UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1997
Commission file number 0-24710
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CD RADIO INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 52-1700207
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SIXTH FLOOR, 1001 22ND STREET, N.W., WASHINGTON, D.C.
20037
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(Address of principal executive offices)
(Zip code)
202-296-6192
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $.001 PAR VALUE 12,577,884
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(Class) (Outstanding as of October 8, 1997)
CD RADIO INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX
Part I - Financial Information
Page
Consolidated Statements of Operations (unaudited) for the three and 1
the nine month periods ended September 30, 1997 and 1996 and
for the period May 17, 1990 (date of inception) to September 30, 1997
Consolidated Balance Sheets (unaudited) as of September 30, 1997 2
and December 31, 1996
Consolidated Statements of Cash Flows (unaudited) for the nine 3
month periods ended September 30, 1997 and 1996 and for the
period May 17, 1990 (date of inception) to September 30, 1997
Notes to Consolidated Financial Statements (unaudited) 4
Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
Part II - Other Information 12
Signatures
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the period
Three months ended Nine months ended May 17,1990
--------------------------------- ------------------------------ (date of inception)
September 30, September 30, September 30, September 30, to September 30,
1997 1996 1997 1996 1997
-------------- -------------- -------------- ------------- ---------------
Revenue $ - $ - $ - $ - $ -
-------------- -------------- -------------- ------------- ---------------
Expenses:
Legal, consulting and
regulatory fees 1,356,711 372,137 2,603,025 978,521 9,851,989
Other general and administrative 864,850 285,259 1,711,204 865,743 9,243,968
Research and development 7,953 24,176 43,010 76,781 1,959,365
Write-off of investment in
Sky-Highway Radio Corp. - - - - 2,000,000
-------------- -------------- -------------- ------------- ---------------
Total expenses 2,229,514 681,572 4,357,239 1,921,045 23,055,322
-------------- -------------- -------------- ------------- ---------------
Other income (expense)
Interest income 1,575,436 17,447 2,873,120 62,836 3,201,792
Interest expense - (3,363) (4,944) (13,183) (171,394)
-------------- -------------- -------------- ------------- ---------------
1,575,436 14,084 2,868,176 49,653 3,030,398
-------------- -------------- -------------- ------------- ---------------
Net loss $ (654,078) $ (667,488) $ (1,489,063) $ (1,871,392) $ (20,024,924)
-------------- -------------- -------------- ------------- ---------------
Preferred stock dividend
requirements (8,662,500) - (51,975,000) - (51,975,000)
-------------- -------------- -------------- ------------- ---------------
Net loss applicable
to common stockholders $ (9,316,578) $ - $ (53,464,063) $ - $ (71,999,924)
============== ============== ============== ============= ===============
Per common share:
Net Loss $ (0.06) $ (0.07) $ (0.14) $ (0.20)
Preferred stock dividend
requirements (0.74) - (4.83) -
-------------- -------------- -------------- -------------
Net loss per common share $ (0.80) $ (0.07) $ (4.97) $ (0.20)
============== ============== ============== =============
Weighted average common shares
outstanding 11,710,794 9,405,677 10,760,684 9,440,913
============== ============== ============== =============
The accompanying notes are an integral part of these consolidated
financial statements
1
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
1997 1996
--------------- ---------------
Current assets:
Cash and cash equivalents $ 29,385,798 $ 4,583,562
Interest receivable and other 566,247 9,368
-------------- ---------------
Total current assets 29,952,045 4,592,930
-------------- ---------------
Property and equipment in service, at cost:
Technical equipment 254,200 254,200
Office equipment and other 91,625 89,220
Demonstration equipment 38,664 38,664
-------------- ---------------
384,489 382,084
Less accumulated depreciation (232,700) (213,344)
-------------- ---------------
151,789 168,740
-------------- ---------------
Satellite construction in process 31,150,000 -
Other assets
Launch deposit 3,526,563 -
FCC license deposit 16,669,200 -
Designated cash 66,676,800 -
Other deposits 303,793 303,793
-------------- ---------------
Total other assets 87,176,356 303,793
-------------- ---------------
Total assets $ 148,430,190 $ 5,065,463
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 63,400 $ 131,118
Other 17,230 20,174
-------------- ---------------
Total current liabilities 80,630 151,292
Deferred rent and other 1,436 15,795
-------------- ---------------
Total liabilities 82,066 167,087
-------------- ---------------
Commitments and contingencies
5% Delayed Convertible Preferred Stock, $0.001 par value;
8,000,000 shares authorized, 5,222,608 shares issued and
outstanding at September 30, 1997 (liquidation preference
of $136,400,000), at net carrying value 116,083,011
Stockholders' equity:
Preferred stock, $0.001 par value, 50,000,000 shares
authorized; 8,000,000 shares designated as 5% Delayed
Convertible Preferred Stock -
Common stock, $0.001 par value; 200,000,000 shares
authorized; 12,577,844 and 10,313,391 shares issued and
outstanding at September 30, 1997 and December 31, 1996,
respectively 12,578 10,300
Additional paid-in capital 104,252,459 23,423,936
Deficit accumulated during the development stage (71,999,924) (18,535,860)
-------------- ---------------
Total stockholders' equity 32,265,113 4,898,376
-------------- ---------------
Total liabilities and stockholders' equity $ 148,430,190 $ 5,065,463
============== ===============
The accompanying notes are an integral part of these consolidated
financial statements
2
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the period
Nine months ended May 17,1990
------------------------------------ (date of inception)
September 30, September 30, to September 30,
1997 1996 1997
------------- --------------- --------------
Cash flows from operating activities:
Net loss $ (1,489,063) $ (1,871,392) $ (20,024,924)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on disposal of equipment 2,943 - 2,943
Depreciation and amortization 27,008 39,890 251,051
Write off of investment in Sky-Highway Radio Corp. - - 2,000,000
Compensation expense in connection with 1,715,500
issuance of stock options - 240,000 901,576
Common stock issued for services rendered - 406,844
Common stock options granted for services
rendered - - 119,820
Increase (decrease) in cash and cash equivalents
resulting from changes in assets and liabilities:
Interest receivable and other (556,879) (35,642) (566,247)
Due to related party - - 350,531
Deposits - - (303,793)
Accounts payable and accrued expenses (67,718) 100,460 138,639
Other liabilities (17,303) 29,889 18,666
------------- --------------- --------------
Net cash used in development stage activities (2,101,012) (1,089,951) (15,396,238)
------------- --------------- --------------
Cash flows from investing activities:
Payments for satellite construction (31,150,000) - (31,150,000)
Advance payment for launch services (3,526,563) - (3,526,563)
License fee payments to the FCC (16,669,200) - (16,669,200)
Designated cash (66,676,800) - (66,676,800)
Capital expenditures (13,000) - (405,782)
Acquisition of Sky-Highway Radio Corp. - - (2,000,000)
------------- --------------- --------------
Net cash used in investing activities (118,035,563) - (120,428,345)
------------- --------------- --------------
Cash flows from financing activities:
Proceeds from issuance of units and common stock, net 24,395,000 - 38,952,482
Proceeds from issuance of preferred stock, net 120,517,811 - 120,517,811
Proceeds from exercise of stock warrants - 4,127,388 4,589,088
Proceeds from issuance of promissory notes - - 200,000
Proceeds from issuance of promissory notes to
related parties - - 2,965,000
Proceeds from exercise of stock options by 181,000
Company employees 26,000 105,000 (200,000)
Repayment of promissory note - - (2,435,000)
Repayment of promissory notes to related parties - - 440,000
Loan from officer - -
------------- --------------- --------------
Net cash provided by financing activities 144,938,811 4,232,388 165,210,381
------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents 24,802,236 3,142,437 29,385,798
Cash and cash equivalents at the beginning of period 4,583,562 1,799,814 -
------------- --------------- --------------
Cash and cash equivalents at the end of period $ 29,385,798 $ 4,942,251 $ 29,385,798
============= =============== ==============
The accompanying notes are an integral part of these consolidated
financial statements
3
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
GENERAL
The accompanying consolidated financial statements do not include all
of the information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal, recurring adjustments) considered necessary to fairly reflect the
Company's consolidated financial position and consolidated results of
operations have been included. These financial statements should be read in
connection with the Company's consolidated financial statements and the notes
thereto for the fiscal year ended December 31, 1996 included in the Company's
annual report on Form 10-K/A as filed with the Securities and Exchange
Commission (the "SEC").
SATELLITE CONSTRUCTION
On August 5, 1997, the Company's satellite vendor Space Systems/Loral
("Loral") agreed to an amendment to the Company's satellite construction
contract under which Loral agreed to defer for three years $20 million in
payments to be made by the Company in connection with the contract. In
addition, on the same date, Loral's parent company, Loral Space &
Communications Ltd., ("Loral Space") purchased from the Company 1.9 million
shares of common stock for $25 million.
BROADCAST LICENSE
In April 1997, the Federal Communications Commission held an auction
for two national satellite radio broadcast licenses. The Company was the
winning bidder in such auction for one of these licenses (the "FCC License")
with a bid price of $83.3 million. Of the total bid price, $16.7 million was
initially deposited with the FCC, with the remainder due within 10 business
days following the public notice by the FCC that it is prepared to award the
license. The Company has classified $66.6 million as designated cash in the
September 30, 1997 balance sheet reflecting the balance due the FCC if and when
the license is awarded. In October 1997, the FCC announced it was prepared to
award the license and the Company paid the $66.6 million due to the FCC. The
Company was awarded the FCC License on October 10, 1997.
4
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
PRIVATE PLACEMENT
In April 1997, the Company completed a private placement of its 5%
Delayed Convertible Preferred Stock (the "5% Preferred Stock"). The Company
sold a total of 5.4 million shares of the 5% Preferred Stock for an aggregate
sale price of $135 million. In connection with the private placement, the
Company paid $10.1 million in fees to its placement agent, Libra Investments,
Inc. ("Libra"), and $2.7 million to Batchelder & Partners, Inc., a financial
advisory firm. In addition, the Company agreed to grant a warrant to Libra to
purchase 486,000 shares of the 5% Preferred Stock with an exercise price of
$25.00 per share. As a result of the private placement, options to purchase
200,000 shares of Common Stock held by Batchelder & Partners, Inc. vest and
become exercisable for three years with an exercise price of $6.25. Reference
is made to the Company's report on Form 8-K filed May 5, 1997 for a description
of the terms of the 5% Preferred Stock.
LOAN AGREEMENTS
On July 22, 1997, the Company entered into two loan agreements
(collectively the "AEF Agreements") with Arianespace Finance S.A. ("AEF"), a
subsidiary of Arianespace S.A. ("Arianespace"), to finance approximately $105
million of the estimated $176 million price of the services to be provided by
Arianespace in connection with the launch of the Company's two satellites.
Under these agreements, the Company is able to borrow funds from AEF to meet
the progress payments due to Arianespace for the construction of each launch
vehicle and other launch costs (the "Loans"). The Company has the opportunity
upon satisfying a variety of conditions specified in the AEF Agreements to
extend the Loans. Otherwise, if not refinanced, the Company will be required to
repay the Loans in full, together with accrued interest and all fees and other
amounts due, approximately three months before the applicable launch date. The
AEF Agreements impose restrictions on the Company's ability to permit liens on
certain assets of the Company, other than liens in favor of AEF. If the Loans
are extended, the Company will be subject to provisions restricting its ability
to incur additional indebtedness or make investments. As of September 30, 1997
the Company had not borrowed funds under the AEF Agreement.
5
NET LOSS PER COMMON SHARE
Net loss per common share has been computed based on the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares representing the common shares that would be issued on
conversion of convertible securities and exercise of outstanding stock options
and warrants reduced by the number of shares which could be purchased from the
related exercise proceeds are not included since their effect would be
anti-dilutive.
The net loss attributable to common stockholders has been adjusted for
deemed dividends. The deemed dividend relates to the discount feature
associated with the Company's 5% Delayed Convertible Preferred Stock, computed
in accordance with the SEC's position on accounting for preferred stock which
is convertible at a discount to the market. The discount, which totaled
approximately $52 million, was recognized as a return to the 5% Delayed
Convertible Preferred Stock shareholders over the period April 1997 through
July 1997, which is the minimum period in which the shareholders can realize
that return.
For reporting periods ending after December 15, 1997, the Company will
be required to report earnings (loss) per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). As
long as the Company continues to experience net losses, there will be no
material impact on the Company's net loss per share from adoption of SFAS 128.
6
CD RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was organized in May 1990 and is in its development stage.
The Company's principal activities to date have included technology
development, pursuing regulatory approval for the CD Radio service, market
research, design, development, contract negotiations with satellite and launch
vehicle contractors, technical efforts with respect to standards and
specifications, strategic planning and securing adequate financing for working
capital and capital expenditures. The Company does not expect to derive any
revenues from operations prior to the commercial launch of CD Radio, which is
expected to occur no earlier than the end of 1999. The Company has incurred
substantial losses to date and expects to incur substantial losses until at
least a year after the commercial launch of CD Radio. In addition, the Company
will require substantial additional capital to complete development and
commence commercial operations of CD Radio. There can be no assurance that CD
Radio will ever commence operations, that the Company will attain any
particular level of revenues or that the Company will achieve profitability.
Upon commencing commercial operations, the Company expects its primary
source of revenues to be monthly subscription fees. The Company currently
anticipates that its subscription fee will be approximately $10 per month to
receive CD Radio broadcasts, with a one time, modest activation fee per
subscriber. To receive CD Radio, subscribers will need to purchase a radio card
or S-band radio together with the associated miniature satellite dish antenna.
The Company does not intend to manufacture these products and thus will not
receive any revenues from their sale. Although the Company holds patents
covering certain technology to be used in the radio cards, S-band radios and
miniature satellite dish antennas, the Company expects to license its
technology to manufacturers at no charge. As the number of subscribers to CD
Radio increases, the Company also may derive revenues from payments from
producers of sports, news and talk programming for providing national
distribution of their programming to subscribers.
The Company expects that the operating expenses associated with
commercial operations will consist primarily of costs to acquire programming;
costs to maintain and operate its satellite broadcasting system and its
national broadcasting studio; and sales, 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). Sales, general and
administrative costs are expected to consist primarily of advertising costs,
salaries of executives, studio personnel, program hosts, administrators,
technical staff, rent and other administrative expenses. The Company expects
that the number of its employees will increase from eleven to approximately
100 by the time it commences commercial operations.
7
In addition to funding initial operating losses, the Company will
require funds for working capital, interest and financing costs on borrowings
and capital expenditures. The Company's interest expense will increase
significantly as a result of its financing plan. However, a substantial portion
of its planned indebtedness will not require cash payments of interest and
principal for some time.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
The Company recorded net losses of $1,489,000 and $1,872,000 for the
nine months ended September 30, 1997 and 1996, respectively, and $654,000 and
$667,000 for the three months ended September 30, 1997 and 1996, respectively.
The Company's total operating expenses were $4,357,000 and $1,921,000 for the
nine months ended September 30, 1997 and 1996, respectively, and were
$2,230,000 for the three months ended September 30, 1997 compared to $682,000
for the three months ended September 30, 1996.
Legal, consulting and regulatory fees increased for the nine months
ended September 30, 1997 to $2,603,000 from $979,000 for the nine months ended
September 30, 1996, and increased to $1,357,000 from $372,000 for the three
months ended September 30, 1997 and 1996, respectively. These levels of
expenditures are the result of increased activity since winning an auction for
a national satellite radio broadcast license conducted by the Federal
Communications Commission in April 1997.
Research and development costs were $43,000 and $77,000 for the nine
months ended September 30, 1997 and 1996, respectively, and $8,000 and $24,000
for the three months ended September 30, 1997 and 1996, respectively. The
Company completed the majority of such activities in 1994.
Other general and administrative expenses increased for the nine
months ended September 30, 1997 to $1,711,000 from $866,000 for the nine months
ended September 30, 1996 and to $865,000 from $285,000 for the three months
ended September 30, 1997 and 1996, respectively. General and administrative
expenses are expected to continue to increase as the Company continues to
develop its business. The Company also incurred a non-cash charge of $240,000
for the nine month period ended September 30, 1996, attributable to the
recognition of compensation expense in connection with stock options issued to
officers of the Company.
The increase in interest income to $2,873,000 for the nine months
ended September 30, 1997, from $62,000 in the nine months ended September 30,
1996 and to $1,575,000 from $17,000 for the three months ended September 30,
1997 and 1996, respectively, was the result of a higher average cash balance
during 1997. The cash and cash equivalents on hand were primarily obtained
from the offering of 5% Delayed Convertible Preferred Stock (the "5% Preferred
Stock") and the sole of Common Stock to Loral Space and Communications Ltd.
("Loral Space") in 1997.
8
YEARS ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
The Company recorded net losses of $2,831,000 ($.29 per share) and
$2,107,000 ($.23 per share) for the years ended December 31, 1996 and 1995,
respectively. The Company's total operating expenses were $2,930,000 in 1996
compared to $2,230,000 in 1995.
Legal, consulting and regulatory fees increased in 1996 to $1,582,000
from $1,046,000 in 1995, as the result of increased efforts to obtain the FCC
License.
Research and development costs were $117,000 in 1996, compared with
$122,000 in 1995. Non-recurring costs associated with the design and
development of the CD Radio demonstration system were substantially completed
in 1993. Costs incurred in subsequent years relate to the operations of the
demonstration system, including leasing satellite time, taking transmission
measurements, and testing multipath fading.
Other general and administrative expenses increased in 1996 to
$1,231,000 from $1,062,000 in 1995. The increase is due to the Company
requiring general administrative support for the effort to obtain the FCC
License.
Interest income decreased to $113,000 in 1996 from $143,000 in 1995 as
a result of the Company having a higher average cash balance in 1995. Proceeds
relating to the exercise of stock warrants were not received until late 1996
and, therefore, did not generate a significant amount of interest income.
Interest expense decreased from $20,000 in 1995 to $13,000 in 1996 as a result
of the Company repaying a promissory note due to an officer of the Company in
1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of
approximately $29,870,000 compared to $4,442,000 at December 31, 1996. The
increase in working capital was primarily the result of remaining cash proceeds
from the offering of 5% Preferred Stock and the sale of Common Stock to Loral
Space in 1997.
FUNDING REQUIREMENTS
The Company is a development stage company and as such will require
substantial amounts of continued outside financing to acquire and develop its
assets and commence commercial operations. The Company estimates that it will
require approximately $660.1 million to develop and commence commercial
operation of CD Radio by the end of 1999. Of this amount, the Company has
raised approximately $266.6 million to date. After giving effect to proposed
financings which the Company expects to undertake in the fourth quarter of
1997, as described below (see "Sources of Funding"), the Company will have
raised approximately $491.6 million of funds, leaving anticipated additional
cash needs of approximately $168.5 million to fund its operations through 1999.
The Company anticipates additional cash requirements of approximately $100.0
million to fund its operations through the year 2000. The Company expects to
finance the remainder of its funding requirements through
9
the issuance of debt or equity securities, or a combination thereof.
Furthermore, if the Company were to exercise its option under the Loral
Satellite Contract to purchase and deploy an additional satellite, substantial
additional funds would be required.
In April 1997, the Federal Communications Commission held an auction
for two national satellite radio broadcast licenses. The Company was the
winning bidder in such auction for one of these licenses (the "FCC License")
with a bid price of $83.3 million. Of the total bid price, $16.7 million was
initially deposited with the FCC, with the remainder due within 10 business
days following the public notice by the FCC that it is prepared to award the
license. The Company has classified $66.6 million as designated cash in the
September 30, 1997 balance sheet reflecting the balance due the FCC if and when
the license is awarded. In October 1997, the FCC announced it was prepared to
award the license and the Company paid the $66.6 million due to the FCC. The
Company was awarded the FCC License on October 10, 1997.
To build and launch the satellites necessary for the operations of CD
Radio, the Company has entered into a satellite construction contract with
Space Systems/Loral ("Loral") (the "Loral Satellite Contract") and a satellite
launch services contract with Arianespace S.A. (the "Arianespace Launch
Contract"). The Loral Satellite Contract provides for Loral to construct for
the Company three satellites, two of which the Company intends to launch and
the third of which will be kept in reserve as a spare, and for an option to be
granted to the Company to purchase a fourth satellite. Under the Arianespace
Launch Contract, Arianespace has agreed to launch two of the Company's
satellites into orbit. The Company is committed to make aggregate payments of
$272.8 million under the Loral Satellite Contract and of $176.0 million under
the Arianespace Launch Contract. Under the Loral Satellite Contract, with the
exception of a payment made at the time of the signing of the Loral Satellite
Contract in March 1993, payments are to be made in 22 installments commencing
in April 1997 and ending in November 2000, the expected delivery date for the
third satellite. Approximately half of these payments are contingent on Loral
meeting specified milestones in the manufacture of the three satellites. In
addition, Loral has agreed to defer a total of $20.0 million of the contract
price, which is to be paid in four equal installments of $5.0 million
commencing November 2001 until March 2003. Amounts due under the Arianespace
Launch Contract, except for payments made for each of the two launches prior to
the execution of the Arianespace Launch Contract, are payable on various dates
between November 1997 and July 1999 for the first launch, and, for the second
launch, are payable on various dates between February 1998 and the earlier of
October 1999 or ten days prior to the second launch.
The Company also will require funds for construction of its national
broadcast studio, working capital, interest on borrowings, acquisition of
programming, financing costs and operating expenses until some time after the
commencement of commercial operations of CD Radio. The Company's interest
expense will increase significantly as a result of its financing plan; however,
a substantial portion of its planned indebtedness will not require immediate
cash payments. Ten year notes proposed to be issued by the Company in the
fourth quarter of 1997 as described below (see "Sources of Funding") are not
expected to require cash payments until 2003. Interest on funds borrowed by the
Company under the AEF Agreements is deferred until repayment of such amounts.
10
SOURCES OF FUNDING
The Company historically has funded its operations through equity
capital. As of September 30, 1997, the Company had received a total of $166.6
million in equity capital and had no outstanding indebtedness. A significant
portion of the Company's equity capital was received in April 1997 as a result
of the Company's issuance of 5,400,000 shares of 5% Preferred Stock for
aggregate net proceeds of $120.5 million in a private placement transaction.
These proceeds were used primarily to finance the payment of the purchase
price for the FCC License and for working capital.
On July 22, 1997, the Company entered into two loan agreements
(collectively the "AEF Agreements") with AEF, a subsidiary of Arianespace, to
finance approximately $105 million of the estimated $176 million price of the
launch services to be provided by Arianespace. Under these agreements, the
Company is able to borrow funds to meet the progress payments due to
Arianespace for the construction of each launch vehicle and other launch costs
(the "Tranche A Loans"). The Company has the opportunity upon satisfying a
variety of conditions specified in the AEF Agreements to extend the term of the
Tranche A Loans. If not extended, or if the Company is unable to comply with
the terms and covenants of such extended loans, the Company will be required
to repay the Tranche A Loans in full, together with accrued interest and all
fees and other amounts due, approximately three months before the applicable
launch date, which will be prior to the time CD Radio commences commercial
operations. There can be no assurance that the Company will have sufficient
funds to make such repayment.
The Loral Satellite Contract provides for payments totalling $272.8
million. Under the Loral Satellite Contract, with the exception of a payment
made at the time of the signing of the Loral Satellite Contract in March 1993,
payments are to be made in 22 installments commencing in April 1997 and ending
in November 2000, the expected delivery date for the third satellite.
Approximately half of these payments are contingent on Loral meeting specified
milestones in the manufacture of the three satellites. In addition, Loral has
agreed to defer a total of $20.0 million of the contract price, which is to be
paid in four equal installments of $5.0 million commencing November 2001 until
March 2003.
In September 1997, the Company filed registration statements with the
Securities and Exchange Commission with respect to three proposed public
offerings of its securities: an offer to exchange shares of new convertible
preferred stock for up to all of the outstanding shares of 5% Delayed
Convertible Preferred Stock (the "Exchange Offer"), an offering (the "Stock
Offering") by the Company of 3,500,000 shares of its Common Stock and a
concurrent offering (the "Notes Offering" and, together with the Stock
Offering, the "Offerings") by the Company of Senior Discount Notes due 2007
(the "Senior Notes") for gross proceeds of $150 million. The Offerings are
expected to be made by the Company, subject to market conditions, in the fourth
quarter of 1997. There can be no assurance as to the actual timing of any of
the Offerings, as to the terms on which any of the Offerings will be made or as
to the amount of proceeds to be retained by the Company as a result of the
Stock Offering or the Notes Offering. The Company will receive no proceeds
from the Exchange Offer.
11
After giving effect to the Offerings and the AEF Agreements, the
Company expects it will require an additional $168.5 million in financing
through 1999. However, there can be no assurance that the Company's actual cash
requirements will not increase. Potential sources of additional financing
include the sale of debt or equity securities in the public or private markets.
There can be no assurance that the Company will be able to obtain additional
financing on favorable terms, or at all, or that it will be able to do so in a
timely fashion. The AEF Agreements contain, and the indenture relating to the
Senior Notes will contain documents governing any indebtedness incurred in the
future are expected to contain, provisions limiting the ability of the
Company to incur additional indebtedness. The issuance by the Company of
additional equity securities could cause substantial dilution of the interest
in the Company by the holders of the Preferred Stock who receive shares of
convertible preferred stock pursuant to the Exchange Offer. If additional
financing were not available on a timely basis, the Company would be required
to delay satellite and/or launch vehicle construction in order to conserve cash
to fund continued operations, which would cause delays in the commencement of
operations and increased costs.
The amount and timing of the Company's actual cash requirements will
depend upon numerous factors, including costs associated with the construction
and deployment of its satellite system and the rate of growth of its business
subsequent to commencing service, costs of financing and the possibility of
unanticipated costs. Additional funds would be required in the event of delay,
cost overruns, launch failure, launch services or satellite system change
orders, or any shortfalls in estimated levels of operating cash flow, or to
meet unanticipated expenses.
12
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities
On August 5, 1997, the Company sold 1,905,488 shares
of its Common Stock, par value $.001 per share, to Loral
Space pursuant to a Stock Purchase Agreement dated August 5,
1997. The aggregate purchase price for the Common Stock was
$25 million. The Stock Purchase Agreement is included
as an exhibit to the Form 8-K filed by the Company on August
18, 1997, which is incorporated by reference herein in its
entirety. The sale of the Common Stock to Loral Space was
exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
On July 15, 1997, the Company solicited, in lieu of a
meeting, the consent of its stockholders of record on June
20, 1997 for a proposed amendment to the Certificate of
Designations of the Company's 5% Delayed Convertible
Preferred Stock (the "5% Preferred Stock"). The purpose of
the proposed amendment was to allow the Company to redeem the
5% Preferred Stock in whole (but not in part) upon the sale,
on or prior to November 15, 1997, by the Company of any
equity or debt securities for net cash proceeds in an amount
not less than $100 million. The proposed amendment did not
affect any terms or rights of the Company's Common Stock. On
July 15, 1997, a consent solicitation statement and an
accompanying form of consent were mailed to stockholders of
record on June 20, 1997 in connection with the solicitation
of consents.
13
The Company did not receive sufficient affirmative votes from
holders of each of the Common Stock and the 5% Preferred
Stock to adopt the proposed amendment. The votes cast in
connection with the proposed amendment were as follows (there
were no broker abstentions):
Common Stock
------------
For: 2,325,161 (22.545%)
Against: 37,764 (0.366%)
Abstain: 11,440 (0.11%)
5% Preferred
------------
For: 1,475,651 (27.327%)
Against: 4,693 (0.87%)
Abstain: 0 (0.0%)
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
- ------ -----------
3.1*/ Amended and Restated Certificate of Incorporation
3.2*/ Amended and Restated By-laws
10.4.14 Amendment No. 15 to the Satellite Construction Agreement between
Space Systems/Loral, Inc. ("SS/L") and the Company, effective
July 31, 1997, (incorporated by reference to Exhibit 99.1 to the
Form 8-K filed on October 7, 1997)
10.4.15 Amendment No. 16 to the Satellite Construction Agreement between
SS/L and the Company, effective August 4, 1997, (incorporated by
reference to Exhibit 99.2 to the Form 8-K filed on October 7,
1997)
10.9 Stock Purchase Agreement dated as of August 5, 1997, by and among
the Company, David Margolese and Loral Space & Communications
Ltd., incorporated by reference to the report on Form 8-K filed on
August 19, 1997
10.10 Employment Agreement dated as of July 10, 1997, between Andrew J.
Greenebaum and the Company
10.11.1 Arianespace Customer Loan Agreement dated as of July 22, 1997,
between the Company and Arianespace Finance S.A. ("AEF"), relating
to Launch 1 ("Arianespace Loan Agreement 1")
10.11.1.1 Amendment No. 1 and Waiver to Arianespace Loan Agreement 1, dated
as of July 22, 1997
10.11.2 Multiparty Agreement relating to Launch 1, entered into as of
July 22, 1997, among Arianespace S.A. ("AE"), AEF and the Company
10.12.1 Arianespace Customer Loan Agreement dated as of July 22, 1997,
between the Company and AEF, relating to Launch 2 ("Arianespace
Loan Agreement 2")
10.12.1.1 Amendment No. 1 and Waiver to Arianespace Loan Agreement 2, dated
as of July 22, 1997
10.12.2 Multiparty Agreement relating to Launch 2 entered into as of July
22, 1997, among AE, AEF and the Company
11.1 Statement with respect to Computation of Per Share Earnings
27 Financial Data Schedule
- ---------------
*/ Incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-1, Commission File No.
33-74782.
14
(b) Reports on Form 8-K
On July 8, 1997, the Company filed a report on Form 8-K
under Item 5 regarding commitments received from certain
holders of its 5% Delayed Convertible Preferred stock to
purchase approximately $50 million of a new class of
convertible preferred stock for cash or in exchange for
shares of 5% Delayed Convertible Preferred Stock.
On August 19, 1997, the Company filed a report on Form
8-K under Item 5 regarding the sale of 1,905,488 shares of
Common Stock to Loral Space and Communications Ltd.
15
SIGNATURES
Pursuant to the requirements 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.
CD RADIO INC.
(Registrant)
Date: October 22, 1997 /s/Andrew J. Greenebaum
--------------------------------
Executive V.P. and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1*/ Amended and Restated Certificate of Incorporation
3.2*/ Amended and Restated By-laws
10.4.14 Amendment No. 15 to the Satellite Construction Agreement between
Space Systems/Loral, Inc. ("SS/L") and the Company, effective
July 31, 1997, (incorporated by reference to Exhibit 99.1 to the
Form 8-K filed on October 7, 1997)
10.4.15 Amendment No. 16 to the Satellite Construction Agreement between
SS/L and the Company, effective August 4, 1997, (incorporated by
reference to Exhibit 99.2 to the Form 8-K filed on October 7,
1997)
10.9 Stock Purchase Agreement dated as of August 5, 1997, by and among
the Company, David Margolese and Loral Space & Communications
Ltd., incorporated by reference to the report on Form 8-K filed on
August 19, 1997
10.10 Employment Agreement dated as of July 10, 1997, between Andrew J.
Greenebaum and the Company
10.11.1 Arianespace Customer Loan Agreement dated as of July 22, 1997,
between the Company and Arianespace Finance S.A. ("AEF"), relating
to Launch 1 ("Arianespace Loan Agreement 1")
10.11.1.1 Amendment No. 1 and Waiver to Arianespace Loan Agreement 1, dated
as of July 22, 1997
10.11.2 Multiparty Agreement relating to Launch 1, entered into as of
July 22, 1997, among Arianespace S.A. ("AE"), AEF and the Company
10.12.1 Arianespace Customer Loan Agreement dated as of July 22, 1997,
between the Company and AEF, relating to Launch 2 ("Arianespace
Loan Agreement 2")
10.12.1.1 Amendment No. 1 and Waiver to Arianespace Loan Agreement 2, dated
as of July 22, 1997
10.12.2 Multiparty Agreement relating to Launch 2 entered into as of July
22, 1997, among AE, AEF and the Company
11.1 Statement with respect to Computation of Per Share Earnings
27 Financial Data Schedule
- --------
*/ Incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-1, Commission File No.
33-74782.