organization, estimates that there will be approximately 200 million
registered private motor vehicles in the United States by the end of 1999. CD
Radio will initially target a number of demographic groups among the drivers of
these vehicles, including 110 million commuters, 34 million of whom spend over
one hour commuting daily; 45 million Americans who live in markets served by
five or fewer radio stations; three million truck drivers; three million owners
of recreational vehicles; and 28 million persons of Hispanic origin.
According to The Arbitron Company ('Arbitron'), in 1996, despite the fact
that almost all vehicles contained either a cassette or compact disc player, 87%
of automobile commuters listened to the radio
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an average of 50 minutes a day while commuting. According to the Radio
Advertising Bureau, each week radio reaches approximately 95% of all Americans
over the age of 12, with the average listener spending more than three hours per
weekday and more than five hours per weekend listening to the radio. More than
40% of all radio listening is done in cars. In addition, in 1997, approximately
79% of total radio listening was to FM stations, which primarily provides music
programming, as compared with AM stations which devote a greater proportion of
their programming to talk and news.
We believe that our ability to offer a wide variety of musical and
non-musical formats simultaneously throughout the continental United States will
enable us to tap significant unmet consumer demand for specialized programming.
The economics of the existing advertiser supported radio industry dictate that
conventional radio stations generally program for the greatest potential
audience. Even in the largest metropolitan areas, station formats are limited.
Nearly half of all commercial radio stations in the United States offer one of
only three formats: country, adult contemporary and news/talk, and the next
three most prevalent formats account for another 30% of all commercial radio
stations. Although niche music categories such as classical, jazz, rap, gospel,
oldies, soundtracks, new age music, children's programming and others accounted
for approximately 30% of sales of recorded music in 1997, such formats generally
are unavailable on existing radio stations in many markets. Even in New York
City, the nation's largest radio market, there are no radio stations devoted
solely to such programming as opera, blues, chamber music, soundtracks, reggae
and many others. CD Radio's wide choice of formats is expected to appeal to the
large number of currently underserved listeners. Furthermore, CD Radio's ability
to offer a number of channels devoted to each genre will enable subscribers to
listen to a wider range of music within their preferred format.
The limited coverage area of conventional radio broadcasting means that
listeners often travel beyond the range of any single station. Unlike
conventional FM stations, which have an average range of only approximately 30
miles before reception fades, CD Radio's system is designed to cover the entire
continental United States, enabling listeners to enjoy virtually seamless
coverage. Our ability to broadcast nationwide will also allow us to serve
currently underserved radio markets.
We also believe that CD Radio will have a competitive advantage over
conventional radio stations because our music channels will be commercial-free.
In contrast, conventional radio stations interrupt their broadcasts with up to
18 minutes of commercials in every hour of music programming, and most stations
also frequently interrupt programming with news, promotional announcements,
public service announcements and miscellaneous information. We believe that
consumers dislike frequent commercial interruptions and that 'station surfing'
to avoid them is common.
PROGRESS TO DATE AND SIGNIFICANT DEVELOPMENT MILESTONES
The following chart lists our past and projected development milestones.
There can be no assurance that we will be able to meet any of our projections
for 1999 or 2000, including completion of our satellite launches or commencement
of commercial operations in the fourth quarter of 2000 as planned. See 'Risk
Factors.'
1990: CD Radio Inc. incorporated
Proposed that FCC create satellite radio service and filed license application
1991: Conducted stationary service simulation
Conducted nationwide focus groups
1992: Radio spectrum allocated for satellite radio service
1993: Contracted with Loral for satellite construction
Conducted additional nationwide focus groups
1994: Completed initial public offering of our Common Stock
1995: Completed Loral satellite design
Developed proprietary miniature satellite dish antenna
Obtained patents for portions of our broadcast system
1996: Developed radio card adapter
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1997: Obtained one of only two national satellite radio broadcasting licenses from the FCC
Commenced construction of our three satellites
Recruited key programming, marketing and financial management team
Completed strategic sale of $25 million of Common Stock to Loral Space & Communications, Ltd.
Completed additional debt and equity financings, raising $315 million
1998: Expanded from 50 planned broadcast channels to 100 broadcast channels
Ordered fourth satellite and expanded Loral's role to provide in-orbit system delivery
Obtained $50 million of vendor financing from Loral
Obtained $115 million of financing from Bank of America and other lenders
Signed agreement with Lucent to design, develop and manufacture chip sets
Obtained additional patents for portions of our broadcast system
Signed programming agreements with content providers for 16 non-music channels
Commenced terrestrial repeater network rollout
Completed sale of $100 million of Common Stock to Prime 66 Partners, L.P.
Completed sale of $135 million of 9.2% Series A Junior Cumulative Convertible Preferred Stock (the
'9.2% Series A Junior Preferred Stock') to investment partnerships led by Apollo Management
Began construction of National Broadcast Studio
Hired various key employees
1999: Complete construction of National Broadcast Studio
Complete agreements with consumer electronics manufacturers for devices capable of receiving CD
Radio
Commence design and construction of transaction management system
Commence nationwide rollout of terrestrial repeater network
Select additional non-music channel content providers
2000: Commence and complete satellite launches
Commence production of devices capable of receiving CD Radio
Complete nationwide terrestrial repeater rollout
Finalize non-music channel content
Test markets
Begin commercial operations in fourth quarter
THE CD RADIO SERVICE
CD Radio will offer motorists: (i) a wide choice of finely focused music
and non-music formats; (ii) nearly seamless signal coverage throughout the
continental United States: and (iii) commercial-free music programming.
Wide Choice Of Programming. CD Radio will offer subscribers a broad range
of programming formats and significant depth within each format. Each of our 50
music channels will have a distinctive format, such as opera, reggae, classic
jazz and children's entertainment, intended to cater to specific subscriber
tastes. In most markets, radio broadcasters target their programming to broad
audience segments and therefore offer limited formats. Even in the largest
metropolitan markets many of our planned formats are unavailable. Additionally,
we will provide news, sports and talk programming that is generally not
available on conventional radio.
'Seamless' Signal Coverage. CD Radio will be available throughout the
continental United States, enabling listeners almost always to be within its
broadcast range. We expect that our nearly seamless signal will appeal to
motorists who frequently travel long distances, including truck drivers and
recreational vehicle owners, as well as commuters and others who outdrive the
range of their preferred FM radio broadcasts. In addition, we expect that our
broadcasts will appeal to the 45 million consumers who live in areas that
currently receive only a small number of FM stations.
5
Commercial-Free Music Programming. CD Radio will provide commercial-free
music programming. Our market research indicates that a principal complaint of
radio listeners concerning conventional broadcast radio is the frequency of
commercials. Because CD Radio, unlike commercial AM and FM stations, will be a
subscription service, our music channels will not contain commercials.
PROGRAMMING
We intend to offer 50 channels of commercial-free, all-music programming
and 50 additional channels of other formats, such as all-news, all-sports and
all-talk programming. Each music channel will have a distinctive format,
intended to cater to specific subscriber tastes. We believe that 50 music
channels will enable us to 'superserve' our subscribers with a greater range of
choice of content within their preferred format than is currently offered by
terrestrial radio, even in the most widely broadcast formats. We expect that the
initial subscription fee for CD Radio, which will entitle subscribers to receive
all CD Radio channels, will be $9.95 per month.
We intend to recruit program managers from the recording, broadcasting and
entertainment industries to manage the development of daily programming for each
CD Radio music channel. In order to be accessible to these industries, we are
building our National Broadcast Studio in Rockefeller Center in New York City.
Program managers also will coordinate our continuing market research to measure
audience satisfaction, refine channel definitions and themes and select program
hosts for those channels that have hosts.
Music programming will be selected from our music library. We intend to
create an extensive music library which will consist of a deep range of recorded
music in each genre broadcast. We have begun to acquire recordings for our music
library. To date, we have acquired approximately 400,000 titles, across a broad
range of music genres. We expect that our music library will consist of
approximately 2,000,000 titles when we commence commercial broadcasts of CD
Radio. We expect to update our music library with new recordings as they are
released, and in certain cases, we will seek to acquire recordings that are no
longer commercially available.
In addition to our music channels, we expect to offer 50 channels of news,
sports and talk programming, most of which will include commercial advertising.
We generally do not intend to produce programming for our non-music channels,
and will obtain such programming from various third party content providers. To
date, we have entered into agreements for a total of 20 channels with content
providers, including Bloomberg News Radio, C-SPAN, Sports Byline USA, Classic
Radio, Hispanic Radio Network, World Radio Network, Wisdom Channel, Speedvision
Radio and Outdoor Life Radio.
In connection with our music programming, we will be required to negotiate
and enter into royalty arrangements with performing rights societies, such as
the American Society of Composers, Authors and Publishers ('ASCAP'), Broadcast
Music, Inc. ('BMI') and SESAC, Inc. ('SESAC'). These organizations collect
royalties and distribute them to songwriters and music publishers. Copyright
users negotiate a fee with these organizations based on a percentage of
advertising and/or subscription revenues. If the parties cannot reach agreement
with ASCAP or BMI, special judicial rate setting procedures are available under
antitrust consent decrees that govern these organizations. SESAC is not subject
to a consent decree or a special judicial rate setting mechanism. Broadcasters
currently pay a combined total of 4% of their revenues to the music performing
rights societies. We also will be required to negotiate similar arrangements
with the owners of the copyrights in sound recordings pursuant to the Digital
Performance Right in Sound Recordings Act of 1995 (the 'Digital Recordings
Act'). The determination of certain royalty arrangements with the owners of
sound recording copyrights under the Digital Recordings Act were previously
subject to arbitration proceedings. In 1998, the Copyright Office reviewed the
results of this arbitration and set the royalty rate at 6.5% of the licensee's
'gross revenues resulting from residential services in the United States'
including, among other services, subscription fees, advertising and time share
revenues. The recording industry, which had sought a royalty of 41.5% of gross
revenues, has appealed this decision to the United States Court of Appeals,
which heard oral argument in this matter on March 19, 1999. We believe that we
will be able to negotiate royalty arrangements with the music performing rights
organizations and the owners of
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sound recording copyrights, but there can be no assurance as to the terms of any
such royalty arrangements ultimately negotiated or established by arbitration or
judicial rate setting.
MARKETING STRATEGY
We plan to offer a high quality broadcast service with targeted music
formats, nearly seamless signal coverage throughout the continental United
States, commercial-free music programming and digital quality fidelity. Our
marketing strategy for CD Radio has three interrelated components: (i) creating
consumer awareness of CD Radio, (ii) generating subscriptions to CD Radio and
(iii) generating purchases of consumer electronic devices capable of receiving
CD Radio broadcasts.
In May 1998, we expanded our planned broadcast capacity from 50 channels to
100 channels, following a market study conducted by The Yankee Group, a market
research organization, which found that 100 channels of programming would
increase and accelerate potential subscriber penetration. Expansion of our
system to 100 channels will allow us to provide subscribers with a greater range
of choice of content within their preferred format and to expand our service to
the Hispanic and other underserved markets.
We believe that the introduction of CD Radio will have high news value,
which we expect will result in significant national and local publicity prior to
and during the initial launch of the service. In addition, we plan to engage in
extensive marketing, advertising and promotional activities to create consumer
awareness of CD Radio. This includes an ongoing major advertising campaign
funded principally by us, together with expected manufacturer and retailer
cooperative advertising. A major national umbrella campaign will utilize a full
mix of media, including network and cable television, radio, print and
billboard.
We intend to focus our initial efforts on a number of demographic groups
that we believe represent potential target markets for CD Radio, including
commuters, niche music listeners, Hispanic listeners, sports enthusiasts, truck
drivers, recreational vehicle owners and consumers in areas with sparse radio
coverage. We also intend to aggressively target early adopters of new
technologies, who we believe are likely to have a high level of interest in CD
Radio.
Commuters. Of the 110 million commuters, we have identified 34 million as
highly addressable by virtue of their commute times averaging over one hour
daily. To reach these commuters, we plan to purchase radio advertising spots on
stations with frequent traffic reports, purchase outdoor billboard advertising
on long commute roads and place inserts in gasoline credit card bills.
Niche Music Listeners. Niche music categories, such as classical, jazz,
rap, gospel, soundtracks, oldies and children's programming, constitute
approximately 30% of the market for recorded music sales. To reach niche music
listeners, we intend to work with the recording industry to include print
material about CD Radio inside niche music compact disc packaging, place print
advertising in specialty music magazines targeted to niche music listeners and
members of fan clubs, conduct direct mailings to specialized music mailing lists
of record clubs and sponsor and advertise at certain music events.
Hispanic Market. Currently there are approximately 28 million
Spanish-speaking Americans, many of whom have limited access to Spanish language
radio, and this population group is growing rapidly and is expected to reach 36
million by 2005. We intend to broadcast a number of music and non-music channels
that will cater to the Hispanic market. We plan to purchase local television
spots on Spanish speaking channels and place advertising in national Spanish
language magazines and local Spanish language newspapers.
Sports Enthusiasts. Many fans of various sports are unable to receive
broadcasts of interest to them because events are broadcast only within limited
regional areas. We intend to broadcast a number of channels containing such
sports programming. We plan to purchase advertising on national and regional
cable television sports channels, in sports magazines and in the sports sections
of newspapers.
Truck Drivers. According to the U.S. Department of Transportation, there
are approximately three million professional truck drivers in the United States,
of whom approximately 1.1 million are long-distance haulers. We intend to place
sampling displays at truck stops and to advertise in publications and on
Internet sites which cater to truck drivers.
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Recreational Vehicle Owners. There are approximately three million
recreational vehicles in the United States. We plan to advertise in magazines
targeted to recreational vehicle enthusiasts, conduct direct mailings targeted
to these individuals and place sampling displays at recreational vehicle
dealerships.
Sparse Radio Zones. More than 45 million people aged 12 and over live in
areas with such limited radio station coverage that the areas are not monitored
by Arbitron. We believe that of these people, approximately 22 million people
receive five or fewer FM stations, 1.6 million receive only one FM station and
at least one million people receive no FM stations. To reach these consumers, we
plan to utilize local newspaper and target direct mailings to music enthusiasts
in these areas.
SUBSCRIPTION AND BILLING
We intend to contract out our customer care functions to a national
customer service and telemarketing provider. Access to our customer service
center will be via our toll-free number, 888-CD-RADIO. Operators at our customer
care center will have the ability to access our separate billing services center
for various functions, including customer activation, billing inquiries, program
service changes and address changes. When appropriate, operators will also refer
technical problems to either a CD Radio help desk, or to a specific equipment
manufacturer. We intend to automate certain customer care functions where
appropriate, either through interactive voice response technology (IVR), or
through our Web site. We expect to pay our customer service provider based on
transaction and call volume.
We also intend to contract out our customer billing and activation function
to a national billing services company. This billing center will receive
requests from our separate customer care center for actions such as radio
activations, deactivations, program service changes, and billing inquiries. This
billing center will handle all other customer processing operations, including
remittance processing, collections, interfacing to credit/debit card clearing
houses, and fulfillment processing. We expect that a large percentage of our
subscribers will pay using a credit card. However, our customer billing system
will also have the capability to do direct invoicing. There will be a modest
one-time activation fee to cover subscriber sign-up costs. The billing software
application and database will be customized to handle our unique requirements,
including interfacing and exchanging of information with automobile
manufacturers, automobile dealers and consumer electronic retailers, and
employing special techniques to address the challenge of activating and
deactivating receivers. We expect to pay our billing services company based on
transaction volumes.
THE CD RADIO DELIVERY SYSTEM
The CD Radio satellite system is designed to provide seamless signal
coverage throughout the continental United States. This means that listeners
will almost always be within the broadcast range of CD Radio, unlike current FM
radio broadcasts, which have an average range of only approximately 30 miles.
The CD Radio system is designed to provide clear reception in most areas despite
variations in terrain, buildings and other obstructions. The system is designed
to enable motorists to receive CD Radio in all outdoor locations where the
vehicle has an unobstructed line-of-sight with one of our satellites or is
within range of one of our terrestrial repeating transmitters.
The portion of the S-band located between 2320 MHz and 2345 MHz has been
allocated by the FCC exclusively for national satellite radio broadcasts, and
will augment traditional AM and FM radio bands. This portion of the spectrum was
selected because there are virtually no other users of this frequency band in
the United States, thus minimizing potential signal interference. In addition,
this frequency band is relatively immune to weather related attenuation, which
is not the case with higher frequencies.
We plan to use 12.5 MHz of bandwidth in the 7060-7072.5 MHz band (or some
other suitable frequency) for uplink transmissions to our satellites. Downlink
transmission from the satellites to subscribers' will use 12.5 MHz of bandwidth
in the 2320.0-2332.5 MHz frequency band.
In May 1998, we expanded our system from 50 planned broadcast channels to
100 channels. As part of that expansion, we announced our plan to change the
orbital location of our satellites from
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geostationary orbits over the equator to inclined elliptical orbits. This
modification will allow our satellites to maximize the time spent over the
continental United States, which will permit us to fully utilize the bandwidth
allocated to us by the FCC. Each satellite will travel in a figure eight pattern
extending above and below the equator, and will spend approximately 16 hours per
day north of the equator. A satellite north of the equator will serve the United
States at a better elevation angle than a geostationary satellite over the
equator. At any given time, two of our three satellites will operate from the
portion of the orbit north of the equator while the third satellite will not
broadcast as it traverses the portion of the orbit south of the equator.
CD Radio is designed to broadcast the same signals from two of the three
satellites. This design involves new applications of technology that have not
been deployed and there can be no assurance that the CD Radio system will work
as planned.
The CD Radio delivery system will consist of three principal components:
(i) the satellites; (ii) the receivers; and (iii) the National Broadcast Studio.
THE SATELLITES
Satellite Design. Our satellites are of the Loral FS-1300 model series.
This family of satellites has a total in-orbit operation time of 275 years. The
satellites are designed to have a useful life of approximately 15 years. To
ensure the durability of our satellites, we have selected components and
subsystems that have a demonstrated track record on operational FS-1300
satellites, such as N-STAR, INTELSAT VII and TELSTAR. In addition, a full series
of ground tests will be performed on each of our satellites prior to launch in
order to detect assembly defects and avoid premature satellite failure.
Our satellites will utilize a three-axis stabilized design. Each satellite
will contain an active attitude and position control subsystem; a telemetry,
command and ranging subsystem; a thermal control subsystem and an electrical
power subsystem. Power will be supplied by silicon solar arrays and, during
eclipses, by nickel-hydrogen batteries. Each satellite after deployment will be
approximately 81 feet long, 19 feet wide and 17 feet tall.
Our satellites will incorporate a design which will act essentially as a
'bent pipe,' relaying received signals directly to the ground. Our satellites
will not contain on-board processors. All of our processing operations will be
on the ground where they are accessible for maintenance and continuing
technological upgrade without the need to launch replacement satellites.
High Elevation Angles. We plan to place our satellites in orbits that
extend over North America in order to provide very high signal elevation angles
and thereby mitigate service interruptions which can result from signal blockage
and fading. Each of our two transmitting satellites will broadcast the same
signal.
Memory Buffer. Our transmission design incorporates the use of a memory
buffer chip contained within the receiver. Each memory buffer chip is designed
to store signals and to mitigate service interruptions which can result from
signal blockage and fading. As with any wireless broadcast service, we expect to
experience occasional 'dead zones' where the service from our satellites will be
interrupted by nearby tall buildings, elevations in topography, tree clusters,
highway overpasses and similar obstructions; however, in most such places, we
expect that subscribers will continue to receive a signal from their receiver's
memory buffer.
Terrestrial Repeaters. In certain areas with high concentrations of tall
buildings, such as urban cores and in tunnels, signals from our satellites will
be blocked and reception will be adversely affected. In such urban areas, we
plan to install terrestrial repeating transmitters to rebroadcast our satellite
signals, increasing the availability of service. The FCC has not yet established
rules governing such terrestrial repeaters, and we cannot predict the outcome of
the FCC's current rulemaking on this subject. We also will need to obtain the
rights to use towers or the roofs of certain structures where the repeaters will
be installed. There can be no assurance that we can obtain such tower or roof
rights on acceptable terms or in all appropriate locations.
During 1998, we completed the construction and testing of our terrestrial
repeater network in San Francisco on an experimental basis. During 1999, we
expect to enter into various agreements for site
9
acquisition, site design and site construction services related to our
terrestrial repeater network and expect to acquire substantially all necessary
sites and commence construction at many of these sites. In addition, in 1999 we
expect to enter into agreements with vendors to purchase the broadcast equipment
necessary to operate our terrestrial repeater network.
Satellite Construction and Launch Services. In March 2, 1993, we entered
into a contract with Loral to build three satellites, two of which we intended
to launch and one of which we intended to keep in reserve as a spare. Under the
contract, we had an option to order a fourth satellite on preset price and
delivery terms. We notified Loral of the exercise of this option in March 1998.
On July 28, 1998, as a result of an evaluation of the advantages of a
three-satellite orbital configuration, we and Loral entered into an Amended and
Restated Contract (the 'Loral Satellite Contract'). Pursuant to the Loral
Satellite Contract, Loral has agreed to construct, launch and deliver our three
satellites, in-orbit and checked-out, to construct for us a fourth satellite for
use as a ground spare and to become our launch services provider.
Each of our satellites is scheduled to be launched on Proton launch
vehicles. Loral has scheduled the launch of our first satellite for January
2000, the launch of our second satellite in March 2000, the launch of our third
satellite by May 2000 and has agreed to deliver our fourth satellite to a
designated ground storage site by August 2000. Loral expects to deliver all
three of our satellites in-orbit and checked-out by June 30, 2000. There can be
no assurance, however that Loral will be able to meet this schedule. It is a
default under the Loral Satellite Contract if (i) we fail to maintain a minimum
net worth, (ii) we fail to have sufficient funds or committed financing to pay
our obligations on a timely basis or (iii) there occurs an event of default
under our credit agreement with Bank of America and other lenders.
Title to our first, second and third satellites will pass to us at the time
such satellites are delivered to us in-orbit and checked out. Risk of loss for
our first, second and third satellites will pass to us at the time of launch.
Title and risk of loss for our fourth satellite will pass to us at the time such
satellite is shipped to the ground storage site designated by us. Each satellite
is warranted to be in accordance with the performance specifications contained
in the Loral Satellite Contract and free from defects in materials and
workmanship. Loral's warranties will expire at the time of launch or, in the
case of our fourth satellite, two years from the date of delivery to the ground
storage site. In the event of a delay in the construction of the satellites that
is caused by us, the Loral Satellite Contract provides that the terms of the
contract will be equitably adjusted.
Following the launch of each satellite, Loral will conduct in-orbit
performance verification. In the event that such testing shows that a satellite
is not meeting the satellite performance specifications contained in the Loral
Satellite Contract, we and Loral have agreed to negotiate an equitable reduction
in the final payment to be made by us for the affected satellite.
Satellite launches are subject to significant risks, including destruction
or damage of the satellite during launch or failure to achieve proper orbital
placement. Although past experience is not necessarily indicative of future
performance, the Proton family of Russian-built launch vehicles has a 92% launch
success rate based on its last 50 launches. There is no assurance that the
launches of our satellites will be successful. Satellites also may fail to
achieve a proper orbit in some instances or be damaged in space. Loral will not
bear the risk of loss for either a satellite or launch vehicle failure. However,
Loral will provide a free launch in the event of a failure of the first Proton
launch vehicle which is used to launch one of our satellites. In that event, we
would attempt to launch the spare satellite that we are having constructed. See
'Risk Factors -- We Are Dependent Upon Loral to Build and Launch Our Satellites'
and ' -- Satellite Launches Are Subject to Significant Risks.'
We are relying upon Loral to arrange for the timely launch of our
satellites. Failure of Loral to arrange to launch the satellites in a timely
manner could materially adversely affect our business. Loral will not be liable
for indirect or consequential damages or lost revenues or profits resulting from
late delivery or other defaults. If Loral fails to deliver the three satellites
in-orbit and checked out by July 31, 2000 or fails to deliver the fourth
satellite to its storage site by September 30, 2000, it may be liable for
certain late delivery penalties. There can be no assurance that these remedies
will adequately mitigate any damage to our business caused by launch delays.
10
After reaching agreement with Loral to provide launch services, we
terminated our prior launch services agreement with Arianespace S.A.
('Arianespace') and terminated the related vendor financing with a subsidiary of
Arianespace. As a result of these terminations, we incurred a liability of
approximately $18 million. We expensed this item, together with approximately $5
million of related capitalized costs, in the second quarter of 1998.
Risk Management and Insurance. Three custom-designed, fully dedicated
satellites are required to broadcast all 100 planned channels of CD Radio. Our
agreement with Loral includes a free relaunch in the event of the failure of the
first Proton launch vehicle used to launch one of our satellites. We intend to
insure against other contingencies, including a failure during launch caused by
factors other than the launch vehicle and failure of launch vehicles other than
the first Proton. If we are required to launch our spare satellite due to a
launch failure, our operational timetable would be delayed for up to six months.
The launch or in-orbit failure of two satellites would require us to arrange for
additional satellites to be built and could delay the commencement or
continuation of our operations for up to three years. See 'Risk Factors -- We
Are Dependent Upon Loral to Build and Launch Our Satellites' and ' -- Satellite
Launches Are Subject to Significant Risks.'
Once properly deployed and operational, the historical risk of premature
total satellite failure has been less than 1% for U.S. geosynchronous commercial
communication satellites. Prior to the launch of our first satellite, we intend
to purchase insurance covering launch risks and in-orbit failure during the
first five years of operation for each of our satellites. Prior to the
expiration of this insurance, we intend to evaluate the need for in-orbit
insurance for the remainder of the estimated useful life of each satellite.
After we have launched our satellites and begun to generate revenues, we will
evaluate the need for business interruption insurance.
Satellites are designed to minimize the adverse effects of transmission
component failure through the incorporation of redundant components which
activate automatically or by ground command upon failure. If multiple component
failures occur, and the supply of redundant components is exhausted, the
satellite generally will continue to operate, but at reduced capacity. In that
event, signal quality may be preserved by reducing the number of channels
broadcast until a replacement satellite can be launched. Alternatively, the
number of broadcast channels may be preserved by reducing the signal quality
until a replacement satellite can be launched.
THE RECEIVERS
We expect consumers will receive CD Radio initially by purchasing specially
designed radio receivers for their existing vehicles and later through a new
generation of three-band radios installed in new vehicles by one or more major
automotive manufacturers. The market for new radio receivers installed in
existing vehicles (which in the autosound industry are often referred to as
'head units') is approximately 7 to 8 million units annually. In the automotive
aftermarket, we expect that CD Radio subscribers will initially have the choice
of one of three different receiving devices for their cars -- an FM modulated
receiver, a three-band receiver and a radio card. These devices, along with CD
Radio satellite antennas, are expected to be manufactured and distributed by a
number of consumer electronics manufacturers. All CD Radio receivers will have a
visual display that will indicate the channel and format selected, as well as
the title, recording artist and album title of the musical selection being
played. Although we do not intend to manufacture or distribute FM modulated
receivers, three-band receivers, radio cards or antennas, in the early years of
our service their availability will be critical to us because they are the only
means by which to receive CD Radio.
These three CD Radio receivers will offer customers a range of options in
price, ease-of-installation and quality.
FM Modulated Receivers. The CD Radio FM modulated receiver will be usable
in all vehicles which have an FM radio, or approximately 95% of all U.S.
vehicles. Each FM modulated receiver will operate with a device (which we call a
downlink processor or 'DLP') that will be approximately the size of a 35mm
camera, and will be mounted either in the vehicle's trunk, behind the dashboard
or under a seat. Each DLP will interface with a vehicle's existing radio through
the FM antenna input. The CD Radio data display, as well as the controls for
changing channels, will be contained in a small
11
remote control which will either be wired or wireless. We expect the retail
price of this FM modulated receiver (including the DLP), with a hard-wired
satellite antenna and professional installation, will be approximately $299. We
anticipate that FM modulated receivers will be sold through electronics
superstores as well as independent autosound retailers.
FM modulation technology is widely used in the autosound industry for the
integration of automobile compact disc changers, which typically interface with
the player unit through the FM antenna input and, like the CD Radio FM modulated
receiver, are controlled through a remote control. Approximately 700,000 FM
modulated compact disc changers were sold in the United States in 1998.
Three-Band Receivers. In order to address consumers who replace their
vehicle's sound system annually, we expect there will be available a receiver
capable of receiving AM, FM and CD Radio broadcasts. In appearance, this
three-band receiver will be nearly identical to existing aftermarket car stereos
and will permit the user to listen to AM, FM, or CD Radio with the push of a
button. Like existing conventional radios, a number of these three-band
receivers may also incorporate cassette or compact disc players. The receiver
apparatus will include a 'CD Radio Ready' head-unit, which will accept the
direct output of the DLP. We expect the retail price of these CD Radio-ready
receivers, including the DLP, antenna and professional installation, will retail
for approximately $150 more than similar receivers which are not capable of
receiving CD Radio broadcasts. We anticipate that three-band receivers,
including the head unit and the DLP, will be sold through electronics
superstores as well as independent autosound retailers.
Radio Cards. CD Radio's wireless adapter, or radio card, will not require
professional installation and will be usable by all vehicles in the United
States equipped with a cassette player, which represents approximately 65% of
all vehicles on the road. Each radio card will include two components -- the
radio card adapter, which will insert into existing cassette slots, and a
wireless version of the CD Radio satellite antenna. The radio card will be
designed so that it can be removed by pushing the cassette player's 'eject'
button. A subscriber will be able to move a radio card from car to car, assuming
a subscriber purchases a separate antenna to receive our service. A subscriber
will simply attach the adhesive antenna to a vehicle and insert the radio card
to receive CD Radio.
The wireless satellite antenna will easily adhere to a vehicle's rear widow
using a high adhesive backing and will be approximately the size and shape of a
silver dollar. The wireless satellite antenna will be mounted on a small base
housing a solar recharging battery and microwatt transmitter that will relay CD
Radio's broadcasts to the vehicle's radio card. Wireless satellite dish antennas
will also be sold separately, so that consumers will be able to receive CD Radio
in a vehicle that has a wireless satellite antenna attached to it simply by
moving a radio card.
We expect the retail price of the radio card, including the wireless
satellite antenna, will be approximately $199. The radio card will be sold
though electronics superstores, mass merchant type stores and direct marketing
channels, such as the Internet.
Lucent Agreement. Each CD Radio receiving device will employ a custom
designed chip set presently being developed by Lucent. This chip set is the
essential element of all CD Radio receivers, and performs all of the digital
signal processing of CD Radio's broadcasts. On April 28, 1998, we entered into
an agreement with Lucent to develop and manufacture this chip set. On February
2, 1999, we amended and restated this agreement with Lucent. Lucent has agreed
to use commercially reasonable efforts to deliver commercial quantities of the
chip set by June 2000. We have agreed to pay Lucent the cost of the development
work related to the chip sets, currently estimated to be approximately
$27,000,000. Approximately half of the expected payments to Lucent are
conditioned upon satisfactory completion of designated development milestones.
Under our original agreement with Lucent, we had expected Lucent to deliver chip
sets by December 1999 and had expected to pay approximately $9,000,000, as the
costs of the chip set development. The design and development of the chip sets
has required more engineering resources than originally estimated. The
additional amounts paid to Lucent will be used to pay costs of these additional
engineering resources. There can be no assurance that Lucent will be able to
deliver chip sets within the time frame described above. In addition, the cost
to us of the chip set development work could exceed $27,000,000. On March 29,
1999, Lucent delivered to us completed system engineering documents, completing
Phase I of the work under the agreement.
12
Lucent has agreed to repay all the costs of the chip set development work,
through discounted chip set prices, after commercial production of the chip set
has begun.
Delco Agreement. On March 29, 1999, we entered into an agreement with Delco
Electronics Corporation ('Delco') to design, develop and manufacture three-band
receivers (including the related DLP) and satellite antennas for sale to major
automotive manufacturers. Delco is one of the world's leading providers of
automotive electronics products and audio and communications systems for
vehicles. We have agreed to pay Delco, upon completion of specified development
milestones, certain costs relating to designing and manufacturing prototypes of
this three-band receiver and antenna. Delco has agreed to use commercially
reasonable efforts to complete the design and development work and have
three-band receivers and antennas available for sale to automobile manufacturers
by March 2001. We cannot assure you that Delco will be able to design and
develop these three-band receivers and antennas. In addition, although we expect
that Delco will manufacture and sell substantial quantities of three-band
receivers and antennas, Delco is not required to manufacture specified
quantities pursuant to this agreement.
Delco is wholly-owned by Delphi Automotive Systems Corporation ('Delphi'),
which is currently 82.3% owned by General Motors Corporation ('GM'). GM has
announced that it intends to spin-off the balance of its ownership in Delphi
sometime in 1999.
Recoton Agreement. On February 23, 1999, we entered into an agreement with
Recoton Corporation ('Recoton'), a worldwide manufacturer and distributor of
consumer electronic products, to design and develop specifications for the FM
modulated receiver (including the DLP) and the radio card, and manufacture
prototypes of each. As part of this agreement, we also agreed to deliver to
Recoton plans and specifications for a hard-wired satellite antenna, which we
have separately developed. Recoton has agreed to manufacture prototypes of this
hard-wired satellite antenna for use with FM modulated receivers and to use
commercially reasonable efforts to design and develop a wireless satellite
antenna for use with radio cards. We have agreed to pay Recoton, upon completion
of specified development milestones, certain costs relating to designing and
manufacturing prototypes of the FM modulated receiver, the radio card, the
hard-wired satellite antenna and the wireless satellite antenna. Recoton has
agreed to deliver to us plans and specifications for the FM modulated receiver,
the radio card and the wireless satellite antenna within 90 business days after
Lucent delivers to us plans and specifications for the chip set (which we expect
will be in the third quarter of 1999). Similarly, Recoton has agreed to deliver
to us prototypes of the FM modulated receiver, the radio card, the hard-wired
satellite antenna and the wireless satellite antenna within 90 business days
after Lucent delivers to us prototypes of the chip set (which we expect will be
in the second quarter of 2000). There can be no assurance that Recoton will be
able to design and develop the FM modulated receiver, the radio card or the
wireless satellite antenna or that Recoton will be able to manufacture
prototypes of the FM modulated receiver, the radio card, the hard-wired
satellite antenna or the wireless satellite antenna.
As part of our agreement with Recoton, Recoton has also agreed to negotiate
with us in good faith an agreement to manufacture, market and sell substantial
quantities of FM modulated receivers, radio cards, three-band receivers,
hard-wired satellite antennas and wireless satellite antennas which are capable
of receiving CD Radio broadcasts using Recoton's distribution network and under
our brand name. These negotiations with Recoton are in an early stage and there
can be no assurance that we will be able to complete a manufacturing and
marketing agreement with Recoton. Recoton has a strong and diverse retail
distribution system with more than 1,000 retail customers, which Recoton
believes have more than 30,000 outlets in the United States and Canada.
None of the CD Radio receivers or antennas is currently available, and
other than Delco and Recoton we are not aware of any manufacturer currently
developing such products. We have commenced discussions with several other
manufacturers regarding manufacturing receivers and antennas for retail sale in
the United States. There can be no assurance that these discussions will result
in a binding commitment by any manufacturer to produce receivers and antennas in
a timely manner so as to permit the widespread introduction of CD Radio in
accordance with our business plan or that
13
sufficient quantities of receivers and antennas will be available to meet
anticipated consumer demand. Failure to have at least one manufacturer develop
and widely market receivers and antennas at affordable prices, or to develop and
widely market such products upon the launch of CD Radio, would have a material
adverse effect on our business. In addition, our FCC license is conditioned on
us certifying that our system includes a receiver design that will permit end
users to access the system of the other licensee. We may also be required to
comply with this interoperability requirement for any person licensed by the FCC
to provide a satellite digital audio radio service in the future.
We are currently in discussions with several automobile manufacturers to
include CD Radio reception capability either as standard or optional equipment
in new cars. We do not expect CD Radio reception capability to be included in
new vehicles prior to January 2001, at the earliest. Our long-term objective is
to promote the adoption of three-band radios as standard equipment or optional
equipment in all automobiles sold in the United States. However, we expect that
sales of FM modulated receivers, three-band radios and radio cards through the
consumer electronics retail distribution system may be the primary distribution
channel for devices capable of receiving CD Radio for a number of years.
In order to reduce fraud, each CD Radio receiver will contain a security
circuit with an electronically encoded identification number. After verification
of subscriber billing information, we will transmit a digital signal to activate
the receiver's CD Radio capability. This feature will help us protect against
piracy of CD Radio's broadcasts. Through this feature, we will directly (via
satellite) deactivate receivers of subscribers who are delinquent in paying the
monthly subscription fee.
THE NATIONAL BROADCAST STUDIO
We will originate 100 channels of programming from our National Broadcast
Studio in Rockefeller Center in New York City. The National Broadcast Studio
will house our corporate headquarters, our music library, facilities for
programming origination, programming personnel and program hosts, as well as
facilities to transmit programming to the satellites, to activate or deactivate
service to subscribers and to perform the tracking, telemetry and control of the
orbiting satellites.
We intend to create an extensive music library which will consist of a deep
range of recorded music. We have begun to acquire recordings for our music
library. To date, we have acquired approximately 400,000 titles, across a broad
range of music genres. We expect that our music library will consist of
approximately 2,000,000 titles when we commence commercial broadcasts of CD
Radio.
Programming will be originated at the National Broadcast Studio and
transmitted to our satellites for broadcast to CD Radio subscribers. We expect
that our broadcast transmissions will be uplinked to our satellites at
frequencies in the 7060-7072.5 MHz band. The satellites will receive and convert
the signal to the 2320.0-2332.5 MHz band. The satellites then will broadcast the
signal to the United States, at a power sufficient to enable its receipt
directly by subscribers. Service-related commands also will be relayed from the
National Broadcast Studio to our satellites for retransmission to subscribers'
receivers. These service-related commands include those required to (i) initiate
and suspend subscriber service, (ii) change the encryption parameters in
receivers to reduce piracy and (iii) activate receiver displays to show program
related information.
Tracking, telemetry and control of our orbiting satellites also will be
performed from the National Broadcast Studio. These activities will include
routine stationkeeping, such as satellite orbital adjustments and monitoring of
the satellites.
DEMONSTRATIONS OF THE CD RADIO SYSTEM
In support of our application for our FCC license, we conducted a
demonstration of our proposed radio service from November 1993 through November
1994. The demonstration involved the transmission of S-band signals to a
prototype S-band radio and satellite dish antenna installed in a car to simulate
certain transmission characteristics of our planned system. Because there are no
commercial satellites in orbit capable of transmitting S-band frequencies to the
United States, we constructed a terrestrial simulation of our planned system.
For this purpose, we selected a test range covering several kilometers near
Washington, D.C. which included areas shadowed by buildings, trees and
overpasses. We placed S-band transmitters on the rooftops of a number of tall
buildings in such a way as to simulate
14
the signal power and angle of arrival of satellite transmissions to be used for
our proposed service. We also modified the standard factory installed sound
system of an automobile to create a radio receiving AM, FM and S-band signals,
and integrated our satellite dish antenna into the car roof. The demonstrations
included the reception of 30 channels of compact disc quality stereo music by
the prototype radio while the car was driven throughout the test range. We have
also successfully tested our system in San Francisco, where construction of our
terrestrial repeater network has been completed. Prior to testing with orbiting
satellites, antennas and receivers suitable for commercial production, there can
be no assurance that the CD Radio system will function as intended. See 'Risk
Factors -- Our Planned System Relies on Unproven Applications of Technology.'
COMPETITION
We expect to face competition from two principal sources: (i) conventional
AM/FM radio broadcasting, including, when available, terrestrial digital radio
broadcasting; and (ii) XM Satellite Radio, Inc. ('XM'), the other holder of an
FCC license. We also may face competition from WCS Radio, Inc. ('WCSR'), a
company purportedly formed by nine of the winners in the FCC's April 1997
wireless communication service license auction, which recently applied for a
license to provide a satellite-based digital audio radio service beginning in
the year 2002.
The AM/FM radio broadcasting industry is very competitive. Radio stations
compete for listeners and advertising revenues directly with other radio
stations within their markets on the basis of a variety of factors, including
program content, on-air talent, transmitter power, assigned frequency, audience
characteristics, local program acceptance and the number and characteristics of
other radio stations in the market. Many of our radio broadcasting competitors
have substantially greater financial resources than we do.
Unlike CD Radio, the radio industry has a well established market for its
services and generally offers 'free' broadcast reception paid for by commercial
advertising rather than by a subscription fee. In addition, certain AM and FM
stations, such as National Public Radio, offer programming without commercial
interruption. Many radio stations also offer information programming of a local
nature, such as local news or traffic reports, which we may be unable to offer.
CD Radio will compete with conventional radio stations on the basis of its
targeted programming formats, nearly seamless signal coverage, freedom from
advertising and digital quality sound, features which are largely unavailable on
conventional broadcast radio.
Currently, radio stations broadcast by means of analog signals, as opposed
to digital transmission. We believe, however, that within several years,
terrestrial broadcasters may be able to place digital audio broadcasts into the
bandwidth occupied by current AM and FM stations and simultaneously transmit
both analog and digital signals on the AM and FM bands. The limited bandwidth
assigned to AM stations will result in lower quality digital signals than can be
broadcast by FM stations. As a result, we expect that the use of this technology
will permit digital AM sound quality to approach monaural FM sound quality and
permit digital FM broadcasts to approach compact disc sound quality. In order to
receive these digital AM/FM broadcasts, listeners will need to purchase new
digital radios which currently are not commercially available. While the
development of digital broadcasting would eliminate one of the advantages of CD
Radio over FM radio, we do not believe it would affect broadcasters' ability to
address the other advantages of CD Radio. In addition, we view the growth of
terrestrial digital broadcasting as a positive force that would encourage
listeners to replace existing radios and thereby facilitate the introduction of
receivers capable of receiving CD Radio broadcasts.
Although certain existing satellite operators currently provide music
programming to customers at fixed locations, these operators are incapable of
providing CD Radio-type service to vehicles as a result of some or all of the
following reasons: (i) these operators do not broadcast on radio frequencies
suitable for reception in a mobile environment; (ii) CD Radio-type service
requires fully dedicated satellites; (iii) CD Radio-type service requires a
custom satellite system design; and (iv) CD Radio-type service requires
regulatory approvals, which existing satellite operators do not have.
XM is the other holder of an FCC license. WorldSpace, Inc. (an affiliate of
a company that plans to provide satellite radio services outside of the United
States) has applied to the FCC for the right to
15
acquire an 81% interest in XM. In addition, the FCC could grant new licenses
that would enable additional competitors to broadcast satellite radio. Finally,
there are many portions of the electromagnetic spectrum that are currently
licensed for other uses and certain other portions for which licenses have been
granted by the FCC without restriction as to use, and there can be no assurance
that these portions of the spectrum could not be utilized for satellite radio
broadcasting in the future. Although any such licensees would face cost and
competition barriers, there can be no assurance that there will not be an
increase in the number of competitors in the satellite radio industry.
TECHNOLOGY AND PATENTS
We have been granted certain U.S. patents on various features of satellite
radio technology. There can be no assurance, however, that any U.S. patent
issued to us will cover our actual commercialized technology or will not be
circumvented by others, or that if challenged would be held to be valid. We have
filed patent applications covering CD Radio system technology in Argentina,
Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, South
Korea, Mexico, the Netherlands, Spain, Switzerland and the United Kingdom, and
been granted patents in a number of these countries. There can be no assurance
that additional foreign patents will be awarded to us or, if any such patents
are granted, that the laws of foreign countries where we receive patents will
protect our proprietary rights to our technology to the same extent as the laws
of the United States. Although we believe that obtaining patent protection may
provide benefits, we do not believe that our business is dependent on obtaining
patent protection or successfully defending any such patents that may be
obtained against infringement by others.
Some of our know-how and technology is not the subject of U.S. patents. To
protect our rights, we require 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
our trade secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure. In addition, our business may be adversely
affected by competitors who independently develop competing technologies.
Our proprietary technology was principally developed by Robert D. Briskman,
CD Radio's co-founder, and was assigned and belongs to us. We believe that we
are the sole owner of the technology covered by our issued patents. There can be
no assurance, however, that third parties will not bring suit against us for
patent infringement or for declaratory judgment to have our patents declared
invalid. See Item 3, 'Legal Proceedings.'
If a dispute arises concerning our patents, trade secrets or know-how,
litigation might be necessary to enforce our patents, to protect our trade
secrets or know-how or litigation may occur to determine the scope of the
proprietary rights of others. Any such litigation could result in substantial
cost to, and diversion of effort by, us, and adverse findings in any proceeding
could subject us to significant liabilities to third parties, require us to seek
licenses from third parties or otherwise adversely affect our ability to
successfully develop and market CD Radio.
GOVERNMENT REGULATION
As an operator of a privately owned satellite system, we are 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. We are currently
subject to regulation by the FCC principally with respect to (i) the licensing
of our satellite system; (ii) preventing interference with or to other users of
radio frequencies; and (iii) compliance with rules that the FCC has established
specifically for United States satellites and rules that the FCC has established
for providing a satellite radio service.
On May 18, 1990, we proposed that the FCC establish a satellite radio
service and applied for an FCC license. On March 3, 1997, the FCC adopted rules
for the national satellite radio broadcast service (the 'FCC Licensing Rules').
Pursuant to the FCC Licensing Rules, an auction was held among the applicants on
April 1 and 2, 1997. We were a winning bidder for one of two FCC licenses with a
bid of approximately $83 million. XM was the other winning bidder for an FCC
license with a bid of $89
16
million. After payment of the full amount by us, on October 10, 1997, the FCC's
International Bureau issued us a license to place two satellites in a
geostationary orbit. Our FCC license was effective immediately; however, for a
period of 30 days following the grant of the FCC license, those parties that had
filed comments or petitions to deny in connection with our application for an
FCC license were entitled to petition the International Bureau to reconsider its
decision to grant the FCC license to us or request review of the decision by the
full FCC. An application for review by the FCC was filed by one of the
low-bidding applicants in the auction. This petition requests, among other
things, that the FCC adopt restrictions on foreign ownership, which were not
applied in the license issued to us by the FCC's International Bureau on October
10, 1997 (the 'IB Order'), and, on the basis of our ownership, overrule the IB
Order. Since December 1997, there have been no further developments concerning
this petition.
Although we believe the FCC will uphold the IB Order, we cannot predict the
ultimate outcome of any proceedings relating to this petition or any other
proceeding that may be filed. If this petition is denied, the complaining party
may file an appeal with the U.S. Court of Appeals which must find that the
decision of the FCC was not supported by substantial evidence, or was arbitrary,
capricious or unlawful in order to overturn the grant of our FCC license.
Pursuant to the FCC Licensing Rules, we are required to meet certain
progress milestones. We are required to begin satellite construction within one
year of the grant of our FCC license; to launch and begin operating our first
satellite within four years; and to begin operating our entire system within six
years. The IB Order states that failure to meet these milestones will render our
FCC license null and void. On May 6, 1997, we notified the FCC that we had begun
construction on the first of our satellites. On March 27, 1997, a third party
requested reconsideration of the FCC Licensing Rules, seeking, among other
things, that the time period allotted for these milestones be shortened. To
date, the FCC has not responded to the petition for reconsideration. We cannot
predict the outcome of this petition.
In 1998, we decided to increase the number of satellites in our system from
two to three and modify our orbits from geostationary to inclined, elliptical
geosynchronous, requiring modification of our FCC license. On December 11, 1998,
we filed an application with the FCC for this modification. Although we believe
that the FCC will approve our application for this change, there can be no
assurance that this will occur. XM and WCSR have filed comments opposing our
application with the FCC. We cannot predict the time it will take the FCC to act
on our application. Failure of the FCC to approve the requested modification to
our license in a timely fashion would have a material adverse effect on our
business, financial condition and prospects.
The term of our FCC license for each satellite is eight years, commencing
from the time each satellite is declared operational after having been inserted
into orbit. Upon the expiration of the term with respect to each satellite, we
will be required to apply for a renewal of the relevant FCC license. Although we
anticipate that, absent significant misconduct on our part, the FCC licenses
will be renewed in due course to permit operation of the satellites for their
useful lives, and that a license would be granted for any replacement
satellites, there can be no assurance of such renewal or grant.
The spectrum allocated by the FCC for satellite radio in the United States
is used in Canada and Mexico for terrestrial microwave links, mobile telemetry
and other purposes. In September 1998, the United States government and Canada
reached an agreement to coordinate the use of this spectrum. The United States
government must still coordinate the United States' use of this spectrum with
the Mexican government before our satellites may become operational. The FCC
Licensing Rules require that both ourselves and XM successfully complete
detailed frequency coordination with existing operations in Mexico, and the IB
Order conditions our FCC license on such coordination. Although the United
States government has begun this coordination process with Mexico, there can be
no assurance that we will be able to coordinate the use of this spectrum with
Mexican operators or will be able to do so in a timely manner.
In order to operate our satellites, we also will have to obtain a license
from the FCC to operate our uplink facility. Normally, such approval is sought
after issuance of an FCC license. Although there can be no assurances that such
licenses will be granted, we do not expect difficulties in obtaining a feeder
link frequency and ground station approval in the ordinary course.
17
In the future, any assignments or transfers of control of our FCC license
must be approved by the FCC. There can be no assurance that the FCC would
approve any such transfer or assignment.
The CD Radio system is designed to permit CD Radio to be received by
motorists in all outdoor locations where the vehicle has an unobstructed
line-of-sight with one of our satellites. In certain areas with high
concentrations of tall buildings, such as urban cores, or in tunnels, signals
from our satellites will be blocked and reception will be adversely affected. In
such cases, we plan to install terrestrial repeating transmitters to broadcast
CD Radio. The FCC has not yet established rules governing the application
procedure for obtaining authorizations to construct and operate terrestrial
repeating transmitters. A rulemaking on the subject was initiated by the FCC on
March 3, 1997. The deadline for the public to file comments was June 13, 1997
and the deadline for filing reply comments was June 27, 1997. Several comments
were received by the FCC that sought to cause the FCC to consider placing
restrictions on our ability to deploy our terrestrial repeating transmitters.
The repeaters we have constructed in San Francisco are operating under temporary
experimental licenses. We cannot predict the outcome, or the timing of, these
FCC proceedings. In addition, in connection with the installation and operation
of our terrestrial repeating transmitters, we need to obtain the rights to use
towers or the roofs of certain structures where the transmitters will be
installed. There can be no assurance that we can obtain such tower or roof
rights on acceptable terms or in appropriate locations for the operation of CD
Radio.
The IB Order conditions our FCC license on us certifying that our system
includes a receiver design that will permit end users to access the other
licensee's system. In November 1998, WCSR submitted an application to the FCC to
provide a satellite-based digital audio radio service. We also may have to
comply with the interoperability requirement for any system launched by WCSR. We
have made progress towards developing a receiver which is interoperable with the
satellite digital audio radio system XM is constructing. However, because of the
various technological challenges involved in designing an interoperable
receiver, we cannot predict whether we will be able to satisfy this
interoperability requirement. Complying with this interoperality requirement
could make the devices capable of receiving CD Radio broadcasts and the related
antenna more difficult and costly to manufacture. Accordingly, this
interoperability requirement could delay the commercial introduction of these
products or require that they be sold at higher prices.
The FCC has proposed to update regulations for a new type of lighting
device that may generate radio energy in the part of the spectrum to be used by
us. The devices would be subject to FCC rules that prohibit such devices from
causing harmful interference to an authorized radio service such as CD Radio.
However, unless the FCC adopts adequate technical standards specifically
applicable to such devices, it may be difficult for us to enforce our rights if
the use of such devices were to become commonplace. We believe that the
currently proposed FCC rules must be strengthened to assure protection of our
spectrum. The FCC's failure to adopt adequate standards could have a material
adverse effect on reception of our broadcasts. We believe that the FCC will set
adequate standards to prevent harmful interference, although there can be no
assurance that it will do so.
Our business operations as currently contemplated may require a variety of
permits, licenses and authorizations from governmental authorities other than
the FCC, but we have not identified any such permit, license or authorization
that we believe could not be obtained in the ordinary course of business.
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. We are regulated as a private carrier, not a common carrier,
by the FCC. As such, the IB Order determined that we are not subject to the
foreign ownership provisions of the Communications Act. The FCC has before it a
petition to apply the foreign ownership rules to digital audio radio services
but has not acted on that petition or indicated that it is likely to do so in
the near future. As a private carrier, we are free to set our own prices and
serve customers according to our own business judgment, without economic
regulation.
The foregoing discussion reflects the application of current communications
law, FCC regulations and international agreements to our proposed service in the
United States. Changes in law, regulations or international agreements relating
to communications policy or to matters affecting specifically the
18
services proposed by us could adversely affect our ability to retain our FCC
license and obtain or retain other approvals required to provide CD Radio or the
manner in which our 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.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
the following factors should be considered carefully in evaluating us and our
business. This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of the federal securities laws. Actual results and
the timing of certain events could differ materially from those projected in the
forward looking statements due to a number of factors, including those set forth
below and elsewhere herein. See 'Special Note Regarding Forward Looking
Statements.'
OUR BUSINESS IS STILL IN THE DEVELOPMENT STAGE
Historically, We Have Only Generated Losses. We are a development stage
company. The service we propose to offer, CD Radio, is in a relatively early
stage of development and we have never recognized any operating revenues or
conducted any operations. Since our inception, we have concentrated on raising
capital, obtaining required licenses, developing technology, strategic planning,
market research and building our infrastructure. Our financial results from our
inception on May 17, 1990 through December 31, 1998, are as follows:
No revenues;
net losses of approximately $72 million (including net losses of
approximately $5 million during the year ended December 31, 1997 and $48
million during the year ended December 31, 1998); and
net losses applicable to common stock of approximately $165 million, which
includes a deemed dividend on our former 5% Delayed Convertible Preferred
Stock (the '5% Preferred Stock') of $52 million. (In November 1997, we
exchanged 1,846,799 shares of our 10 1/2% Series C Convertible Preferred
Stock ('Series C Preferred Stock') for all of the issued and outstanding
shares of 5% Preferred Stock).
We Do Not Expect Any Revenues Before 2001, and Still Have a Variety of
Hurdles to Surmount Before Commencing Operations. We do not expect to generate
any revenues from operations before late 2000 or to generate positive cash flow
from operations until the third quarter of 2001, at the earliest. Our ability to
generate revenues, generate positive cash flow and achieve profitability will
depend upon a number of factors, including:
the timely receipt of all necessary regulatory authorizations;
the successful and timely construction and deployment of our satellite
system;
the development and manufacture by one or more consumer electronics
manufacturers of devices capable of receiving CD Radio; and
the successful marketing and consumer acceptance of CD Radio.
We cannot assure you that we will accomplish any of the above, that CD Radio
will ever commence operations, that we will attain any particular level of
revenues, that we will generate positive cash flow or that we will achieve
profitability.
WE NEED ADDITIONAL FINANCING TO BUILD AND LAUNCH OUR SERVICE
We Need More Money in the Current Fiscal Year to Continue Implementing Our
Business Plan. We require near-term funding to continue building our CD Radio
system. We believe we can fund our planned operations and the construction of
our satellite system into the fourth quarter of 1999 from our working capital at
December 31, 1998, which includes the proceeds from our sale of 5,000,000 shares
of Common Stock to Prime 66 Partners, L.P. ('Prime 66') for $100 million on
November 2, 1998, and the proceeds from our sale of a new class of 9.2% Series A
Junior Preferred Stock to Apollo Investment
19
Fund IV, L.P. and Apollo Overseas Partners, L.P. (collectively, the 'Apollo
Investors') for $135 million on December 23, 1998.
The Apollo Investors have also granted us an option to sell them 650,000
shares of our 9.2% Series B Junior Cumulative Convertible Preferred Stock, par
value $.001 per share (the '9.2% Series B Junior Preferred Stock'), for $65
million. Together these two series of preferred stock constitute the 'Junior
Preferred Stock.' We may exercise this option at any time prior to September 30,
1999.
We currently do not have sufficient financing commitments to fund our
capital requirements. We expect to satisfy the remainder of our funding
requirements through the issuance of debt or equity securities or a combination
of debt and equity securities. We cannot assure you that we will obtain
additional financing on favorable terms or that we will do so on a timely basis.
We estimate that we will need the following amounts for the following
purposes:
to develop and commence commercial operation of CD Radio by the fourth quarter of $1.14 billion
2000
to fund operations through the first full year of operations ending with the fourth $100 million
quarter of 2001
Total through the first year of operations $1.24 billion
We have or expect that we may have use of the following funds to develop
and operate CD Radio:
net funds raised through December 31, 1998 (including $115 million of debt which we $721 million
must refinance or repay by September 30, 1999)
funds from the possible sale of 9.2% Series B Junior Preferred Stock to the Apollo $63 million
Investors, if we exercise our option, net of fees and expenses
funds which Bank of America National Trust and Savings Association ('Bank of $106 million
America') may (but is not required to) arrange for us
Total funds we may access $890 million
After we give effect to the funds we have and the funds we expect to raise,
we estimate that we will need an additional $250 million to develop and commence
commercial operation of CD Radio by the fourth quarter of 2000. We estimate that
we will need total additional funds of $350 million to fund our business through
the first full year of operations. We will require more money in the event of
delays, cost overruns, launch failure or other adverse developments.
WE FACE MANY FINANCING CHALLENGES AND CONSTRAINTS
We face many challenges and constraints in financing our development and
operations, including those listed below.
Our Existing Debt Instruments Limit Our Ability to Incur Indebtedness. The
indenture (the 'Senior Notes Indenture') governing our outstanding 15% Senior
Secured Discount Notes due 2007 (the 'Senior Secured Notes') issued in November
1997 limits our ability to incur additional indebtedness. In addition, we expect
any future indebtedness will contain similar limits on our ability to incur
additional indebtedness.
We Will Have to Satisfy a Variety of Conditions Before We can Obtain any
Syndicated Bank Borrowings. We entered into a credit agreement with Bank of
America and other lenders in July 1998. Under this agreement, Bank of America
and the other lenders agreed to provide us a term loan facility of up to $115
million maturing September 30, 1999. Additionally, Bank of America has agreed to
attempt to arrange a syndicate of lenders to provide us with a second term loan
facility of $225 million. We intend to use a portion of the proceeds from this
second term loan facility to repay the existing term loan facility and for other
general corporate purposes. The second term loan facility would provide us with
approximately $106 million of net additional funds after repayment of the
existing term loan facility and the payment of fees and expenses. To borrow
under the second term loan facility, we must
20
first satisfy certain conditions, negotiate, execute and deliver definitive loan
documents and obtain consents from holders of certain of our outstanding
indebtedness.
We Have Substantial Near-Term Requirements for Additional Funds. Over the
near-term, we require substantial funds to construct and launch the satellites
that will be part of our broadcast system. We are committed to pay a total of
approximately $718 million under the Loral Satellite Contract for the
construction, launch and in-orbit delivery of three satellites and construction
of our spare fourth satellite. Of this total, we must pay $438 million for the
construction of satellites and $280 million for launch services. As of December
31, 1998, we have satisfied $221 million of the amount due to Loral. We started
paying for the construction of the satellites in April 1997 and we must make
further installments through December 2003.
If we fail to secure the financing required to pay Loral on a timely basis,
we risk:
delays in launching our satellites and starting broadcasting operations;
increases in the cost of building or launching our satellites or other
activities necessary to put CD Radio into operation;
a default on our commitments to Loral, our creditors or others;
our inability to commence CD Radio service; and
the forced discontinuance of our operations or the sale of our business.
A Delay in Introducing Our Service Could Hinder Our Ability to Raise
Additional Financing. Any delay in implementing our business plan would hurt our
ability to obtain the financing we need by adversely affecting our expected
results of operations and increasing our cost of capital. Our ability to begin
offering our CD Radio service in the fourth quarter of 2000 depends entirely on
Loral delivering completed satellites prior to the launch dates and providing or
obtaining launch services on a timely basis. A significant delay in the
development, construction, launch or commencement of operation of our satellites
would adversely affect our results of operations in a material way.
Other delays in implementing our business plan could also materially
adversely affect our results of operations. Several factors could delay us,
including the following:
obtaining additional authorizations from the FCC;
coordinating the use of S-band radio frequency spectrum with Mexico;
delays in or modifications to the design, development, construction or
testing of our satellites or other aspects of the CD Radio system;
changes of technical specifications;
delay in commercial availability of devices capable of receiving CD Radio;
failure of our vendors to perform as anticipated; and
a delayed or unsuccessful satellite launch or deployment.
During any period of delay, we would continue to need significant amounts of
cash to fund capital expenditures, administrative and overhead costs,
contractual obligations and debt service. Accordingly, any delay could
materially increase the aggregate amount of funds we need to commence
operations. Additional financing may not be available on favorable terms or at
all during periods of delay. Delays also could place us at a competitive
disadvantage relative to any competitor that begins operations before us.
WE ARE DEPENDENT UPON LORAL TO BUILD AND LAUNCH OUR SATELLITES
Our business depends upon Loral successfully constructing and launching the
satellites to transmit CD Radio. We are relying upon Loral to construct and to
deliver these satellites in orbit on a timely basis. We cannot assure you that
Loral will deliver the satellites or provide such launch services on a timely
basis, if at all. If Loral fails to deliver functioning satellites in a timely
manner, our business could be materially adversely affected. Although our
agreement with Loral requires Loral to pay us penalties for late delivery, based
on the length of the delay, these remedies may not adequately mitigate the
damage any launch delays cause to our business. In addition, if Loral fails to
deliver the designated
21
launch services due to causes beyond its control, Loral will not be liable for
the delay or the damages caused by the delay. While the satellites are under
construction, Loral is at risk should anything happen to the satellites. In
addition, Loral is responsible for making sure the satellites meet certain
performance specifications at the time of launch (in the case of our first three
satellites) or at the time of delivery to our ground storage location (in the
case of our fourth satellite). However, we, and not Loral, will be at risk for
anything that happens to the satellites at the time of launch and thereafter (in
the case of our first three satellites) or at any time after delivery to our
ground storage location (in the case of our fourth satellite). This means that
if any satellite is destroyed during or after launch or if the fourth satellite
is damaged or destroyed while in storage, Loral will not be responsible to us
for the cost of replacing it.
We depend on Loral to obtain access to available slots on launch vehicles
and to contract with third-party launch service providers for the launch of our
satellites. A launch service provider may postpone one or more of our launches
for a variety of reasons, including:
technical problems;
a launch of a scientific satellite whose mission may be degraded by delay;
the need to conduct a replacement launch for another customer; or
a launch of another customer's satellite whose launch was postponed.
Generally, Loral is not liable to us for a satellite or launch failure. However,
if the first Proton launch vehicle used to launch our satellites fails, Loral
will provide us with a free replacement launch. The timing of such replacement
launch cannot be predicted.
We also depend on Loral to ensure that the software to test the satellites
prior to launch, to run the satellites and to track and control the satellites
will be capable of handling the potential problems that may arise beginning on
January 1, 2000. These potential problems are known as 'The Year 2000 Issue.'
The Year 2000 Issue is the result of computer programs being written using two
digits (rather than four) to define a year, which could result in
miscalculations or system failures resulting from recognition of a date
occurring after December 31, 1999 as falling in the year 1900 (or another year
in the 1900s) rather than the year 2000 or thereafter. While currently the above
mentioned systems are not fully prepared to handle The Year 2000 Issue, Loral is
aware of this and has assured us that all Loral systems will be year 2000
compliant before the critical date of January 1, 2000.
WE ARE DEPENDENT ON LUCENT TO DESIGN AND DEVELOP INTEGRATED CIRCUITS
Our business depends upon Lucent successfully designing, developing and
manufacturing commercial quantities of integrated circuits, which will be used
in consumer electronic devices capable of receiving CD Radio's broadcasts.
Lucent has agreed to use commercially reasonable efforts to deliver commercial
quantities of the chip sets by June 2000. We have agreed to pay Lucent the cost
of the development work related to the chip sets, currently estimated to be
approximately $27,000,000, which is approximately $18,000,000 more than
originally estimated.
There can be no assurance that:
Lucent will be able to deliver commercial quantities of chip sets by June
2000;
The cost to us of the chip set development work will not exceed
$27,000,000; or
Lucent will be able to establish a price for the chip sets which will be
low enough to encourage and support the widespread introduction of
consumer devices capable of receiving CD Radio.
If Lucent fails to deliver commercial quantities of the chip sets in a timely
manner, the costs of the chip set development work increases significantly or
the price of the chip set is not low enough to support the introduction of
consumer devices capable of receiving CD Radio, our business will be materially
adversely affected.
WE ARE NOT SURE THERE WILL BE A MARKET FOR CD RADIO
Currently no one offers a commercial satellite radio service such as CD
Radio in the United States. As a result, our proposed market is new and untested
and we cannot reliably estimate the potential
22
demand for such a service or the degree to which our proposed service will meet
that demand. We cannot assure you that there will be sufficient demand for CD
Radio to enable us to achieve significant revenues or cash flow or profitable
operations. CD Radio will achieve or fail to gain market acceptance depending
upon factors beyond our control, including:
the willingness of consumers to pay subscription fees to obtain satellite
radio broadcasts;
the cost, availability and consumer acceptance of devices capable of
receiving CD Radio;
our marketing and pricing strategies and those of our competitors;
the development of alternative technologies or services; and
general economic conditions.
OUR PLANNED SYSTEM RELIES ON UNPROVEN APPLICATIONS OF TECHNOLOGY
Our Satellite System Applies Technology in New and Unproven Ways. CD Radio
is designed to be broadcast from three satellites orbiting the Earth. Two of the
three satellites will transmit the same signal at any given time to receivers
that will receive signals through antennas. This design applies technology in
new and unproven ways. Accordingly, we cannot assure you that the CD Radio
system will work as planned.
Certain Obstructions Will Adversely Affect CD Radio Reception. High
concentrations of tall buildings and other obstructions, such as those found in
large urban areas, and tunnels will block the signals from both transmitting
satellites. We plan to install terrestrial repeating transmitters to rebroadcast
CD Radio in certain urban areas to mitigate this problem. However, certain areas
with impediments to satellite line-of-sight may still experience 'dead zones.'
We cannot assure you that the CD Radio system will operate as planned with the
technology we have developed.
Our System Has Never Been Tested with Orbiting Satellites. In support of
our application for our FCC license, we conducted a demonstration of our
proposed radio service from November 1993 through November 1994. For the
demonstration, we transmitted S-band signals to a prototype S-band radio and
satellite dish antenna installed in a car to simulate certain transmission
characteristics of our planned system. We constructed a terrestrial simulation
of our planned system because there are no commercial satellites in orbit
capable of transmitting radio signals on S-band frequencies to the United
States. As part of the demonstration, the prototype radio received 30 channels
of compact disc quality stereo music while the car was driven throughout the
range. We have also successfully tested our system in San Francisco, where our
terrestrial repeater network has been completed. We cannot assure you that the
CD Radio system will function as intended until we test it with orbiting
satellites and antennas and receivers suitable for commercial production.
SATELLITE LAUNCHES ARE SUBJECT TO SIGNIFICANT RISKS
We cannot assure you that the launches of our satellites will be
successful. Satellite launches are subject to significant risks, including
launch failure, damage or destruction of the satellite during launch and failure
to achieve a proper orbit or operate as planned. The Loral Satellite Contract
does not protect us against the risks inherent in satellite launches or in-orbit
operations. Our three satellites are scheduled to be launched on Proton launch
vehicles, which are built by Russian entities. The Proton family of launch
vehicles has a 92% launch success rate based on its last 50 launches. Past
experience, however, is not necessarily indicative of future performance.
As part of our risk management program, we contracted with Loral for the
construction of a fourth satellite that we will use as a ground spare. We also
plan to obtain insurance covering a replacement launch to the extent required to
cover risks Loral does not assume. If we need to launch our spare satellite, the
start of our commercial operations would be delayed for a period of up to six
months, which could materially adversely affect the demand for our services, our
revenues and our results of operations.
23
SATELLITES HAVE A LIMITED LIFE AND MAY FAIL IN ORBIT
We expect that our satellites will last approximately 15 years, and that
after this period their performance in delivering CD Radio will deteriorate. We
cannot assure you, however, of the useful life of any particular satellite. Our
operating results would be adversely affected if the useful life of our initial
satellites is significantly shorter than 15 years.
The useful lives of our satellites will vary and will depend on a number of
factors, including:
quality of construction;
amount of fuel on board;
durability of component parts;
expected gradual environmental degradation of solar panels;
random failure of satellite components, which could result in damage to or
loss of a satellite; and
in rare cases, damage or destruction by electrostatic storms or collisions
with other objects in space.
If one of our satellites fails on launch or in orbit and if we are required to
launch our spare satellite, our operational timetable will be delayed for up to
six months. If two or more of our satellites fail on launch or in orbit, our
operational timetable could be delayed by a minimum of 16 months.
INSURANCE MAY NOT COVER ALL RISKS OF LAUNCHING AND OPERATING SATELLITES
There Are Many Potential Risks to Insure. Because our agreement with Loral
does not protect us against launch vehicle failure, failure of a satellite to
deploy correctly or failure of a satellite to operate as planned, we must obtain
insurance to protect adequately against such risks. The insurance premiums we
pay may increase substantially upon any adverse change in insurance market
conditions. We cannot assure you that we will be able to purchase launch
insurance or in-orbit insurance or that we will be able to purchase it at a cost
or on terms acceptable to us.
Many Risks We Face May Not be Covered by Insurance. Our insurance may not
cover all of our losses, and may not fully reimburse us for the following:
expenditures for a satellite which fails, totally or in part, upon launch;
expenditures for a satellite which fails to perform to specifications
after launch;
damages from business interruption, loss of business and similar losses
arising from satellite failures or launch delays; and
losses subject to deductibles, exclusions and conditions.
OUR TECHNOLOGY MAY BECOME OBSOLETE
We operate in an industry characterized by rapid technological advances and
innovations and one or more of the technologies which we use or develop could
become obsolete. In addition, we will depend on technologies being developed by
third parties to implement key aspects of our proposed system. We may be unable
to obtain more advanced technologies on a timely basis or on reasonable terms,
or our competitors may obtain more advanced technologies and we may not have
access to such technologies. Finally, we may encounter unforeseen problems in
the development of our satellite radio broadcasting system. Such problems could
adversely affect the performance, cost or timely implementation of our system,
which could materially adversely affect our results of operations.
RECEIVERS AND ANTENNAS ARE NOT YET AVAILABLE
To receive the CD Radio service, a subscriber will need to purchase a
device capable of receiving our broadcasts as well as an antenna. We have
entered into an agreement with Lucent to develop and manufacture the
microelectronic circuits that represent the essential element of the CD Radio
receivers and our miniature satellite dish antennas. We cannot assure you that
Lucent will succeed in this development effort. We have also entered into an
agreement with Delco and Recoton to design and develop devices capable of
receiving CD Radio broadcasts and antennas for use with these devices. We cannot
assure you that Delco and Recoton will succeed in this development effort.
24
No one currently manufactures devices capable of receiving CD Radio
broadcasts and suitable antennas. We do not intend to manufacture or distribute
CD Radio receivers and antennas ourselves. We have discussed the manufacture of
CD Radio receivers and antennas for retail sale in the United States with
several manufacturers, including Delco and Recoton. These discussions may not
result in a binding commitment on the part of any manufacturer to produce,
market and sell devices capable of receiving CD Radio broadcasts and suitable
antennas in a timely manner and at a price that would permit the widespread
introduction of CD Radio in accordance with our business plan. In addition, any
manufacturers of devices capable of receiving CD Radio broadcasts and antennas
may not produce them in sufficient quantities to meet anticipated consumer
demand. Our business would be materially adversely affected if we cannot arrange
for the timely development of these products for commercial sale at an
affordable price and with sufficient retail distribution.
Our FCC license requires that we design a receiver that is interoperable
with the national satellite radio system being developed by the other existing
licensee, XM. Although we have made progress towards designing a receiver that
is interoperable with the system XM is constructing, we cannot predict whether
we will be able to satisfy this interoperability requirement because of the
various technological challenges involved. Complying with this interoperability
requirement also could make the devices capable of receiving CD Radio broadcasts
and the related antenna more difficult and costly to manufacture. Accordingly,
this interoperability requirement could delay the commercial introduction of
these products or require that they be sold at higher prices. We may also be
required to comply with this interoperability requirement for any person
licensed by the FCC to provide a satellite-based digital audio radio service in
the future.
WE WILL FACE COMPETITION FROM ESTABLISHED CONVENTIONAL RADIO STATIONS
We will be competing with established conventional (over the air) radio
stations, which, unlike CD Radio:
do not charge subscription fees;
do not require users to purchase a separate receiver and antenna;
often offer local information programming such as local news and traffic
reports; and
in the case of some FM stations, may begin to broadcast digital, compact
disc quality signals before we start operations.
In addition to direct competition from XM, we face the possibility of
additional satellite broadcast radio competition:
if the FCC grants additional licenses for satellite-delivered radio
services;
if holders of licenses for other portions of the electromagnetic spectrum
(currently licensed for other uses) obtain changes to their licenses; or
if holders of licenses without FCC restrictions for other portions of the
spectrum devise a method of broadcasting satellite radio.
Nine of the winners in the FCC's April 1997 wireless communication service
license auction have formed an additional potential competitor called WCS Radio,
Inc. In November 1998, WCSR submitted an application to the FCC to provide a
satellite-based digital audio radio service. WCSR said in its application that
it wants to launch two satellites into geostationary equatorial orbits beginning
in the fourth quarter of 2001 and to broadcast 'up to 100 channels of high
quality music and talk radio and innovative data services throughout the
contiguous United States' beginning in the third quarter of 2002. We cannot
predict whether the FCC will grant this application or whether WCSR will be able
to launch a competing service. WCSR expects that its satellites will be built by
a subsidiary of TRW, Inc.
Although any potential competitor would face cost and competition barriers,
the number of competitors in the satellite radio industry may increase. One or
more competitors may design a satellite radio broadcast system that is superior
to our system. The competitive factors listed above could materially adversely
affect our results of operations.
25
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE RAPID GROWTH
We have not started broadcasting CD Radio. We expect to experience
significant and rapid growth in the scope and complexity of our business as we
proceed with the development of our satellite radio system. As of March 29,
1999, we employed 49 people and 12 part time consultants. We do not employ
sufficient staff to program our broadcast service, manage operations, control
the operation of our satellites or handle sales and marketing efforts. Although
we have hired experienced executives in these areas, we must hire many
additional employees before we begin commercial operations of our service. This
growth, including the creation of a management infrastructure and staffing, is
likely to place a substantial strain on our management and operational
resources. Our results of operations could be materially adversely affected if
we fail to do any of the following:
develop and implement effective management systems;
hire and train sufficient personnel to perform all of the functions
necessary to effectively provide our service;
manage our subscriber base and business; or
manage our growth effectively.
WE ARE SUBJECT TO CONTINUING AND DETAILED REGULATION BY THE FCC
Our FCC License is Being Challenged. On October 10, 1997, the FCC's
International Bureau granted us an FCC license after we submitted a winning bid
in an FCC auction. One of the low-bidders in the FCC auction applied to have the
full FCC review the grant of our FCC license. The application requests that the
FCC adopt restrictions on foreign ownership and overrule the granting of our FCC
license on the basis of our ownership. If the FCC denies this application, the
complaining party may appeal to the U.S. Court of Appeals. Although we believe
the FCC will uphold the grant of our FCC license, we cannot predict the ultimate
outcome of any proceedings relating to this application or any other proceedings
that interested parties may file. Since December 1997, there have been no
developments in this matter.
We Need a Modification to our FCC License Before We can Begin Operation. In
May 1998, we decided to increase the number of satellites in our system from two
to three and to change the orbit of those satellites. To implement these
changes, the FCC must first approve changes to our FCC license. On December 11,
1998, we filed an application with the FCC for these changes. Although we
believe that the FCC will approve our application for this necessary change, we
cannot assure you that this will occur. XM and WCSR have filed comments
objecting to this modification of our FCC license. We cannot predict the time it
will take the FCC to act on our application or any such objections and we cannot
be sure that the modification we have requested will be granted. If the FCC were
to deny our application to modify our license, we would be required to redesign
our proposed system and modify our satellites, at a significant cost, and our
commercial operations would be delayed.
We Will Need to Renew Our FCC License after Eight Years. The term of our
FCC license with respect to each satellite is eight years. The term for a
satellite starts on the date it is declared operational after it is inserted
into orbit. When the term of our FCC license for each satellite expires, we must
apply for a renewal of the relevant license. We cannot assure you that we will
obtain such renewals. If the FCC does not renew our FCC license, we would be
forced to cease broadcasting CD Radio.
We Would Need FCC Approval to Assign our FCC License. The FCC must approve
any future assignments or transfers of control of our FCC license under the
transfer of control rule restrictions in the Communications Act. We cannot
assure you that the FCC would approve any transfer or assignment of our FCC
license.
We Need FCC Approval to Operate Our Terrestrial Repeating Transmitters.
Although, we plan to install terrestrial repeating transmitters to rebroadcast
CD Radio in certain urban areas and have completed the construction of such
repeaters in San Francisco where we have an experimental license, the FCC has
not yet established rules governing the application procedure for obtaining
authorizations to construct and operate terrestrial repeating transmitters on a
commercial basis. The FCC initiated a
26
rulemaking on the subject in March 1997 and received several comments urging the
FCC to consider placing restrictions on our ability to deploy our terrestrial
repeating transmitters. We cannot predict the outcome of this process.
To install and operate our terrestrial repeating transmitters, we will also
need to obtain the rights to use towers or the roofs of certain structures. We
cannot assure you that we can obtain these tower or roof rights on acceptable
terms or in appropriate locations for the operation of CD Radio. Our inability
to install terrestrial repeaters in areas where we think we need them could
adversely affect the quality of reception of CD Radio service.
New Devices may Interfere with CD Radio Broadcasts. A new type of lighting
device may generate radio energy in the part of the spectrum we intend to use.
The FCC proposes to revise its regulations to prohibit such devices from causing
harmful interference to an authorized radio service such as CD Radio. If the FCC
fails to adopt adequate technical standards specifically applicable to such
devices and if the use of such devices becomes commonplace, we could experience
difficulties enforcing our rights. We believe that the FCC must strengthen the
currently proposed regulations to assure protection of our portion of the
spectrum. If the FCC fails to adopt adequate standards, the new devices could
materially adversely affect reception of our broadcasts. We believe that the FCC
will set adequate standards to prevent harmful interference, although we cannot
assure you that it will do so.
The United States Needs to Complete Frequency Coordination with Mexico. In
order to use our assigned spectrum, the United States government must complete a
process of frequency coordination with Mexico. This is required under the rules
adopted by the FCC on March 3, 1997 for the national satellite radio broadcast
service. We cannot assure you that the United States government will be able to
coordinate use of this spectrum with Mexico or do so in a timely manner. If the
FCC were to authorize an additional satellite digital audio service in spectrum
adjacent to ours, for example, as proposed by WCSR, coordination with Mexico
could become more difficult. The United States and Canadian governments were
required to complete a similar process and have done so.
We may be Adversely Affected by Changing Regulations. To provide CD Radio,
we must retain our FCC license and obtain or retain other requisite approvals.
Our ability to do so could be affected by changes in laws, FCC regulations,
international agreements governing communications policy generally or
international agreements relating specifically to CD Radio. In addition, the
manner in which CD Radio would be offered or regulated could be affected by any
such changes.
We may be Adversely Affected by Foreign Ownership Restrictions. The
Communications Act restricts ownership in certain broadcasters by foreigners. If
these foreign ownership restrictions were applied to us, we would need further
authorization from the FCC if our foreign ownership were to exceed 25%. The
order granting our FCC license determined that, as a private carrier, those
restrictions do not apply to us. The order granting our FCC license stated that
our foreign ownership status under the Communications Act could be raised in a
future proceeding. The pending appeal of the grant of our FCC license may bring
the question of foreign ownership restrictions before the full FCC.
We Could Become Subject to Public Service Regulations. The FCC has
indicated that it may impose public service obligations on satellite radio
broadcasters in the future, which could add to our costs or reduce our revenues.
For example, the FCC could require broadcasters to set aside channels for
educational programming. We cannot predict whether the FCC will impose public
service obligations or the impact that any such obligations would have on our
results of operations.
WE NEED U.S. GOVERNMENT APPROVAL TO LAUNCH OUR SATELLITES FROM OUTSIDE THE
UNITED STATES
We cannot assure you that Loral will obtain the required export licenses to
launch our satellites from a launch facility outside the United States, as we
plan. The United States has recently amended its export control laws and
regulations to transfer jurisdiction for granting export licenses from the
Commerce Department to the State Department. This transfer is expected to result
in increased scrutiny of export licenses and may make foreign satellite launches
more difficult. In addition, the fact that a particular foreign launch service
provider has obtained prior export approvals does not guarantee that the
provider will obtain export approvals in the future. If we fail to obtain the
necessary export
27
licenses, we would need to arrange for alternative launch sites, which could
cause delays, increase costs or increase the risks of a launch failure.
In addition, we may require export licenses if we arrange to have other
portions of the CD Radio system manufactured or assembled offshore. We cannot
assume that we can obtain these export licenses.
CONSUMERS MAY OBTAIN OUR SERVICE WITHOUT PAYING FOR IT
Consumers may steal the CD Radio signal. Although we plan to use encryption
technology to mitigate signal piracy, we do not believe that any such technology
is infallible. Accordingly, we cannot assure you that we can eliminate theft of
the CD Radio signal. Widespread signal theft could reduce the number of
motorists willing to pay us subscription fees and materially adversely affect
our results of operations.
OUR PATENTS MAY NOT BE SUFFICIENT TO PREVENT OTHERS FROM COPYING ELEMENTS OF OUR
SYSTEM
Although our U.S. patents cover various features of satellite radio
technology, our patents may not cover all aspects of our system. Others may
duplicate aspects of our system which are not covered by our patents without
liability to us. In addition, competitors may challenge, invalidate or
circumvent our patents. We may be forced to enforce our patents or determine the
scope and validity of other parties' proprietary rights through litigation. In
this event, we may incur substantial costs and we cannot assure you of success
in any such litigation. In addition, others may block us from operating our
system if our system infringes their patents, their pending patent applications
which mature into patents or their inventions developed earlier which mature
into patents. Should we desire to license our technology, we cannot assure you
that we can do so. Assuming we pay all necessary fees on time, the earliest
expiration date on any of our patents is April 10, 2012.
ITEM 2. PROPERTIES
On March 31, 1998, we signed a lease for the 36th and 37th floors and
certain portions of the roof and basement at 1221 Avenue of the Americas, New
York, New York, to house our headquarters and National Broadcast Studio. We will
use portions of the roof to install and maintain satellite transmission
equipment and will use a portion of the 8th floor setback to install an
emergency electric power generator. The term of the lease is 15 years and 10
months, with an option to renew for an additional five years at fair market
value. We also have a right of first refusal, from and after October 8, 2001, to
lease any full floor which becomes available on floors 27 through 37 of the
building at fair market value. The initial annual rental is approximately $4.3
million, with specified increases and escalations based on operating expenses.
ITEM 3. LEGAL PROCEEDINGS
On January 12, 1999, we filed a lawsuit against XM in the United States
District Court for the Southern District of New York. The lawsuit alleges
infringement by XM of our U.S. Patent Nos. 5,319,673, 5,485,485 and 5,592,471.
We are seeking, among other things, an injunction against infringement by XM for
any manufacture, use, offer for sale or sale within the scope of any claim of
U.S. Patent Nos. 5,319,673, 5,485,485 and 5,592,471. On March 1, 1999, XM
answered our complaint in this lawsuit, denying our allegations and asserting
certain affirmative defenses. Both XM and ourselves have requested that the
other produce certain documents and answer interrogatories and this process is
proceeding. While we believe that we should prevail in this lawsuit, there can
be no assurance that the Court will rule in our favor.
Except as described above, we are not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 7, 1998, we mailed to holders of our Common Stock a consent
solicitation statement seeking the approval of: (i) the issuance and sale of
1,350,000 shares of our 9.2% Series A Junior
28
Preferred Stock pursuant to a Stock Purchase Agreement, dated as of November 13,
1998, by and among CD Radio Inc., Apollo Investment Fund IV, L.P. and Apollo
Overseas Partners IV, L.P. (the 'Apollo Stock Purchase Agreement'), (ii) the
issuance and sale, at our option, of 650,000 shares of our 9.2% Series B Junior
Preferred Stock pursuant to the Apollo Stock Purchase Agreement, (iii) the
issuance of up to 2,950,000 shares of 9.2% Series A Junior Preferred Stock in
payment of dividends that may be paid on the such preferred stock from time to
time, and (iv) the issuance up to 1,450,000 shares of 9.2% Series B Junior
Preferred Stock in payment of dividends that may be paid on such preferred stock
from time to time (the 'Proposal').
As of December 23, 1998, we received the written consent to the Proposal
from holders of 16,449,109 shares of Common Stock, representing more than 50% of
the Common Stock, and the Proposal was approved. Holders of 60,400 shares of
Common Stock withheld consent, and holders of 13,497 shares of Common Stock
abstained.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are listed below.
NAME AGE POSITIONS WITH CD RADIO
- ------------------------------------- --- ---------------------------------------------------------------
David Margolese...................... 41 Chairman and Chief Executive Officer
Robert D. Briskman................... 66 Executive Vice President, Engineering and Operations
Andrew J. Greenebaum................. 36 Executive Vice President and Chief Financial Officer
Ira H. Bahr.......................... 36 Executive Vice President, Marketing
Joseph S. Capobianco................. 49 Executive Vice President, Content
Patrick L. Donnelly.................. 37 Executive Vice President, General Counsel and Secretary
DAVID MARGOLESE has served as Chairman and Chief Executive Officer since
August 1993, and as a director since August 1991. Prior to his involvement with
CD Radio, Mr. Margolese proposed and co-founded Cantel Inc., Canada's national
cellular telephone carrier, which was acquired by Roger Communications Inc. in
1989, and Canadian Telecom Inc., a radio paging company, serving as that
company's president until the company's sale in 1987.
ROBERT D. BRISKMAN is CD Radio's co-founder and has served as Executive
Vice President, Engineering and Operations, and as a director since October
1991. Prior to 1986, during his twenty-two year career at Communications
Satellite Corporation, an integrated satellite communications company, he was
responsible for the engineering and implementation of numerous major satellite
systems, including PALAPA, ITALSAT, MORELOS, ARABSAT, CHINASAT and others. Mr.
Briskman was one of the early engineers hired at NASA in 1959, and received the
APOLLO Achievement Award for the design and implementation of the Unified S-Band
System. He is past chairman of the IEEE Standards Board, past president of the
Aerospace and Electronics Systems Society and served on the industry advisory
council to NASA. He is the Telecommunications Editor of McGraw Hill's
Encyclopedia of Science and Technology and is a recipient of the IEEE Centennial
Medal.
ANDREW J. GREENEBAUM has served as Executive Vice President and Chief
Financial Officer since August 1997. From August 1989 to August 1997, he held a
variety of senior management positions with The Walt Disney Company, a
diversified international entertainment corporation. From March 1996 to August
1997, Mr. Greenebaum was Vice President, Corporate Finance in charge of
corporate and project finance. From May 1995 to March 1996, he was Director,
Strategic Planning. From October 1992 to May 1995, he was Director, Corporate
Finance.
IRA H. BAHR has served as Executive Vice President, Marketing, since
October 1998. From June 1998 to October 1998, Mr. Bahr was Vice President,
Marketing. Previously, Mr. Bahr held senior management positions at BBDO New
York, a worldwide advertising agency. From 1992 through 1998, Mr. Bahr was
Senior Vice President and Worldwide Account Director in charge of the agency's
relationship with Federal Express. In that role, he planned, managed and
executed FedEx advertising and promotional programs around the world and worked
closely with FedEx executive management in developing long term business and
branding strategies.
29
JOSEPH S. CAPOBIANCO has served as Executive Vice President, Content, since
April 1997. From 1981 to April 1997, he was an independent consultant providing
programming, production, marketing and strategic planning consulting services to
media and entertainment companies, including Home Box Office, a cable television
service and a subsidiary of Time Warner Entertainment Company, L.P., and ABC
Radio. From May 1990 to February 1995, he served as Vice President of
Programming at Music Choice, which operates a 40-channel music service available
to subscribers to DIRECTV, and is partially owned by Warner Music Group Inc.,
Sony Entertainment Inc. and EMI.
PATRICK L. DONNELLY has served as Executive Vice President, General Counsel
and Secretary since May 1998. From June 1997 to May 1998, he was Vice President
and Deputy General Counsel of ITT Corporation, a hotel, gaming and entertainment
corporation that was acquired by Starwood Hotels & Resorts Worldwide, Inc. in
February 1998. From October 1995 to June 1997, he was Assistant General Counsel
of ITT Corporation. Prior to October 1995, Mr. Donnelly was an associate at the
law firm of Simpson Thacher & Bartlett.
In the course of preparing this Annual Report on Form 10-K, we discovered,
based solely upon a review of Forms 3 and 4 and amendments thereto, that certain
executive officers and directors failed to file on a timely basis certain
reports required by Section 16(a) of the Exchange Act. Specifically, Andrew
Greenebaum failed to timely file a Form 3 when he was elected Executive Vice
President and Chief Financial Officer in August 1997. Joseph Vittoria failed to
timely file a Form 3 in April 1998 when he was elected a Director. Lawrence
Gilberti, a Director, failed to timely file a Form 4 in September 1996 when he
received 10,000 stock options and in April 1998 when he received an additional
15,000 stock options. David Margolese failed to timely file a Form 4 in April
1996 when he received 400,000 stock options. Joseph Capobianco failed to timely
file a Form 4 in July 1997 when he received 25,000 options and again in May 1998
when he received an additional 25,000 options. Robert Briskman failed to timely
file a Form 4 in April of 1996 when he received 30,000 options, in October 1997
when he received an additional 30,000 options and in April 1998 when he received
an additional 57,500 options. These omissions have been corrected.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock began trading on the Nasdaq SmallCap Market on September
13, 1994. Since October 24, 1997, our Common Stock has traded on the Nasdaq
National Market under the symbol 'CDRD.' The following table sets forth the high
and low closing bid price for our Common Stock, as reported by Nasdaq, for the
periods indicated below. The prices set forth below for the periods prior to
October 24, 1997 reflect interdealer quotations, without retail markups,
markdowns, fees or commissions and do not necessarily reflect actual
transactions.
HIGH LOW
---- ---
Year Ended December 31, 1998
First Quarter.............................................................. 23 1/2 12 1/8
Second Quarter............................................................. 41 1/2 24 1/8
Third Quarter.............................................................. 36 7/8 15 1/4
Fourth Quarter............................................................. 38 1/2 14 9/16
Year Ended December 31, 1997
First Quarter.............................................................. 8 3 9/16
Second Quarter............................................................. 20 1/4 10 3/4
Third Quarter.............................................................. 20 14
Fourth Quarter............................................................. 24 5/8 16 5/8
On March 25, 1999, the closing bid price of our Common Stock on Nasdaq was
$23 1/4 per share. On March 25, 1999, there were 218 record holders of our
Common Stock. We have never paid cash dividends on our capital stock. We
currently intend to retain earnings, if any, for use in our business and do not
anticipate paying any cash dividends in the foreseeable future. The agreements
governing our outstanding debt and the instruments governing our outstanding
preferred stock contain provisions that limit our ability to pay dividends on
our Common Stock. See Item 7, 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources' and
'Note 4 of Notes to Consolidated Financial Statements.'
Recent Sales of Unregistered Securities. On November 2, 1998, we sold
5,000,000 shares of our Common Stock to Prime 66 for an aggregate purchase price
of $100 million. In connection with this sale, we paid an aggregate of $2
million in fees to investment banking firms. The proceeds from this sale of our
Common Stock will be used for general corporate purposes.
On December 23, 1998, we sold 1,281,269 shares of our 9.2% Series A Junior
Preferred Stock to Apollo Investment Fund IV, L.P. and 68,731 shares of our 9.2%
Series A Junior Preferred Stock to Apollo Overseas Partners IV, L.P. for an
aggregate purchase price of $135 million. In connection with this sale, we paid
an aggregate $5.15 million in fees to investment banking firms. Each share of
our 9.2% Series A Junior Preferred Stock is convertible into shares of Common
Stock at a price of $30 per share. The proceeds from this sale of our 9.2%
Series A Junior Preferred Stock will be used for general corporate purposes.
These sales were exempt from registration under the Securities Act of 1933,
as amended (the 'Securities Act'), by virtue of Section 4(2) thereof. We
determined that each of Prime 66 and the Apollo Investors had such knowledge and
experience in financial and business matters that they were capable of
evaluating the merits and risks of purchasing shares of Common Stock or 9.2%
Series A Junior Preferred Stock, as the case may be. We did not sell the shares
of Common Stock or 9.2% Series A Junior Preferred Stock by any form of general
solicitation or general advertising, and we determined that Prime 66 and the
Apollo Investors were acquiring these shares for their own accounts and with no
intention of distributing or reselling them. In addition, prior to these sales,
we provided Prime 66 and the Apollo Investors with reports we filed with the
Securities and Exchange Commission, and other information, as contemplated by
Rule 502 under the Securities Act, and we afforded each of them an opportunity
to ask questions concerning the information provided to them and to obtain any
other information concerning us.
31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the Company set forth below
has been derived from audited consolidated financial statements of the Company.
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.'
STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating revenues................................... $ -- $ -- $ -- $ -- $ --
Net loss (basic and diluted)......................... $ (4,065) $ (2,107) $ (2,831) $ (4,737) $(48,396)
Net loss per share................................... $ (.48) $ (.23) $ (.29) $ (.41) $ (2.70)
Weighted average common shares (basic and diluted)
and common share equivalents outstanding........... 8,398 9,224 9,642 11,626 17,932
BALANCE SHEET DATA
DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
Cash and cash equivalents............................ $ 3,400 $ 1,800 $ 4,584 $ 900 $204,753
Marketable securities, at market..................... $ -- $ -- $ -- $169,482 $ 60,870
Working capital (deficit)............................ $ 2,908 $ 1,741 $ 4,442 $170,894 $180,966
Total assets......................................... $ 3,971 $ 2,334 $ 5,065 $323,808 $643,880
Deficit accumulated during the development stage..... $(13,598) $(15,705) $(18,536) $(23,273) $(71,669)
Stockholders' equity(1).............................. $ 3,431 $ 1,991 $ 4,898 $ 15,980 $ 77,953
- ------------
(1) No cash dividends were declared or paid in any of the periods presented.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the federal securities laws. Actual results and the timing
of certain events could differ materially from those projected in the
forward-looking statements due to a number of factors, including those set forth
under 'Business -- Risk Factors' and elsewhere herein. See 'Special Note
Regarding Forward Looking Statements.'
OVERVIEW
CD Radio Inc. was organized in May 1990 and is in its development stage.
Our principal activities to date have included technology development, obtaining
regulatory approval for the CD Radio service, commencement of construction of
three satellites, acquisition of content for our programming, strategic
planning, market research, recruitment of our management team and securing
financing for working capital and capital expenditures. We do not expect to
generate any revenues from operations until late 2000, at the earliest, and we
expect that positive cashflow from operations will not be generated until third
quarter 2001, at the earliest. In addition, we require additional capital to
complete development and commence commercial operations of CD Radio. There can
be no assurance that we will ever commence operations, that we will attain any
particular level of revenues or that we will achieve profitability.
Upon commencing commercial operations, we expect our primary source of
revenues to be monthly subscription fees. We currently anticipate that our
subscription fee will be approximately $9.95
32
per month to receive CD Radio broadcasts, with a one time, modest activation fee
per subscriber. In addition, we expect to derive additional revenues from
directly selling or bartering advertising time on our non-music channels. We do
not intend to manufacture the consumer electronic devices necessary to receive
CD Radio and thus will not receive any revenues from their sale. Although we
hold patents covering certain technology which may be used in these consumer
electronic devices, we expect to license our technology to manufacturers at no
charge.
We expect that the operating expenses associated with commercial operations
will consist primarily of marketing, sales, programming, maintenance of the
satellite and broadcasting system and general and administrative costs. Costs to
acquire programming are expected to include payments to build and maintain an
extensive music library and royalty payments for broadcasting music (calculated
based on a percentage of revenues). Marketing, sales, general and administrative
costs are expected to consist primarily of advertising costs, salaries of
employees, rent and other administrative expenses. We expect to have
approximately 150 employees by the time we commence commercial operations.
In addition to funding initial operating losses, we require funds for
working capital, interest and financing costs on borrowings and capital
expenditures in the near term.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
We recorded net losses of $48,396,000 ($2.70 per share) and $4,737,000
($.41 per share) for the years ended December 31, 1998 and 1997, respectively.
Our total operating expenses were $39,079,000 in 1998 and $6,865,000 in 1997.
Legal, consulting and regulatory fees increased to $4,064,000 in 1998 from
$3,236,000 in 1997. The increase in the level of expenditures was primarily the
result of greater consulting expenses due to the accelerated execution of our
business plan. Consulting fees were generated primarily in connection with the
technical aspects of our business plan, such as satellite construction, chip set
design and terrestrial repeater network build-out. The major components of
legal, consulting and regulatory fees in the 1998 period were legal (48%),
consulting (50%) and regulatory (2%), while in the 1997 period the major
components were legal (51%), consulting (44%) and regulatory (5%).
Research and development costs were $22,000 in 1998, compared with $57,000
in 1997. This level of research and development cost is the result of our
completing the majority of such activities in 1994.
Other general and administrative expenses increased to $9,311,000 in 1998
from $3,572,000 in 1997. General and administrative activities have grown as we
continue to expand our management team and the workforce necessary to develop
and commence the broadcast of CD Radio. The major components of other general
and administrative costs in 1998 were salaries and employment related costs
(51%) and rent and occupancy costs (24%), while in the 1997 period the major
components were salaries and employment related costs (57%) and rent and
occupancy costs (11%). The increase in the percentage of the total costs related
to rent and occupancy was due to our taking possession of the premises where our
National Broadcast Studio is being constructed. The remaining portion of other
general and administrative costs (25% in 1998 and 32% in 1997) consists of other
costs such as insurance, market research, travel, depreciation and supplies,
with no amount exceeding 10% of the total.
Interest and investment income increased to $7,250,000 in 1998 from
$4,074,000 in 1997. The increase was the result of a higher average investment
balance throughout 1998 than 1997. The higher average investment balance was due
to the completion of the sales of stock to both Prime 66 and the Apollo
Investors in 1998 and the unexpended proceeds from our 1997 stock sales.
Interest expense, net of capitalized interest, was $14,272,000 in 1998 and
$1,946,000 in 1997. This increase was due to interest expense accruing on our
Senior Secured Notes issued in November 1997. We recorded $2,295,000 of income
tax expense in 1998, which is related to our being a 'start-up' company for
income tax purposes and the fact that the interest expense on our Senior Secured
Notes is deductible only when paid.
33
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
We recorded net losses of $4,737,000 ($.41 per share) and $2,831,000 ($.29
per share) for the years ended December 31, 1997 and 1996, respectively. Our
total operating expenses were $6,865,000 and $2,930,000 for the years ended
December 31, 1997 and 1996, respectively.
Legal, consulting and regulatory fees increased for the year ended
December 31, 1997 to $3,236,000 from $1,582,000 for the year ended December 31,
1996. These levels of expenditures are the result of increased activity since
winning the auction for our FCC license in April 1997, and in connection with
our public offerings of Common Stock and Units and the exchange offer for our 5%
Preferred Stock. The major components of legal, consulting and regulatory fees
in 1997 were legal (51%), consulting (44%) and regulatory (5%), while in 1996
the major components were legal (48%), consulting (38%) and regulatory (14%).
Research and development costs were $57,000 and $117,000 for the years
ended December 31, 1997 and 1996, respectively. We completed the majority of
such activities in 1994.
Other general and administrative expenses increased for the year ended
December 31, 1997 to $3,572,000 from $1,231,000 for the year ended December 31,
1996. General and administrative expenses are expected to continue to increase
as we continue to develop our business. The major components of other general
and administrative costs in 1997 were salaries and employment related costs
(57%) and rent and occupancy costs (11%), while in 1996 the major components
were salaries and employment related costs (50%) and rent and occupancy costs
(22%). The remaining portion of other general and administrative costs (32% in
1997 and 28% in 1996) consists of other costs such as insurance, market
research, travel, depreciation and supplies, with no amount exceeding 10% of the
total.
The increase in interest and investment income to $4,074,000 for the year
ended December 31, 1997, from $112,000 in the year ended December 31, 1996, was
the result of a higher average investment balance during 1997. The investments
on hand were primarily obtained from the debt and equity offerings completed in
1997.
Interest expense increased for the year ended December 31, 1997 to
$1,946,000 from $13,000 for the year ended December 31, 1996. The increase is
the result of the issuance of the Units in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had working capital of $180,966,000 compared to
$170,894,000 at December 31, 1997. The increase in working capital was primarily
the result of our 1998 stock sales.
Funding Requirements. We require near-term funding to continue building our
CD Radio system. We believe we can fund our planned operations and the
construction of our satellite system into the fourth quarter of 1999 from our
working capital. We estimate that we will require approximately $1.14 billion to
develop and commence commercial operations by the fourth quarter of 2000. Of
this amount, we have raised or have access to approximately $890 million,
leaving anticipated additional cash needs of approximately $250 million to fund
our operations through the fourth quarter of 2000. We anticipate additional cash
requirements of approximately $100 million to fund our operations through the
first full year of commercial operations. We expect to finance the remainder of
our funding requirements through the issuance of debt or equity securities, or a
combination thereof.
In April 1997, we were the winning bidder in an FCC auction for one of two
FCC licenses with a winning bid of $83.3 million, which was paid in 1997, and we
were awarded our FCC license on October 10, 1997. In May 1998, we decided to
increase the number of satellites in our system from two to three and modify
their orbital locations from geostationary to inclined, geosynchronous,
elliptical, which requires a modification of our FCC license. We filed an
application with the FCC for this modification on December 11, 1998. Although we
believe that the FCC will approve our application for this change, there can be
no assurance that this will occur.
To build and launch the satellites necessary for the operations of CD Radio
we entered into the Loral Satellite Contract. The Loral Satellite Contract
provides for Loral to construct, launch and deliver three satellites in-orbit
and checked-out, to construct for us a fourth satellite for use as a ground
spare
34
and to become our launch services provider. We are committed to make aggregate
payments of approximately $718 million under the Loral Satellite Contract. As of
December 31, 1998, $221 million of this obligation had been satisfied. Under the
Loral Satellite Contract, with the exception of a payment made to Loral in March
1993, payments are made in installments commencing in April 1997 and will end in
December 2003. Approximately half of these payments are contingent upon Loral
meeting specified milestones in the construction of our satellites.
In the event of a satellite or launch failure, we will be required to pay
Loral the full-deferred amount for the affected satellite no later than 120 days
after the date of the failure. If we elect to put one of our first three
satellites into ground storage, rather than having it shipped to the launch
site, the full-deferred amount for that satellite will become due within 60 days
of such election.
We also will require funds for working capital, interest on borrowings,
acquisition of programming, financing costs and operating expenses until some
time after the commencement of commercial operations of CD Radio. We expect our
interest expense will increase significantly when compared to our 1997 interest
expense as a result of our financing plan; however, our Senior Secured Notes,
which represent a substantial portion of our planned indebtedness, will not
require cash payments of interest until June 2003. We believe that our working
capital at December 31, 1998 is sufficient to fund planned operations and
construction of our satellite system into the fourth quarter of 1999.
Sources of Funding. To date, we have funded our capital needs through the
issuance of debt and equity. As of December 31, 1998, we had received a total of
$450 million in equity capital. $192 million of our equity capital was received
in 1997 as a result of the issuance of 5,400,000 shares of 5% Preferred Stock
and 4,955,488 shares of Common Stock resulting in net proceeds of $121 million
and $71 million, respectively. A total of 1,905,488 shares of Common Stock were
sold to Loral Space & Communications, Ltd. in August 1997 and 3,050,000 shares
of Common Stock were sold to the public in November 1997. In November 1997, we
exchanged 1,846,799 shares of our newly issued Series C Preferred Stock for all
of the outstanding shares of 5% Preferred Stock. We received no proceeds from
this exchange offer. On November 2, 1998, we sold an additional 5,000,000 shares
of Common Stock to Prime 66 for an aggregate purchase price of $100 million and
on December 23, 1998, we sold 1,350,000 of 9.2% Series A Junior Preferred Stock
to the Apollo Investors for an aggregate purchase price of $135 million.
In November 1997, we received net proceeds of $116 million from the
issuance of 12,910 Units, each consisting of $20,000 aggregate principal amount
at maturity of Senior Secured Notes and a Warrant to purchase additional Senior
Secured Notes with an aggregate principal amount at maturity of $3,000. All
warrants were exercised in 1997. The aggregate value at maturity of the Senior
Secured Notes is $297 million. The Senior Secured Notes mature on November 15,
2007 and the first cash interest payment is due in June 2003. The Senior Notes
Indenture contains certain limitations on our ability to incur additional
indebtedness. The Senior Secured Notes are secured by a pledge of the stock of
Satellite CD Radio Inc., our subsidiary that holds our FCC license.
On July 28, 1998, we entered into a credit agreement with a group of
financial institutions (the 'Lenders'), including Bank of America as agent and a
lender, pursuant to which the Lenders agreed to provide us a term loan facility
(the 'Tranche A Facility') in an aggregate principal amount of up to $115
million (the term loans thereunder, the 'Tranche A Loans'). The proceeds of the
Tranche A Loans are being used to fund a portion of the progress payments
required to be made by us under the Loral Satellite Contract for the purchase of
launch services and to pay interest, fees and other expenses related to the
Tranche A Facility. The Tranche A Loans are due on September 30, 1999. As of
December 31, 1998, we had borrowed $70.9 million under the Tranche A Facility,
substantially all of which was used to make progress payments under the Loral
Satellite Contract.
In connection with the Tranche A Facility, Loral agreed with Bank of
America that at maturity of the Tranche A Loans (including maturity as a result
of an acceleration), upon the occurrence of a bankruptcy of CD Radio Inc. or
upon the occurrence of an event of default by Loral under its agreement with
Bank of America, Loral will repurchase from the Lenders the Tranche A Loans at a
price equal to the principal amount of the Tranche A Loans plus accrued and
unpaid interest. In exchange for providing such credit support, Loral receives a
fee from us equal to 1.25% per annum of the outstanding amount of the Tranche A
Loans from time to time.
35
We have also entered into an agreement with Bank of America pursuant to
which Bank of America has agreed to attempt to arrange a syndicate of lenders to
provide a term loan facility (the 'Tranche B Facility') for us in the aggregate
principal amount of $225 million (the term loans thereunder, the 'Tranche B
Loans'). It is anticipated that a portion of the proceeds of the Tranche B Loans
would be used on or prior to September 30, 1999 to repay amounts outstanding
under the Tranche A Facility and for other general corporate purposes. Bank of
America has not committed to provide the Tranche B Loans. The closing of the
Tranche B Facility is expected to be subject to the satisfaction of certain
significant conditions, including the consent of the holders of a majority of
our Senior Secured Notes, and there is no assurance that such Tranche B Loans
will be arranged or the terms of any such Tranche B Loans will be acceptable to
us. If we are unable to close the Tranche B Facility, we will seek to repay the
Tranche A Loans from the proceeds of the sale of debt securities, equity
securities or a combination thereof.
On November 13, 1998, we entered into a Stock Purchase Agreement with the
Apollo Investors pursuant to which we sold a total of 1,350,000 shares of 9.2%
Series A Junior Preferred Stock to the Apollo Investors, for an aggregate
purchase price of $135 million, and the Apollo Investors granted us an option to
sell them an additional 650,000 shares of 9.2% Series B Junior Preferred Stock
for an aggregate purchase price of $65 million. We may exercise our option to
require the Apollo Investors to purchase the 9.2% Series B Junior Preferred
Stock at any time prior to September 30, 1999.
The Junior Preferred Stock is convertible into shares of Common Stock at a
price of $30 per share. The Junior Preferred Stock is callable by us beginning
November 15, 2001 if the current market price, as defined in the Certificate of
Designation of the Junior Preferred Stock, of our Common Stock exceeds $60 per
share for a period of 20 consecutive trading days, and in all events will be
callable beginning November 15, 2003 at a price of 100% and must be redeemed by
us on November 15, 2011. Dividends on the Junior Preferred Stock are
payable-in-kind or cash annually, at our option. The Junior Preferred Stock will
have the right to vote, on an as-converted basis, on matters in which the
holders of our Common Stock have the right to vote.
Loral has agreed to defer a total of $50 million of the payments under the
Loral Satellite Contract originally scheduled for payment in 1999. These
deferred amounts bear interest at 10% per annum and all interest on these
deferred amounts will accrue until December 2001, at which time interest will be
payable quarterly in cash. The principal amounts of the deferred payments under
the Loral Satellite Contract are required to be repaid in six installments
between June 2002 and December 2003. As collateral security for these deferred
payments, we have agreed to grant Loral a security interest in our terrestrial
repeater network.
We will require an additional $250 million in financing through the fourth
quarter of 2000. However, there can be no assurance that our actual cash
requirements will not exceed such amount. Potential sources of additional
financing include the sale of debt or equity securities in the public or private
markets. There can be no assurance that we will be able to obtain additional
financing on favorable terms, or at all, or that we will be able to do so in a
timely fashion. Our Senior Notes Indenture and the Tranche A Facility contain,
and documents governing any indebtedness incurred in the future are expected to
contain, provisions limiting our ability to incur additional indebtedness. If
additional financing were not available on a timely basis, we would be required
to delay satellite and/or launch vehicle construction in order to conserve cash
to fund continued operations, which would cause delays in the commencement of
operations and increase costs.
The amount and timing of our actual cash requirements will depend upon
numerous factors, including costs associated with the construction and
deployment of our satellite system and the rate of growth of our business
subsequent to commencing service, costs of financing and the possibility of
unanticipated costs. Additional funds would be required in the event of delay,
cost overruns, unanticipated expenses, launch failure, launch services or
satellite system change orders, or any shortfalls in estimated levels of
operating cash flow.
36
OTHER MATTERS -- THE YEAR 2000 ISSUE
The Year 2000 Issue will test the capability of business processes to
function correctly. We have undertaken an effort to identify and mitigate The
Year 2000 Issues in our information systems, product, suppliers and facilities.
Our approach to The Year 2000 Issue can be separated into four phases: (1)
define/measure -- identify and inventory possible sources of Year 2000 Issues;
(2) analyze -- determine the nature and extent of Year 2000 Issues and develop
project plans to address those issues; (3) improve -- execute project plans and
perform a majority of the testing; and (4) control -- complete testing, continue
monitoring readiness and complete necessary contingency plans. The first three
phases of the program have been completed for a substantial majority of our
mission-critical activities. Management plans to have nearly all significant
information systems and facilities through the control phase of the program by
mid-1999.
We have also communicated with our significant vendors and suppliers to
determine the extent to which we are vulnerable to the failure of these parties
to remedy Year 2000 Issues. We can give no assurance that failure to address the
Year 2000 Issues by third parties on whom our systems and business processes
rely would not have a material adverse effect on our operations or financial
condition.
The total Year 2000 Issue remediation expenditures are expected to be
approximately $100,000, of which 25% was spent by the end of 1998. Substantially
all of the remainder is expected to be spent in 1999. The activities involved in
the Year 2000 effort necessarily involve estimates and projections of activities
and resources that will be required in the future. These estimates and
projections could change as work progresses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedule contained on page F-1.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to our
definitive proxy statement (the 'Proxy Statement') prepared with respect to the
Annual Meeting of Stockholders to be held on June 22, 1999. The Proxy Statement
will be filed with the Securities and Exchange Commission at a later date, that
is not more than 120 days after the end of our 1998 fiscal year. The information
with respect to Executive Officers is set forth, pursuant to General
Instruction G of Form 10-K, under Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement prepared with respect to the Annual Meeting of Stockholders to
be held on June 22, 1999. The Proxy Statement will be filed with the Securities
and Exchange Commission at a later date, that is not more that 120 days after
the end of our 1998 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement prepared with respect to the Annual Meeting of Stockholders to
be held on June 22, 1999. The Proxy Statement will be filed with the Securities
and Exchange Commission at a later date, that is not more than 120 days after
the end of our 1998 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement prepared with respect to the Annual Meeting of Stockholders to
be held on June 22, 1999. The Proxy Statement will be filed with the Securities
and Exchange Commission at a later date, that is not more than 120 days after
the end of our 1998 fiscal year.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statement, Financial Statement Schedules and Exhibits
(1) Financial Statements
See index to financial statements and schedule appearing on page F-1.
(2) Financial Statement Schedules
See index to financial statements and schedule appearing on page F-1.
(3) Exhibits
See Exhibit Index appearing on pages E-1 through E-4 for a list of
exhibits filed or incorporated by reference as part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K
On October 13, 1998, the Company filed a Current Report on Form 8-K
announcing that it had entered into an agreement to sell 5,000,000 shares
of Common Stock to Prime 66 for an aggregate purchase price of
$100,000,000.
On November 17, 1998, the Company filed a Current Report on Form 8-K
announcing that it had entered into an agreement with the Apollo Investors
pursuant to which the Company agreed to sell a total of 1,350,000 shares of
9.2% Series A Junior Preferred Stock to the Apollo Investors, for an
aggregate purchase price of $135 million, and the Apollo Investors granted
the Company an option to sell the Apollo Investors an additional 650,000
shares of 9.2% Series B Junior Preferred Stock for an aggregate purchase
price of $65 million.
On December 10, 1998, the Company filed a Current Report on Form 8-K
to indicate that PricewaterhouseCoopers, LLP, the Company's independent
accountants, had revised its earlier report on the Company's 1997 Financial
Statements to alleviate uncertainties noted in such report as to whether
the Company may be able to continue as a going concern through 1999.
As of the date of the filing of this Annual Report on Form 10-K, no proxy
materials have been furnished to security holders. Copies of all proxy materials
will be furnished to the Securities and Exchange Commission in compliance with
its rules.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 31st day of
March, 1999.
CD RADIO INC.
By: /S/ JOHN T. MCCLAIN
...................................
JOHN T. MCCLAIN
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
/s/ DAVID MARGOLESE Chairman of the Board and Chief Executive March 31, 1999
......................................... Officer (Principal Executive Officer)
(DAVID MARGOLESE)
/s/ ANDREW J. GREENEBAUM Executive Vice President and Chief Financial March 31, 1999
......................................... Officer (Principal Financial Officer)
(ANDREW J. GREENEBAUM)
/s/ JOHN T. MCCLAIN Vice President and Controller (Principal March 31, 1999
......................................... Accounting Officer)
(JOHN T. MCCLAIN)
/s/ ROBERT D. BRISKMAN Director and Executive Vice President, March 31, 1999
......................................... Engineering and Operations
(ROBERT D. BRISKMAN)
/s/ LAWRENCE F. GILBERTI Director March 31, 1999
.........................................
(LAWRENCE F. GILBERTI)
/s/ JOSEPH V. VITTORIA Director March 31, 1999
.........................................
(JOSEPH V. VITTORIA)
/s/ RALPH W. WHITWORTH Director March 31, 1999
.........................................
(RALPH W. WHITWORTH)
40
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants........................................................................... F-2
Consolidated Statements of Operations for each of the three years in the period ended December 31, 1998, and
for the period May 17, 1990 (date of inception) to December 31, 1998...................................... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998................................................ F-4
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31,
1998 and for the period May 17, 1990 (date of inception) to December 31, 1998............................. F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998 and
for the period May 17, 1990 (date of inception) to December 31, 1998...................................... F-8
Notes to Consolidated Financial Statements.................................................................. F-9
Valuation and Qualifying Accounts........................................................................... S-1
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
CD RADIO INC.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of CD
Radio Inc. and subsidiary (a Development Stage Enterprise) (collectively, the
'Company') at December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, and for the period May 17, 1990 (the date of inception) to December 31,
1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is expected to incur significant operating
losses before it commences operations and is obligated to make substantial
capital expenditures through December 31, 1999 for which it currently does not
have the financial resources. This raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to this matter are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 5, 1999
F-2
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE FOR
THE PERIOD
MAY 17, 1990
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
------------------------------------------- TO DECEMBER 31,
1996 1997 1998 1998
----------- ------------ ------------ -------------------
Revenue....................................... $ -- $ -- $ -- $ --
Operating expenses:
Legal, consulting and regulatory fees.... (1,582,000) (3,236,000) (4,064,000) (14,549,000)
Other general and administrative......... (1,231,000) (3,572,000) (9,311,000) (20,416,000)
Research and development................. (117,000) (57,000) (22,000) (1,995,000)
Special charges.......................... -- -- (25,682,000) (27,682,000)
----------- ------------ ------------ -------------------
Total operating expenses............ (2,930,000) (6,865,000) (39,079,000) (64,642,000)
----------- ------------ ------------ -------------------
Other income (expense):
Interest and investment income........... 112,000 4,074,000 7,250,000 11,652,000
Interest expense, net.................... (13,000) (1,946,000) (14,272,000) (16,384,000)
----------- ------------ ------------ -------------------
99,000 2,128,000 (7,022,000) (4,732,000)
----------- ------------ ------------ -------------------
Income (loss) before income taxes............. (2,831,000) (4,737,000) (46,101,000) (69,374,000)
Income taxes:
Federal.................................. -- -- (1,982,000) (1,982,000)
State.................................... -- -- (313,000) (313,000)
----------- ------------ ------------ -------------------
Net loss...................................... (2,831,000) (4,737,000) (48,396,000) (71,669,000)
----------- ------------ ------------ -------------------
Preferred stock dividend...................... -- (2,338,000) (19,380,000) (21,718,000)
Preferred stock deemed dividend............... -- (51,975,000) (11,676,000) (63,651,000)
Accretion of dividends in connection with the
issuance of warrants on preferred stock..... -- -- (6,501,000) (6,501,000)
----------- ------------ ------------ -------------------
Net loss applicable to common stockholders.... $(2,831,000) $(59,050,000) $(85,953,000) $(163,539,000)
----------- ------------ ------------ -------------------
----------- ------------ ------------ -------------------
Net loss per share applicable to common
stockholders (basic and diluted)............ $(0.29) $(5.08) $(4.79)
Weighted average common shares outstanding
(basic and diluted)......................... 9,642,000 11,626,000 17,932,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1997 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 900,000 $204,753,000
Marketable securities, at market.................................................. 169,482,000 60,870,000
Prepaid expense and other......................................................... 928,000 166,000
------------ ------------
Total current assets.......................................................... 171,310,000 265,789,000
------------ ------------
Property and equipment, at cost:
Satellite construction in process................................................. 49,400,000 188,849,000
Launch construction in process.................................................... 10,885,000 87,492,000
Terrestrial repeater network in process........................................... -- 1,990,000
Broadcast studio in process....................................................... -- 5,168,000
Technical equipment and other..................................................... 389,000 156,000
------------ ------------
60,674,000 283,655,000
Less accumulated depreciation......................................................... (243,000) (21,000)
------------ ------------
60,431,000 283,634,000
Other assets:
FCC license....................................................................... 83,346,000 83,368,000
Debt issue cost, net.............................................................. 8,617,000 9,313,000
Deposits and other................................................................ 104,000 1,776,000
------------ ------------
Total other assets............................................................ 92,067,000 94,457,000
------------ ------------
Total assets.................................................................. $323,808,000 $643,880,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................................. $ 416,000 $ 5,481,000
Satellite construction payable.................................................... -- 8,479,000
Short-term notes payable.......................................................... -- 70,863,000
------------ ------------
Total current liabilities..................................................... 416,000 84,823,000
Long-term notes payable and accrued interest.......................................... 131,387,000 153,033,000
Deferred satellite payments and accrued interest...................................... -- 31,324,000
Deferred income taxes................................................................. -- 2,237,000
------------ ------------
Total liabilities............................................................. 131,803,000 271,417,000
------------ ------------
Commitments and contingencies
10 1/2% Series C Convertible Preferred Stock, no par value: 2,025,000 shares
authorized, 1,846,799 and 1,467,416 shares issued and outstanding at December 31,
1997 and 1998, respectively (liquidation preferences of $184,679,900 and
$146,741,600), at net carrying value including accrued dividends.................... 176,025,000 156,755,000
9.2% Series A Junior Cumulative Convertible Preferred Stock, $.001 par value:
4,300,000 shares authorized, 1,350,000 shares issued and outstanding at December 31,
1998 (liquidation preference of $135,000,000), at net carrying value including
accrued dividends................................................................... -- 137,755,000
9.2% Series B Junior Cumulative Convertible Preferred Stock, $.001 par value:
2,100,000 shares authorized, no shares issued or outstanding........................ -- --
Stockholders' equity:
Preferred stock, $.001 par value; 50,000,000 shares authorized 8,000,000 shares
designated as 5% Delayed Convertible Preferred Stock; none issued or
outstanding...................................................................... -- --
Common stock, $.001 par value; 200,000,000 shares authorized, and 16,048,691 and
23,208,949 shares issued and outstanding at December 31, 1997 and 1998,
respectively..................................................................... 16,000 23,000
Additional paid-in capital........................................................ 39,237,000 149,599,000
Deficit accumulated during the development stage.................................. (23,273,000) (71,669,000)
------------ ------------
Total stockholders' equity.................................................... 15,980,000 77,953,000
------------ ------------
Total liabilities and stockholders' equity.................................... $323,808,000 $643,880,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
-------------------------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- --------- ---------- -----------
Initial sale of no par value
common stock, $5.00 per
share, May 17, 1990.......... 11,080 $ 55,000 -- $ -- -- $ --
Initial issuance of common
stock in satisfaction of
amount due to related party,
$5.00 per share.............. 28,920 145,000 -- -- -- --
Conversion of no par value
common stock to Class A and
Class B no par value common
stock........................ (40,000) (200,000) 2,000,000 169,000 360,000 31,000
Sale of Class B common stock,
$0.4165 per share............ -- -- -- -- 442,000 184,000
Issuance of Class B common
stock in satisfaction of
amount due to related party,
$0.4165 per share............ -- -- -- -- 24,000 10,000
Net loss...................... -- -- -- -- -- --
--------- --------- --------- ------- --------- ---------
Balance, December 31, 1990.... -- -- 2,000,000 169,000 826,000 225,000
Sale of Class B common stock,
$0.50 per share.............. -- -- -- -- 610,000 305,000
Issuance of Class B common
stock in satisfaction of
amount due to related party,
$0.50 per share.............. -- -- -- -- 300,000 150,000
Net loss...................... -- -- -- -- -- --
--------- --------- --------- ------- --------- ---------
Balance, December 31, 1991.... -- -- 2,000,000 169,000 1,736,000 680,000
Sale of Class B common stock,
$0.50 per share.............. -- -- -- -- 200,000 100,000
Issuance of Class B common
stock in satisfaction of
amount due to related party,
$0.50 per share.............. -- -- -- -- 209,580 105,000
Conversion of note payable to
related party to Class B
common stock, $0.4165........ -- -- -- -- 303,440 126,000
Conversion of Class A and
Class B common stock to no
par value common stock....... 4,449,020 1,180,000 (2,000,000) (169,000) (2,449,020) (1,011,000)
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........... -- (3,174,000) -- -- -- --
Sale of $.001 par value common
stock, $5.00 per share....... 315,000 -- -- -- -- --
Net loss...................... -- -- -- -- -- --
--------- --------- --------- ------- --------- ---------
Balance, December 31, 1992.... 6,364,020 6,000 -- -- -- --
Sale of $.001 par value common
stock, $5.00 per share, net
of commissions............... 1,029,000 1,000 -- -- -- --
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 -- -- -- -- --
Common stock issued in
satisfaction of commissions
payable, $5.00 per share..... 4,000 -- -- -- -- --
Net loss...................... -- -- -- -- -- --
--------- --------- --------- ------- --------- ---------
Balance, December 31, 1993.... 7,457,020 7,000 -- -- -- --
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
ADDITIONAL DURING THE ON STOCK
PAID-IN DEVELOPMENT OPTIONS
CAPITAL STAGE GRANTED TOTAL
----------- ----------- ------------ -----------
Initial sale of no par value
common stock, $5.00 per
share, May 17, 1990.......... $ -- $ -- $ -- $ 55,000
Initial issuance of common
stock in satisfaction of
amount due to related party,
$5.00 per share.............. -- -- -- 145,000
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............ -- -- -- 184,000
Issuance of Class B common
stock in satisfaction of
amount due to related party,
$0.4165 per share............ -- -- -- 10,000
Net loss...................... -- (839,000) -- (839,000)
---------- --------- -------- ---------
Balance, December 31, 1990.... -- (839,000) -- (445,000)
Sale of Class B common stock,
$0.50 per share.............. -- -- -- 305,000
Issuance of Class B common
stock in satisfaction of
amount due to related party,
$0.50 per share.............. -- -- -- 150,000
Net loss...................... -- (575,000) -- (575,000)
---------- --------- -------- ---------
Balance, December 31, 1991.... -- (1,414,000) -- (565,000)
Sale of Class B common stock,
$0.50 per share.............. -- -- -- 100,000
Issuance of Class B common
stock in satisfaction of
amount due to related party,
$0.50 per share.............. -- -- -- 105,000
Conversion of note payable to
related party to Class B
common stock, $0.4165........ -- -- -- 126,000
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........... 3,174,000 -- -- --
Sale of $.001 par value common
stock, $5.00 per share....... 1,575,000 -- -- 1,575,000
Net loss...................... -- (1,551,000 ) -- (1,551,000)
---------- --------- -------- ---------
Balance, December 31, 1992.... 4,749,000 (2,965,000 ) -- 1,790,000
Sale of $.001 par value common
stock, $5.00 per share, net
of commissions............... 4,882,000 -- -- 4,883,000
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........................ 300,000 -- -- 300,000
Common stock issued in
satisfaction of commissions
payable, $5.00 per share..... 20,000 -- -- 20,000
Net loss...................... -- (6,568,000) -- (6,568,000)
---------- --------- -------- ---------
Balance, December 31, 1993.... 10,031,000 (9,533,000) -- 505,000
(continued)
The accompanying notes are on integral part of these consolidated statements.
F-5
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
COMMON STOCK
---------------------------------------------------------------
CLASS CLASS
CLASS A A CLASS B B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ------- ------ ------- ------
Sale of $.001 par value common stock, $5.00 per share,
net of commissions................................... 250,000 -- -- -- -- --
Initial public offering of Units, consisting of two
shares of $.001 par value common stock and one
warrant, $10.00 per Unit, net of expenses............ 1,491,940 2,000 -- -- -- --
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 9,000 -- -- -- --
Common stock issued for services rendered, between
$3.028 and $3.916 per share.......................... 107,000 -- -- -- -- --
Amortization of deferred compensation................. -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- --
---------- ------ --- --- --- ---
Balance, December 31, 1995............................ 9,305,960 9,000 -- -- -- --
Exercise of stock warrants at $6.00 per share......... 791,931 1,000 -- -- -- --
Exercise of stock options by Company officers, between
$1.00 and $5.00 per share............................ 135,000 -- -- -- -- --
Common stock issued for services rendered, between
$5.76 and $12.26 per share........................... 67,500 -- -- -- -- --
Common stock options granted for services rendered, to
purchase 60,000 shares at $4.50 per share............ -- -- -- -- -- --
Amortization of deferred compensation................. -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- --
---------- ------ --- --- --- ---
Balance, December 31, 1996............................ 10,300,391 10,000 -- -- -- --
Exercise of stock options between $1.00 and $2.00 per
share................................................ 43,000 -- -- -- -- --
Value of beneficial conversion feature on 5% Preferred
Stock................................................
Accretion of deemed dividend.......................... -- -- -- -- -- --
Sale of $.001 par value common stock, $13.12, net of
expenses............................................. 1,905,488 2,000 -- -- -- --
Exchange of 5% Preferred Stock into 10 1/2% Preferred
Stock................................................ -- -- -- -- -- --
Conversion of 5% Preferred Stock into $.001 par value
common stock......................................... 749,812 1,000 -- -- -- --
Public offering of $.001 par value common stock at
$18.00 per share, net of expenses.................... 3,050,000 3,000 -- -- -- --
Dividends on preferred stock.......................... -- -- -- -- -- --
Issuance of fully vested in the money stock options... -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- --
---------- ------ --- --- --- ---
Balance, December 31, 1997............................ 16,048,691 $16,000 -- $-- -- $--
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
ADDITIONAL DURING THE ON STOCK
PAID-IN DEVELOPMENT OPTIONS
CAPITAL STAGE GRANTED TOTAL
----------- ------------ ------------ ------------
Sale of $.001 par value common stock, $5.00 per share,
net of commissions................................... 1,159,000 -- -- 1,159,000
Initial public offering of Units, consisting of two
shares of $.001 par value common stock and one
warrant, $10.00 per Unit, net of expenses............ 4,834,000 -- -- 4,836,000
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........................................ 113,000 -- -- 113,000
Amortization of deferred compensation................. -- -- 883,000 883,000
Net loss.............................................. -- (4,065,000) -- (4,065,000)
----------- ------------ ---------- ----------
Balance, December 31, 1994............................ 17,660,000 (13,598,000) (640,000) 3,431,000
Common stock issued for services rendered, between
$3.028 and $3.916 per share.......................... 347,000 -- -- 347,000
Amortization of deferred compensation................. -- -- 320,000 320,000
Net loss.............................................. -- (2,107,000) -- (2,107,000)
----------- ------------ ---------- ----------
Balance, December 31, 1995............................ 18,007,000 (15,705,000) (320,000) 1,991,000
Exercise of stock warrants at $6.00 per share......... 4,588,000 -- -- 4,589,000
Exercise of stock options by Company officers, between
$1.00 and $5.00 per share............................ 155,000 -- -- 155,000
Common stock issued for services rendered, between
$5.76 and $12.26 per share........................... 554,000 -- -- 554,000
Common stock options granted for services rendered, to
purchase 60,000 shares at $4.50 per share............ 120,000 -- -- 120,000
Amortization of deferred compensation................. -- -- 320,000 320,000
Net loss.............................................. -- (2,831,000) -- (2,831,000)
----------- ------------ ---------- ----------
Balance, December 31, 1996............................ 23,424,000 (18,536,000) -- 4,898,000
Exercise of stock options between $1.00 and $2.00 per
share................................................ 56,000 -- -- 56,000
Value of beneficial conversion feature on 5% Preferred
Stock................................................ 51,975,000 -- -- 51,975,000
Accretion of deemed dividend.......................... (51,975,000) -- -- (51,975,000)
Sale of $.001 par value common stock, $13.12, net of
expenses............................................. 24,393,000 -- -- 24,395,000
Exchange of 5% Preferred Stock into 10 1/2% Preferred
Stock................................................ (63,450,000) -- -- (63,450,000)
Conversion of 5% Preferred Stock into $.001 par value
common stock......................................... 10,280,000 -- -- 10,281,000
Public offering of $.001 par value common stock at
$18.00 per share, net of expenses.................... 46,424,000 -- -- 46,427,000
Dividends on preferred stock.......................... (2,338,000) -- -- (2,338,000)
Issuance of fully vested in the money stock options... 448,000 -- -- 448,000
Net loss.............................................. -- (4,737,000) -- (4,737,000)
----------- ------------ ---------- ----------
Balance, December 31, 1997............................ $39,237,000 $(23,273,000) $ -- $ 15,980,000
(continued)
The accompanying notes are on integral part of these consolidated statements.
F-6
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
COMMON STOCK
---------------------------------------------------------------
CLASS CLASS
CLASS A A CLASS B B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ------- ------ ------- ------
Sale of $.001 par value common stock, $20.00, net of
expenses............................................. 5,000,000 5,000 -- -- -- --
Exercise of stock options between $2.00 and $4.50 per
share................................................ 44,850 -- -- -- -- --
Conversion of 10 1/2% Preferred Stock into $.001 par
value common stock................................... 2,107,666 2,000 -- -- -- --
Issuance of $.001 par value common stock in connection
with employee benefit plan........................... 7,742 -- -- -- -- --
Compensation expense in connection with quick vesting
of stock options..................................... -- -- -- -- -- --
Value of beneficial conversion feature on Series A
Junior Preferred Stock............................... -- -- -- -- -- --
Value of option on Series B Junior Preferred Stock.... -- -- -- -- -- --
Accretion of deemed dividend.......................... -- -- -- -- -- --
Dividends on preferred stock.......................... -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- --
---------- ------- -- --- -- ---
Balance, December 31, 1998............................ 23,208,949 $23,000 -- $-- -- $--
---------- ------- -- --- -- ---
---------- ------- -- --- -- ---
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
ADDITIONAL DURING THE ON STOCK
PAID-IN DEVELOPMENT OPTIONS
CAPITAL STAGE GRANTED TOTAL
------------ ------------ ------------ ------------
Sale of $.001 par value common stock, $20.00, net of
expenses............................................. 97,995,000 -- -- 98,000,000
Exercise of stock options between $2.00 and $4.50 per
share................................................ 140,000 -- -- 140,000
Conversion of 10 1/2% Preferred Stock into $.001 par
value common stock................................... 37,654,000 -- -- 37,656,000
Issuance of $.001 par value common stock in connection
with employee benefit plan........................... 214,000 -- -- 214,000
Compensation expense in connection with quick vesting
of stock options..................................... 950,000 -- -- 950,000
Value of beneficial conversion feature on Series A
Junior Preferred Stock............................... 10,884,000 -- -- 10,884,000
Value of option on Series B Junior Preferred Stock.... (6,600,000) -- -- (6,600,000)
Accretion of deemed dividend.......................... (11,495,000) -- -- (11,495,000)
Dividends on preferred stock.......................... (19,380,000) -- -- (19,380,000)
Net loss.............................................. -- (48,396,000) -- (48,396,000)
------------ ------------ ------- ------------
Balance, December 31, 1998............................ $149,599,000 $(71,669,000) $ -- $ 77,953,000
------------ ------------ ------- ------------
------------ ------------ ------- ------------
The accompanying notes are on integral part of these consolidated statements.
F-7
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FOR THE
PERIOD MAY 17, 1990
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
--------------------------------------------- TO DECEMBER 31,
1996 1997 1998 1998
----------- ------------- ------------- --------------------
Cash flows from development stage activities:
Net loss................................. $(2,831,000) $ (4,737,000) $ (48,396,000) $ (71,669,000)
Adjustments to reconcile net loss to net
cash provided by (used in) development
stage activities:
Depreciation expense................. 53,000 30,000 49,000 303,000
Amortization of debt issue costs..... -- 73,000 1,354,000 1,427,000
Unrealized (gain) loss on marketable
securities......................... -- (624,000) 391,000 (233,000)
(Gain) loss on disposal of assets.... -- -- 105,000 105,000
Special charges...................... -- -- 23,557,000 25,557,000
Accretion of note payable charged as
interest expense................... -- 1,868,000 25,998,000 27,866,000
Sales (purchases) of marketable
securities, net.................... -- (168,858,000) 108,221,000 (60,637,000)
Compensation expense in connection
with issuance of stock options..... 440,000 448,000 -- 2,284,000
Common stock issued for services
rendered........................... 554,000 -- 150,000 1,052,000
Increase (decrease) in cash and cash
equivalents resulting from changes in
assets and liabilities:
Prepaid expense and other............ (1,000) (919,000) 762,000 (166,000)
Due to related party................. -- -- -- 351,000
Deposits and other assets............ -- -- (3,722,000) (4,026,000)
Accounts payable and accrued
expenses........................... 85,000 270,000 5,080,000 5,556,000
Accrued interest and other
liabilities........................ (20,000) (21,000) (18,000) (4,000)
Deferred taxes....................... -- -- 2,237,000 2,237,000
----------- ------------- ------------- --------------------
Net cash provided by (used in)
development stage activities... (1,720,000) (172,470,000) 115,768,000 (69,997,000)
----------- ------------- ------------- --------------------
Cash flows from investing activities:
Purchase of FCC license.................. -- (83,346,000) (22,000) (83,368,000)
Payments for satellite construction...... -- (49,300,000) (99,646,000) (148,946,000)
Payments for launch services............. -- (6,292,000) (103,563,000) (109,855,000)
Capital expenditures..................... -- (7,000) (7,301,000) (7,700,000)
Acquisition of Sky-Highway Radio Corp.... -- -- -- (2,000,000)
----------- ------------- ------------- --------------------
Net cash used in investing
activities..................... -- (138,945,000) (210,532,000) (351,869,000)
----------- ------------- ------------- --------------------
Cash flows from financing activities:
Proceeds from issuance of notes
payable................................ -- -- 70,863,000 70,863,000
Proceeds from issuance of common stock,
net.................................... -- 70,822,000 98,064,000 183,443,000
Proceeds from issuance of preferred
stock, net............................. -- 120,518,000 129,550,000 250,068,000
Proceeds from exercise of stock options
and warrants........................... 4,744,000 56,000 140,000 4,940,000
Proceeds from issuance of promissory note
and Units.............................. -- 116,335,000 -- 116,535,000
Proceeds from issuance of promissory
notes to related parties............... -- -- -- 2,965,000
Repayment of promissory notes............ (240,000) -- -- (2,635,000)
Loan from officer........................ -- -- -- 440,000
----------- ------------- ------------- --------------------
Net cash provided by financing
activities..................... 4,504,000 307,731,000 298,617,000 626,619,000
----------- ------------- ------------- --------------------
Net increase (decrease) in cash and cash
equivalents................................ 2,784,000 (3,684,000) 203,853,000 204,753,000
Cash and cash equivalents at the beginning of
period..................................... 1,800,000 4,584,000 900,000 --
----------- ------------- ------------- --------------------
Cash and cash equivalents at the end of
period..................................... $ 4,584,000 $ 900,000 $ 204,753,000 $ 204,753,000
----------- ------------- ------------- --------------------
----------- ------------- ------------- --------------------
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest............................... $ 43,000 $ -- $ 2,383,000 $ 2,466,000
Cash paid during the period for taxes.... $ -- $ -- $ 58,000 $ 58,000
Supplemental disclosure of non-cash investing
and financing activities:
Deferred satellite payments, including
accrued interest....................... $ -- $ -- $ 31,324,000 $ 31,324,000
Common stock issued in satisfaction of
notes payable
and amounts due to related parties,
including
accrued interest....................... $ -- $ -- $ -- $ 1,407,000
Exchange of 5% Preferred Stock for
10 1/2% Series C Preferred Stock....... $ -- $ 173,687,000 $ -- $ 173,687,000
Exchange of 10 1/2% Series C Preferred
Stock for common stock................. $ -- $ -- $ 37,656,000 $ 37,656,000
Accrual of dividends on preferred
stock.................................. $ -- $ 2,338,000 $ 19,380,000 $ 21,718,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
CD Radio Inc. (the 'Company'), a Delaware corporation, is a pioneer in the
development of a service for broadcasting digital quality music programming via
satellites to subscribers' vehicles ('satellite radio'). The Company intends to
focus exclusively on providing a consumer service, and anticipates that the
equipment required to receive its broadcasting will be manufactured by consumer
electronics manufacturers. In April 1997, the Company was the winning bidder in
an FCC auction for one of two national satellite broadcast licenses with a
winning bid of $83.3 million. The Company paid the bid amount during 1997 and
was awarded an FCC license on October 10, 1997.
2. ACCOUNTING POLICIES
Basis of presentation: The consolidated financial statements include the
accounts of CD Radio Inc. and its wholly owned subsidiary. Intercompany
transactions are eliminated in consolidation. The Company's principal activities
to date have included technology development, obtaining regulatory approval for
the CD Radio service, commencement of construction of three satellites,
acquisition of content for its programming, strategic planning, market research,
recruitment of its senior management team and securing financing for working
capital and capital expenditures. Accordingly, the Company's financial
statements are presented as those of a development stage enterprise, as
prescribed by Statement of Financial Accounting Standards ('SFAS') No. 7,
'Accounting and Reporting by Development Stage Enterprises.'
The Company's financial statements for the year ended December 31, 1998
have been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. The Company expects to incur additional substantial expenditures to
complete the construction of its satellite system, to plan and implement its
service and to sustain its operations until it generates positive cash flow from
operations. The Company's working capital at December 31, 1998 will not be
sufficient to meet these objectives as presently structured. Management
recognizes that it must generate additional resources or consider modifications
to its programs to enable it to continue operations with its available
resources. Management's plans to raise additional financing include the sale of
debt or equity securities or a combination thereof. Management expects to
complete the sale of such securities, however, no assurance can be given that
such financings will be completed on terms acceptable to the Company. If the
Company is unable to obtain additional financing, management will be required to
sharply curtail its satellite program and to curtail its operations. The
financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Risks and uncertainties: As a development stage enterprise, the Company has
a limited operating history and its prospects are subject to the risks, expenses
and uncertainties frequently encountered by companies in new and rapidly
evolving markets for satellite products and services. These risks include the
failure of the Company to have: (1) a successful and timely construction and
deployment of its satellite system; (2) the development and manufacture by one
or more consumer electronics manufacturers of devices capable of receiving CD
Radio broadcasts and antennas; and (3) the successful marketing and consumer
acceptance of the Company's service, as well as other risks and uncertainties.
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. Actual amounts could differ
from these estimates.
F-9
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash equivalents: The Company considers all highly liquid investments
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
obligations of agencies of the U.S. government and in commercial paper issued by
major U.S. corporations with high credit ratings. The Company has not
experienced any losses on its investments.
Property and equipment: All costs incurred related to activities necessary
to prepare the CD Radio satellite system for use are capitalized, including
interest on funds borrowed to finance construction. To date, such costs consist
of satellite construction in process, launch construction in process, broadcast
studio construction in process, terrestrial repeater network in process,
capitalized interest (totaling $16.2 million at December 31, 1998) and the cost
to acquire the FCC license at auction. Charges to operations for depreciation
and amortization of these items will begin upon commencement of commercial
broadcasting, which is projected to be in 2000. The Company anticipates that it
will depreciate satellite and launch costs over a period not to exceed 15 years
and amortize the FCC license costs over 40 years. Depreciation of technical and
other equipment, primarily satellite communications equipment, is computed on
the straight-line method based on estimated useful lives ranging from 4 to 10
years.
Long-lived assets: The Company evaluates the recoverability of long-lived
assets, utilizing qualitative and quantitative factors. At such time as an
impairment in value is identified, the impairment, will be quantatively measured
in accordance with SFAS No. 121, 'Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of,' and charged to operations.
No such impairment losses have been recognized to date.
Fair value information: The carrying amount of current assets and current
liabilities approximates fair value because of the short maturity of these
investments. The fair value of fixed-rate long-term debt and redeemable
preferred stock is estimated using quoted market prices where applicable or by
discounting remaining cash flows at the current market rate.
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.
Redeemable convertible preferred stock: The Company records redeemable
convertible preferred stock on the date of issuance by allocating a portion of
the proceeds that represents a beneficial conversion feature to additional
paid-in capital. The beneficial conversion feature (discount) is amortized using
the effective interest method and is recognized as a deemed dividend over the
shortest period of conversion. The carrying value of the stock accretes to its
liquidation value over the mandatory redemption period. The periodic accretion
increases the net loss applicable to common stockholders.
Net loss per share: Effective December 31, 1997, the Company adopted SFAS
No. 128, 'Earnings Per Share,' which requires the presentation of basic earnings
(loss) per share and diluted earnings per share. Basic earnings (loss) per share
is based on the weighted average number of outstanding shares of common stock.
Diluted earnings per share adjusts the weighted average for the potential
dilution that could occur if stock options, warrants or other convertible
securities were exercised or converted into common stock. Diluted earnings
(loss) per share is the same as basic earnings per share because the effects of
such items were anti-dilutive. Earnings (loss) per share for all periods
presented conform to SFAS No. 128.
F-10
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of net loss per common share before
preferred stock dividend requirements to net loss per share applicable to common
stockholders:
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1997 1998
------ ------ ------
Per common shares (basic and diluted):
Net loss................................................................. $(0.29) $(0.41) $(2.70)
Preferred stock dividend requirements.................................... -- (4.67) (1.73)
Accretion of dividends in connection with the issuance of warrants on
preferred stock........................................................ -- -- (0.36)
------ ------ ------
Net loss applicable to common stockholders............................... $(0.29) $(5.08) $(4.79)
------ ------ ------
------ ------ ------
Comprehensive income: In 1997, the Financial Accounting Standards Board
('the FASB') issued SFAS No. 130, 'Reporting Comprehensive Income.' SFAS No. 130
requires additional reporting with respect to certain changes in assets and
liabilities that previously were included in stockholders' equity. Presently,
the Company has no comprehensive income items to report.
Recent accounting pronouncements: The FASB has issued SFAS No. 131,
'Disclosures about Segments of an Enterprise and Related Information,' which
requires financial and descriptive information with respect to operating
segments of an entity based on the way management disaggregates the entity for
internal operating decisions. There is no impact to the Company's 1998 financial
statements from the adoption of this standard.
Reclassifications: Certain amounts in the prior year's financial statements
have been reclassified to conform to the current presentation.
3. MARKETABLE SECURITIES
Marketable securities consist of fixed income securities and are stated at
market value. Marketable securities are defined as trading securities under the
provision of SFAS No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities' and unrealized holding gains and losses are reflected in
earnings. Unrealized holding gains were $624,000 and $232,000 at December 31,
1997 and 1998, respectively.
4. NOTES PAYABLE
SHORT-TERM
The Company has entered into a credit agreement with Bank of America
('BofA') and a group of financial institutions (together with BofA, the
'Lenders') pursuant to which the Lenders provide the Company a term loan
facility in an aggregate principal amount of up to $115 million. The proceeds of
the facility are being used to fund progress payments for the purchase of launch
services and to pay interest, fees and other related expenses. The contract
under which the launch vehicles are being constructed has been pledged to the
Lenders as collateral. The terms of the credit agreement require the Company to
maintain minimum levels of consolidated net worth and place limitations on asset
disposals. The amounts advanced under the credit agreement are due on September
30, 1999 and bear interest at a variable rate selected by the Company. The
weighted average borrowing rate for 1998 was 9%. Loral Space & Communications
Ltd. ('Loral Space') has guaranteed the amounts outstanding under the credit
agreement.
LONG-TERM
In November 1997, the Company received net proceeds of $116 million from
the issuance of 12,910 units consisting of $20,000 principal amount at maturity
of 15% Senior Secured Discount Notes due
F-11
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2007 (the 'Notes') and a warrant to purchase an additional $3,000 principal
amount at maturity of Notes for no additional consideration. All of the warrants
were exercised in 1997. The aggregate maturity value of the Notes, including
Notes issued upon the exercise of the warrants, is $297 million. The Notes
mature on December 1, 2007 and the first cash interest payment is deferred until
June 2003. Cash interest of $22.3 million will be due on each June 1 and
December 1 of the remaining years of the Notes. The Indenture under which the
Notes were issued contains various restrictive covenants, including a limitation
on the amount of additional indebtedness that may be incurred by the Company. As
of December 31, 1997 and 1998, the Company had accrued interest relating to the
Notes of $1,869,000 and $27,867,000, respectively. At December 31, 1998, the
Notes had a fair value of $157 million. The Notes are redeemable, at the option
of the Company, in whole or in part, at any time on or after December 1, 2002,
at specified redemption prices plus accrued interest, if any, to the date of
redemption. The Notes are senior obligations of the Company and are secured by a
lien on all of the issued and outstanding common stock of Satellite CD Radio,
Inc. ('SCDR'). SCDR conducts no business activities and its only asset is the
FCC license.
The Company incurred $8.7 million of costs in connection with the issuance
of the Notes. Debt issuance costs have been deferred and are amortized over the
10 year life of the Notes. Accumulated amortization of debt issuance costs was
$73,000 and $952,000 at December 31, 1997 and 1998, respectively.
5. DEFERRED SATELLITE PAYMENTS
Under an amended and restated contract (the 'Loral Satellite Contract')
with Space Systems/Loral, Inc. ('SS/L'), SS/L has agreed to defer certain
amounts due under the Loral Satellite Contract. The amounts deferred, which
approximate fair value, bear interest at 10% per year and are due in quarterly
installments beginning in June 2002. The Company has the right to prepay any
deferred payments together with accrued interest, without penalty.
6. CAPITAL STOCK
COMMON STOCK, PAR VALUE $.001 PER SHARE
On September 29, 1994, the Company completed its initial public offering by
issuing 1,491,940 shares of Common Stock for net proceeds of $4.8 million. On
August 5, 1997, the Company sold 1.9 million shares of Common Stock to Loral
Space for net proceeds of approximately $24.4 million. In November 1997, the
Company issued 2.8 million shares of Common Stock for net proceeds of $42.2
million in a public offering. In December 1997, the Company issued an additional
250,000 shares, in connection with the partial exercise of an option granted to
the underwriters of the public offering solely to cover overallotments, for net
proceeds of $4.2 million. In November 1998, the Company issued 5 million shares
of Common Stock to Prime 66 Partners, L.P. for net proceeds of $98 million.
In 1995, the Company adopted the 1995 Stock Compensation Plan from which up
to 175,000 shares of Common Stock could be issued in lieu of cash compensation
to employees and or consultants. During 1995 and 1996, respectively, 107,000 and
67,500 shares of the Company's Common Stock were issued pursuant to this Plan.
As of December 31, 1998, 33.4 million shares of Common Stock were reserved
in connection with convertible preferred stock, warrants and incentive stock
plans.
PREFERRED STOCK
In April 1997, the Company completed a private placement of its 5% Delayed
Convertible Preferred Stock (the '5% Preferred Stock'). The Company sold a total
of 5.4 million shares of the 5%
F-12
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock for an aggregate sales price of $135 million. The 5% Preferred
Stock was immediately convertible at a discount to the fair market value of
Common Stock and accordingly, the Company recorded approximately $52 million as
a deemed dividend in determining net loss attributable to common stockholders.
In November 1997, the Company exchanged 1,846,799 shares of 10 1/2% Series
C Convertible Preferred Stock (the '10 1/2% Preferred Stock') for all
outstanding shares of its 5% Preferred Stock. Each share of 10 1/2% Preferred
Stock is convertible into a number of shares of Common Stock calculated by
dividing the $100 per share liquidation preference (the 'Liquidation
Preference') by a conversion price of $18.00. This conversion price is subject
to adjustment for certain corporate events. Any stockholder who converts the
10 1/2% Preferred Stock into Common Stock prior to November 15, 2002 will
forfeit the right to any accrued and unpaid dividends. Dividends on the 10 1/2%
Preferred Stock are cumulative from the date of issuance and payable, if
declared by the Board of Directors, on a quarterly basis commencing on November
15, 2002. Dividends may be paid with cash or Common Stock at the option of the
Company. Commencing November 15, 1999, the Company may redeem the 10 1/2%
Preferred Stock at the Liquidation Preference plus any accrued and unpaid
dividends, provided the price of the Company's Common Stock is at least $31.50
per share during a specified period. After November 15, 2002, the Company's
right to redeem the 10 1/2% Preferred Stock is not restricted by the market
price of its Common Stock. The Company is required to redeem all outstanding
shares of 10 1/2% Preferred Stock on November 15, 2012 at a price equal to the
Liquidation Preference plus any accrued and unpaid dividends. As of December 31,
1997 and 1998, the Company accrued dividends payable relating to the 10 1/2%
Preferred Stock totaling $2,338,000 and $18,179,000, respectively. At December
31, 1998, the 10 1/2% Preferred Stock had a fair value of $279 million.
On December 23, 1998, the Company and Apollo Investment Fund IV, L.P., a
Delaware limited partnership ('AIF IV'), and Apollo Overseas Partners IV, L.P.,
a Cayman Islands limited partnership ('AOP IV' and, together with AIF IV, the
'Apollo Investors') completed a transaction pursuant to which the Company sold
to the Apollo Investors 1,350,000 shares of its 9.2% Series A Junior Cumulative
Convertible Preferred Stock, par value $.001 per share (the 'Series A Preferred
Stock'), for an aggregate purchase price of $135 million. Each share of Series A
Preferred Stock is convertible into a number of shares of Common Stock
calculated by dividing the $100 per share liquidation preference (the 'Series A
Liquidation Preference') by a conversion price of $30. This conversion price is
subject to adjustment for certain corporate events. Dividends on the Series A
Preferred Stock are payable annually commencing on November 15, 1999 and may be
paid with cash or additional shares of Series A Preferred Stock, at the option
of the Company. From and after November 15, 2001 and prior to November 15, 2003,
the Company may redeem the Series A Preferred Stock at the Series A Liquidation
Preference, plus any unpaid dividends, provided the price of the Common Stock is
at least $60 per share during a specified period. From and after November 15,
2003, the Company's right to redeem the Series A Preferred Stock is not
restricted by the market price of its Common Stock. The Company is required to
redeem all outstanding shares of the Series A Preferred Stock at a price equal
to the Series A Liquidation Preference plus any unpaid dividends on November 15,
2011. On the date of issuance, the Series A Preferred Stock was immediately
convertible at a discount to the then fair market value of the Common Stock and,
accordingly, the Company recorded approximately $11 million as a deemed dividend
in net loss applicable to common stockholders. At December 31, 1998, the Series
A Preferred Stock fair value approximates book value and accrued dividends
payable relating to this stock totaled $1,565,000.
The Apollo Investors have also granted the Company an option to sell the
Apollo Investors an additional 650,000 shares of its 9.2% Series B Junior
Cumulative Convertible Preferred Stock, par value $.001 per share (the 'Series B
Preferred Stock'), for an aggregate purchase price of $65 million. The Company
may exercise its option to require the Apollo Investors to purchase the Series B
Preferred Stock at any time prior to September 23, 1999. The terms of the Series
B Preferred Stock are similar to
F-13
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
those of the Series A Preferred Stock. The Company recorded the value of the
Series B Preferred Stock option at fair value and recorded approximately
$180,000 of deemed dividends related primarily to the amortization of the value
of the option.
WARRANTS
In connection with the Company's initial public offering in 1994, the
Company issued warrants to purchase 745,970 shares of Common Stock.
Additionally, the Company issued to the underwriters as consideration warrants
to purchase 123,560 shares of the Company's Common Stock. In September 1996, the
Company received proceeds of $4,589,000 relating to the exercise of 864,848
warrants and the remaining 4,682 warrants expired unexercised. Of the warrants
exercised, 764,848 shares of Common Stock were issued in exchange for cash at a
purchase price of $6.00 per share and 27,083 shares of Common Stock were issued
in a cashless exercise of 100,000 warrants held by the underwriters.
In connection with the November 1997 issuance of the 10 1/2% Preferred
Stock, the Company granted to its investment advisor and certain related
persons, in lieu of a warrant to purchase shares of 5% Preferred Stock, warrants
to purchase an aggregate of 177,178 shares of 10 1/2% Preferred Stock at an
initial exercise price of $68.47 per share. The exercise price of the warrants
declines by approximately $0.12 per month to $60.24 per share on and after
April 1, 2002. This warrant is convertible at a discount to the then fair market
value of the Common Stock and accordingly, the Company will record, over the
life of the warrant, $1.6 million as a deemed dividend in connection with the
issuance of warrants on preferred stock. During 1998, the Company accreted
dividends of $428,000 related to this warrant. In addition, the Company granted
to an investor warrants to purchase 1,800,000 shares of common stock at $50 per
share during the period from June 15, 1998 until June 15, 2005, subject to
certain conditions. After June 15, 2000, the Company may redeem all of these
warrants, provided that the price of its Common Stock is at least $75 per share
during a specified period. During 1998, the Company accreted dividends of
$6,073,000 related to these warrants.
7. EMPLOYEE BENEFIT PLANS
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. The aggregate number of shares of Common Stock available for issuance
pursuant to the 1994 Plan and the Directors' Plan is 3,100,000.
F-14
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option activity under the 1994 Plan, the Directors' Plan and
of all other option activity follows:
1994 PLAN DIRECTORS' PLAN OTHER
---------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTION PRICE PER OPTION PRICE PER OPTION PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
--------- --------- ------- --------- -------- ---------
Outstanding at December 31, 1995............ 637,500 $ 3.61 105,000 $ 3.39 350,000 $4.00
Granted................................ 545,000 $ 8.10 40,000 $ 6.88 --
Exercised.............................. (60,000) $ 1.00 (5,000) $ 1.00 (120,000) $1.00
Cancelled.............................. -- -- --
--------- ------- --------
Outstanding at December 31, 1996............ 1,122,500 $ 5.93 140,000 $ 4.47 230,000 $5.57
Granted................................ 515,000 $ 14.52 -- --
Exercised.............................. (13,000) $ 2.00 -- (30,000) $1.00
Cancelled.............................. (55,000) $ 5.98 -- --
--------- ------- --------
Outstanding at December 31, 1997............ 1,569,500 $ 8.73 140,000 $ 4.47 200,000 $6.25
Granted................................ 559,500 $ 28.53 100,000 $ 25.88 --
Exercised.............................. (19,850) $ 3.25 (25,000) $ 3.00 --
Cancelled.............................. (70,625) $ 18.55 -- --
--------- ------- --------
Outstanding at December 31, 1998............ 2,038,525 $ 13.35 215,000 $ 14.50 200,000 $6.25
--------- ------- --------
--------- ------- --------
Exercisable at December 31, 1998............ 1,207,650 $ 6.56 188,334 $ 12.89 200,000 $6.25
--------- ------- --------
--------- ------- --------
1994 PLAN DIRECTORS' PLAN OTHER
---------------- ---------------- -----
As of December 31, 1998:
Range of exercise prices........................................... $1.00 - $38.38 $ 2.13 - $25.88 $6.25
Weighted average remaining contractual life for options outstanding
(years).......................................................... 8.11 7.99 4.39
The weighted average fair value of options granted during 1997 and 1998 was
$4.37 and $18.22, respectively. As of December 31, 1998, 729,000 shares of
Common Stock are available for grant pursuant to either the 1994 Plan or the
Directors' Plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123 as
they pertain to financial statement recognition of compensation expense
attributable to option grants. If the Company had elected to recognize
compensation cost for the option grants in accordance with SFAS No. 123, the
Company's net loss and net loss per share (basic and diluted) on a pro-forma
basis would have been:
1997 1998
----------- ------------
Net loss -- as reported.................................................. $(4,737,000) $(48,396,000)
Net loss -- pro-forma.................................................... $(6,254,000) $(51,028,000)
Net loss per share -- as reported........................................ $ (0.41) $ (2.70)
Net loss per share -- pro-forma.......................................... $ (0.54) $ (2.85)
F-15
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro-forma expense related to stock options is recognized over the
vesting period, generally four years. The fair value of each option grant was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for each year:
1997 1998
----- -----
Risk-free interest rate.............................................................. 6.11% 4.72%
Expected life of options -- years.................................................... 3.11 4.36
Expected stock price volatility...................................................... 75% 75%
Expected dividend yield.............................................................. N/A N/A
401(K) SAVINGS PLAN
During 1998, the Company adopted the CD Radio 401(k) Savings Plan (the
'401(k) Plan'). The 401(k) Plan allows eligible employees to contribute from 1%
to 12% of their pretax pay subject to certain defined limits. Employees are 100%
vested in their contributions at all times. In addition, the Company matches
100% of the employees' contribution, in the form of the Company's Common Stock.
The Company matching contribution is 33 1/3% vested each year and is fully
vested after three years of employment with the Company. Contribution expense to
the 401(k) Plan was $104,000 in 1998.
8. INCOME TAXES
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax assets and deferred tax liability are as follows:
DECEMBER 31,
---------------------------
1997 1998
----------- ------------
Capitalized start-up costs............................................... $ 7,919,000 $ 13,066,000
Accrual to cash adjustments.............................................. 316,000 6,427,000
Net operating loss carryforwards......................................... 335,000 6,205,000
Other.................................................................... 656,000 (1,581,000)
----------- ------------
9,226,000 24,117,000
Valuation allowance...................................................... (9,226,000) (26,354,000)
----------- ------------
Net deferred tax liability............................................... $ -- $ (2,237,000)
----------- ------------
----------- ------------
Realization of deferred tax assets at the balance sheet date is dependent
upon future earnings, which are uncertain. Accordingly, a full valuation
allowance was recorded against the assets.
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $15 million for federal and state income tax purposes available to
offset future taxable income. The net operating loss carryforwards expire at
various dates beginning 2008. There may be limitations on the annual utilization
of these net operating losses as a result of certain changes in ownership that
have occurred since the Company's inception. In addition, a significant portion
of costs incurred have been capitalized for tax purposes as a result of the
Company's status as a start-up enterprise. Total start-up costs as of December
31, 1998 are $32 million. Once the Company begins its active trade or business,
these capitalized costs will be amortized over 60 months. The total deferred tax
asset related to capitalized start-up costs of $13 million includes $169,000
which, when realized, would not affect financial statement income but will be
recorded directly to stockholders' equity.
F-16
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SPECIAL CHARGES
During 1998, the Company decided to enhance its satellite delivery system
to include a third in-orbit satellite and to terminate certain launch and orbit
related contracts. The Company recorded special charges totaling $25,682,000
related primarily to the termination of such contracts.
10. RELATED PARTIES
Since inception, the Company has relied upon related parties for certain
consulting, legal and management services. The Company has paid for these
services with cash and with the issuance of Common Stock. Total cash expenses
incurred in transactions with related parties during the years ended December
31, 1996, 1997 and 1998 and the period from May 17, 1990 (date of inception) to
December 31, 1998 were $272,000, $279,000, $127,000 and $2,446,000,
respectively. The Company has also issued Common Stock in lieu of cash in
settlement of other related party liabilities. Total related party expenses
settled with the issuance of Common Stock during the years ended December 31,
1996, 1997 and 1998 and the period from May 17, 1990 (date of inception) to
December 31, 1998 were $554,000, $ -- , $ -- and $1,311,000, respectively.
11. LEASES AND RENTALS
As of December 31, 1998, minimum rental commitments under operating leases
were $4,467,000, $4,467,000, $4,467,000, $4,467,000 and $4,467,000 for 1999,
2000, 2001, 2002 and 2003, respectively. For the remaining years, such
commitments totaled $52,052,000, aggregating total minimum lease payments of
$74,387,000.
Total rent expense for the years ended December 31, 1996, 1997 and 1998 and
the period May 17, 1990 (date of inception) to December 31, 1998 was $302,000,
$278,000, $1,985,000 and $3,468,000, respectively.
12. COMMITMENTS AND CONTINGENCIES
SATELLITE CONSTRUCTION AND LAUNCH SERVICES
To build and launch the satellites necessary for the operations of CD
Radio, on July 28, 1998, the Company entered into the Loral Satellite Contract
with SS/L. The Loral Satellite Contract provides for SS/L to construct, launch
and deliver three satellites in-orbit and checked-out, to construct for the
Company a fourth satellite for use as a ground spare and to become the Company's
launch services provider. The Company is committed to make aggregate payments of
approximately $718 million under the Loral Satellite Contract. Approximately
half of these payments are contingent upon SS/L meeting specified milestones in
the construction of the satellites. SS/L has agreed to defer $50 million total
of payments due in 1999 and 2000 until 2002 and 2003. As of December 31, 1998,
$221 million of this commitment has been satisfied. Future payments are due as
follows: $218 million in 1999, $229 million in 2000, $25 million in 2002 and $25
million in 2003.
In the event of a satellite or launch failure, the Company will be required
to pay Loral the full-deferred amount for the affected satellite no later than
120 days after the date of the failure. If the Company should elect to put one
of the first three satellites into ground storage, rather than having it shipped
to the launch site, the full-deferred amount for the affected satellite will
become due within 60 days of such election.
INTEGRATED CIRCUITS
During 1998, the Company signed an agreement with Lucent Technologies, Inc.
('Lucent') pursuant to which Lucent has agreed to use commercially reasonable
efforts to deliver commercial
F-17
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quantities of integrated circuits ('chip sets'), which will be used in consumer
electronic devices capable of receiving the Company's broadcasts, by December
1999. The Company agreed to pay Lucent the costs of the chip set development
work totaling $9 million. On February 1, 1999, the Company and Lucent amended
and restated this agreement due to the design and development of the chip sets
requiring more engineering resources than originally estimated. Lucent will now
use commercially reasonable efforts to deliver commercial quantities of chip
sets by June 2000. The estimates of the development work in this amended
contract total $27 million.
F-18
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
CD RADIO INC.:
Our audits of the consolidated financial statements referred to in our
report dated February 5, 1999 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 14(a)(2) of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 5, 1999
SCHEDULE II
CD RADIO INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS (DEDUCTIONS)
-------------------------------------------------
CHARGED TO CHARGED TO WRITE-OFFS/
BALANCE COSTS AND OTHER ACCOUNTS -- PAYMENTS/ BALANCE
DESCRIPTION JANUARY 1 EXPENSES DESCRIBE OTHER DECEMBER 31
- ------------------------------------- ---------- ----------- ------------------- ----------- -----------
Year Ended December 31, 1998
Deferred Tax Assets -- Valuation
allowance..................... $9,226,000 $17,128,000 $-- $-- $26,354,000
Year Ended December 31, 1997
Deferred Tax Assets -- Valuation
allowance..................... 7,491,000 1,735,000 -- -- 9,226,000
Year Ended December 31, 1996
Deferred Tax Assets -- Valuation
allowance..................... 6,378,000 1,113,000 -- -- 7,491,000
S-1
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------------
3.1 -- Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (File No. 33-74782) (the 'S-1 Registration Statement')).
3.2 -- Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to the S-1 Registration
Statement).
3.3 -- Certificate of Designations of 5% Delayed Convertible Preferred Stock (incorporated by reference to
Exhibit 10.24 to the Company's Form 10-K/A for the year ended December 31, 1996 (the '1996 Form 10-K')).
3.4 -- Form of Certificate of Designations of Series B Preferred Stock (incorporated by reference to Exhibit A
to Exhibit 1 to the Company's Registration Statement on Form 8-A, filed with the Commission on October
30, 1997 (the 'Form 8-A')).
3.5.1 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights
of 10 1/2% Series C Convertible Preferred Stock (the 'Series C Certificate of Designations')
(incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 (File No.
333-34761) (the 'S-4 Registration Statement')).
3.5.2 -- Certificate of Correction of the Series C Certificate of Designations (incorporated by reference to
Exhibit 3.5.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the
'1997 Form 10-K')).
3.5.3 -- Certificate of Increase of 10 1/2% Series C Convertible Preferred Stock (incorporated by reference to
Exhibit 3.5.3 to the Company's Form 10-Q for the period ended March 31, 1998).
3.6 -- Form of Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of 9.2% Series A Junior Cumulative Convertible Preferred Stock (incorporated by reference
to Exhibit 99.2 to the Company's Current Report on Form 8-K filed with the Commission on November 17,
1998).
3.7 -- Form of Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of 9.2% Series B Junior Cumulative Convertible Preferred Stock (incorporated by reference
to Exhibit 99.3 to the Company's Current Report on Form 8-K filed with the Commission on November 17,
1998).
4.1 -- Form of Certificate for Shares of Common Stock (incorporated by reference to Exhibit 4.3 to the S-1
Registration Statement).
4.2 -- Form of Certificate for Shares of 10 1/2% Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 4.4 to the S-4 Registration Statement).
4.3.1 -- Rights Agreement, dated as of October 22, 1997, between the Company and Continental Stock Transfer &
Trust Company, as Rights Agent (incorporated by reference to Exhibit 1 to the Form 8-A).
4.3.2 -- Form of Right Certificate (incorporated by reference to Exhibit B to Exhibit 1 to the Form 8-A).
4.3.3 -- Amendment to Rights Agreement, dated as of October 22, 1997, between the Company and Continental Stock
Transfer & Trust Company, as Rights Agent, dated as of October 13, 1998 (incorporated by reference to
Exhibit 99.2 to the Company's Current Report on Form 8-K dated October 8, 1998).
4.3.4 -- Amendment to Rights Agreement, dated as of December 22, 1997, between the Company and Continental Stock
Transfer & Trust Company, as Rights Agent, dated as of November 13, 1998 (incorporated by reference to
Exhibit 99.7 to the Company's Current Report on Form 8-K dated November 17, 1998).
4.3.5 -- Amended and Restated Amendment to Rights Agreement, dated as of December 22, 1997, between the Company
and Continental Stock Transfer & Trust Company, as Rights Agent, dated as of December 22, 1998
(incorporated by reference to Exhibit 6 to the Amendment No. 1 to the Form 8-A, filed with the
Commission on January 6, 1999).
4.4 -- Indenture, dated as of November 26, 1997, between the Company and IBJ Schroder Bank & Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3
(File No. 333-34769) (the 'Units Registration Statement')).
4.5 -- Form of Note (incorporated by reference to Exhibit 4.2 to the Units Registration Statement).
4.6 -- Pledge Agreement, dated as of November 26, 1997, between the Company, as Pledgor, and IBJ Schroder Bank
& Trust Company, as Collateral Agent (incorporated by reference to Exhibit 4.5 to the Units Registration
Statement).
E-1
EXHIBIT DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------------
4.7.1 -- Warrant Agreement, dated as of November 26, 1997, between the Company and IBJ Schroder Bank & Trust
Company, as Warrant Agent (incorporated by reference to Exhibit 4.3 to the Units Registration
Statement).
4.7.2 -- Form of Warrant (incorporated by reference to Exhibit 4.4 to the Units Registration Statement).
4.8 -- Form of Preferred Stock Warrant Agreement, dated as of April 9,1997, between the Company and each
Warrantholder thereof (incorporated by reference to Exhibit 4.12 to the 1997 Form 10-K).
4.9 -- Form of Common Stock Purchase Warrant granted by the Company to Everest Capital Master Fund, L.P. and
to The Ravich Revocable Trust of 1989 (incorporated by reference to Exhibit 4.11 to the 1997 Form 10-K).
4.10.1 -- Form of Certificate for shares of 9.2% of Series A Junior Cumulative Convertible Preferred Stock (filed
herewith).
4.10.2 -- Form of Certificate for shares of 9.2% of Series B Junior Cumulative Convertible Preferred Stock (filed
herewith).
9.1 -- Voting Trust Agreement, dated as of August 26, 1997, by and among Darlene Friedland, as Grantor, David
Margolese, as Trustee, and the Company (incorporated by reference to Exhibit (c) to the Company's Issuer
Tender Offer Statement on Form 13E-4, filed with the Commission on October 16, 1997).
10.1 -- Lease Agreement, dated as of March 31, 1998, between Rock-McGraw, Inc. and the Company (incorporated by
reference to Exhibit 10.1.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
1998).
10.2.1 -- Engagement Letter Agreement, dated November 18, 1992, between the Company and Batchelder & Partners,
Inc. (incorporated by reference to Exhibit 10.4 to the S-1 Registration Statement).
10.2.2 -- Engagement Termination Letter Agreement, dated December 4, 1997, between the Company and Batchelder &
Partners, Inc. (incorporated by reference to Exhibit 10.2.2 to the 1997 Form 10-K).
*10.3.1 -- Proprietary Information and Non-Competition Agreement, dated February 9, 1993, for Robert D. Briskman
(incorporated by reference to Exhibit 10.8.1 to the S-1 Registration Statement).
*10.3.2 -- Amendment No. 1 to Proprietary Information and Non-Competition Agreement between the Company and Robert
D. Briskman (incorporated by reference to Exhibit 10.8.2 to the S-1 Registration Statement).
'D'10.4.1 -- Amended and Restated Contract, dated as of June 30, 1998, between the Company and Space Systems/Loral,
Inc. (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q/A for the
period ended June 30, 1998).
10.5.1 -- Assignment of Technology Agreement, dated April 15, 1993, between Robert D. Briskman and the Company
(incorporated by reference to Exhibit 10.10 to the S-1 Registration Statement).
*10.5.2 -- Stock Option Agreement, dated as of October 15, 1997, between the Company and Robert D. Briskman
(incorporated by reference to Exhibit 10.6.2 to the 1997 Form 10-K).
*10.5.3 -- Amended and Restated Option Agreement between the Company and Robert D. Briskman (incorporated by
reference to Exhibit 10.13 to the S-1 Registration Statement).
*10.6 -- Employment Agreement, dated as of January 1, 1999, between the Company and David Margolese (filed
herewith).
*10.7.1 -- Employment and Non-Competition Agreement between the Company and Robert D. Briskman (incorporated by
reference to Exhibit 10.19.1 to the S-1 Registration Statement).
*10.7.2 -- First Amendment to Employment Agreement between the Company and Robert D. Briskman (incorporated by
reference to Exhibit 10.19.2 to the S-1 Registration Statement).
*10.7.3 -- Second Amendment to Employment Agreement between the Company and Robert D. Briskman (incorporated by
reference to Exhibit 10.12.3 to the 1996 Form 10-K).
*10.8 -- Employment and Non-Competition Agreement, dated as of July 10, 1997, between the Company and Andrew J.
Greenebaum (incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997).
*10.9 -- Employment and Non-Competition Agreement, dated as of April 16, 1997, between the Company and Joseph S.
Capobianco (incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q/A
for the period ended March 31, 1997).
E-2
EXHIBIT DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------------
*10.10.1 -- Employment and Non-Competition Agreement, dated as of April 28, 1997, between the Company and Keno V.
Thomas (incorporated by reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q/A for
the period ended March 31, 1997).
*10.10.2 -- Separation Agreement, dated as of July 6, 1998, between the Company and Keno V. Thomas (incorporated by
reference to Exhibit 10.11.2 to the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1998).
*10.11 -- Employment and Non-Competition Agreement, dated as of May 18, 1998, between the Company and Patrick L.
Donnelly (incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998).
10.12 -- Registration Agreement, dated January 2, 1994, between the Company and M.A. Rothblatt and B.A.
Rothblatt (incorporated by reference to Exhibit 10.20 to the S-1 Registration Statement).
*10.13 -- 1994 Stock Option Plan (incorporated by reference to Exhibit 10.21 to the S-1 Registration Statement).
*10.14 -- Amended and Restated 1994 Directors' Nonqualified Stock Option Plan (incorporated by reference to
Exhibit 10.22 to the Annual Report on Form 10-K for the year ended December 31, 1995).
10.15.1 -- Option Agreement, dated as of October 21, 1992, between the Company and Batchelder & Partners, Inc.
(incorporated by reference to Exhibit 10.24 to the S-1 Registration Statement).
10.15.2 -- Form of Option Agreement, dated as of December 29, 1997, between the Company and each Optionee
(incorporated by reference to Exhibit 10.16.2 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998).
10.16 -- Settlement Agreement, dated as of April 1, 1994, among the Company, M.A. Rothblatt, B.A. Rothblatt and
Marcor, Inc. (incorporated by reference to Exhibit 10.27 to the S-1 Registration Statement).
10.17.1 -- Preferred Stock Investment Agreement dated October 23, 1996 between the Company and certain investors
(incorporated by reference to Exhibit 10.24 to the 1996 Form 10-K).
10.17.2 -- First Amendment to Preferred Stock Investment Agreement dated March 7, 1997 between the Company and
certain investors (incorporated by reference to Exhibit 10.24.1 to the 1996 Form 10-K).
10.17.3 -- Second Amendment to Preferred Stock Investment Agreement dated March 14, 1997 between the Company and
certain investors (incorporated by reference to Exhibit 10.24.2 to the 1996 Form 10-K).
10.18 -- Stock Purchase Agreement, dated as of August 5, 1997, between the Company, David Margolese and Loral
Space & Communications Ltd. (incorporated by reference to Exhibit 99.1 to the Company's Current Report
on Form 8-K filed with the Commission on August 19, 1997).
10.19 -- Letter, dated May 29, 1998, terminating Launch Services Agreement dated July 22, 1997 between the
Company and Arianespace S.A.; Arianespace Customer Loan Agreements dated July 22, 1997 for Launches #1
and #2 between the Company and Arianespace Finance S.A.; and the Multiparty Agreements dated July 22,
1997 for Launches #1 and #2 among the Company, Arianespace S.A. and Arianespace Finance S.A.
(incorporated by reference to Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998).
10.20 -- Credit Agreement, dated as of June 30, 1998, among the Company, the financial institutions from time to
time parties thereto and Bank of America National Trust and Savings Association, as Administrative Agent
(incorporated by reference to Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998).
10.21 -- Pledge Agreement, dated as of June 30, 1998, made by the Company in favor of Bank of America National
Trust and Savings Association, as Administrative Agent (incorporated by reference to Exhibit 10.23 to
the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998).
10.22 -- Summary Term Sheet/Commitment, dated June 15, 1997, among the Company and Everest Capital
International, Ltd., Everest Capital Fund, L.P. and The Ravich Revocable Trust of 1989 (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on July 8, 1997).
10.23.1 -- Engagement Letter Agreement, dated June 14, 1997, between the Company and Libra Investments, Inc.
(incorporated by reference to Exhibit 10.26.1 to the 1997 Form 10-K).
10.23.2 -- Engagement Termination Letter Agreement, dated August 6, 1997, between the Company and Libra
Investments, Inc. (incorporated by reference to Exhibit 10.26.2 to the 1997 Form 10-K).
E-3
EXHIBIT DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------------
10.24 -- Engagement Letter Agreement, dated October 8, 1997, between the Company and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to Exhibit 10.27 to the 1997 Form 10-K).
'D'10.25 -- Radio License Agreement, dated January 21, 1998, between the Company and Bloomberg Communications Inc.
(incorporated by reference to Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1998).
'D'10.26 -- Amended and Restated Agreement, dated as of February 1, 1999, between Lucent Technologies Inc. and the
Company (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed
with the Commission on February 4, 1999).
*10.27 -- CD Radio Inc. 401(k) Savings Plan (incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-8 (File No. 333-65473)).
10.28 -- Stock Purchase Agreement, dated as of October 8, 1998, between the Company and Prime 66 Partners, L.P.
(incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated October 8,
1998).
10.29 -- Stock Purchase Agreement, dated as of November 13, 1998, by and among the Company, Apollo Investment
Fund IV, L.P. and Apollo Overseas Partners IV, L.P. (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated November 17, 1998).
10.30 -- Voting Agreement, dated as of November 13, 1998, by and among Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P. and David Margolese (incorporated by reference to Exhibit 99.5 to the
Company's Current Report on Form 8-K dated November 17, 1998).
10.31 -- Tag-Along Agreement, dated as of November 13, 1998, by and among Apollo Investment Fund IV, L.P.,
Apollo Overseas Partners IV, L.P., the Company and David Margolese (incorporated by reference to
Exhibit 99.6 to the Company's Current Report on Form 8-K dated November 17, 1998).
21.1 -- List of Subsidiaries.
23.1 -- Consent of PricewaterhouseCoopers, LLP.
27.1 -- Financial Data Schedule.
------------------------
* This document has been identified as a management contract or compensatory
plan or arrangement.
'D' Portions of these exhibits, which are incorporated by reference, have been
omitted pursuant to an Application for Confidential treatment filed by the
Company with the Securities and Exchange Commission.
E-4
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as................................ 'D'