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 June 30, 1998
Commission file number 0-24710
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.)
1180 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
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(Address of principal executive offices)
(Zip code)
212-899-5000
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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 17,619,456 shares
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(Class) (Outstanding as of August 11, 1998)
CD RADIO INC.
(A Development Stage Enterprise)
INDEX
Page
Part I - Financial Information
Consolidated Statements of Operations (unaudited) for the three 1
and six month periods ended June 30, 1998 and 1997 and for the
period May 17, 1990 (date of inception) to June 30, 1998
Consolidated Balance Sheets (unaudited) as of June 30, 1998 2
and December 31, 1997
Consolidated Statements of Cash Flows (unaudited) for the three 3
and six month periods ended June 30, 1998 and 1997 and for the
period May 17, 1990 (date of inception) to June 30, 1998
Notes to Consolidated Financial Statements (unaudited) 4
Management's Discussion and Analysis of Financial Condition and 6
Results of Operations
Part II - Other Information 14
Signatures 16
CD RADIO INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative
for the period
May 17, 1990
(date of
inception)
to June 30,
For the Three Months Ended June 30, For the Six Months Ended June 30, 1998
---------------------------------- -------------------------------- ------------
1998 1997 1998 1997
---- ---- ---- ----
Revenue $ - $ - $ - $ - $ -
Operating expenses:
Legal, consulting and
regulatory fees 949,000 1,009,000 1,928,000 1,246,000 12,413,000
Other general and administrative 1,929,000 566,000 3,267,000 847,000 14,372,000
Research and development 5,000 16,000 21,000 35,000 1,994,000
Special charges 25,682,000 - 25,682,000 - 27,682,000
------------- ------------- ------------- ------------- -------------
Total operating expenses 28,565,000 1,591,000 30,898,000 2,128,000 56,461,000
------------- ------------- ------------- ------------- -------------
Other income (expense):
Interest and investment income 1,585,000 1,237,000 3,903,000 1,298,000 8,305,000
Interest expense (3,159,000) - (8,982,000) (5,000) (11,094,000)
------------- ------------- ------------- ------------- -------------
(1,574,000) 1,237,000 (5,079,000) 1,293,000 (2,789,000)
------------- ------------- ------------- ------------- -------------
Income taxes (38,000) - (38,000) - (38,000)
------------- ------------- ------------- ------------- -------------
Net loss (30,177,000) (354,000) (36,015,000) (835,000) (59,288,000)
------------- ------------- ------------- ------------- -------------
Preferred stock dividend (4,438,000) - (9,219,000) - (11,557,000)
Preferred stock deemed dividend - (43,313,000) - (43,313,000) (51,975,000)
Accretion of dividends in connection with the
issuance of warrants on preferred stock (2,097,000) - (6,372,000) - (6,372,000)
------------- ------------- ------------- ------------- -------------
Net loss applicable to common stockholders $ (36,712,000) $ (43,667,000) $ (51,606,000) $ (44,148,000) $(129,192,000)
============= ============= ============= ============= =============
Per common shares:
Net Loss $ (1.79) $ (0.03) $ (2.18) $ (0.08)
Preferred stock dividend requirements (0.26) (4.20) (0.56) (4.20)
Accretion of dividends in connection with the
issuance of warrants on preferred stock (0.13) - (0.39) -
------------- ------------- ------------- -------------
Net loss applicable to common stockholders (basic
and diluted) $ (2.18) $ (4.23) $ (3.13) $ (4.28)
------------- ------------- ------------- -------------
Weighted average common shares
outstanding (basic and diluted) 16,826,000 10,313,000 16,493,000 10,307,000
============= ============= ============= =============
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
June 30, December 31,
ASSETS 1998 1997
-------------------- ------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 64,741,000 $ 900,000
Marketable securities, at market 65,884,000 169,482,000
Prepaid expense and other 1,602,000 928,000
-------------------- ------------------
Total current assets 132,227,000 171,310,000
-------------------- ------------------
Property and equipment, at cost:
Satellite construction in process 63,807,000 49,400,000
Launch construction in process 9,000,000 10,885,000
Broadcast studio in process 95,000 -
Technical equipment 254,000 254,000
Office equipment and other 149,000 96,000
Demonstration equipment 39,000 39,000
-------------------- ------------------
73,344,000 60,674,000
Less accumulated depreciation (264,000) (243,000)
-------------------- ------------------
73,080,000 60,431,000
-------------------- ------------------
Other assets:
FCC license 83,346,000 83,346,000
Debt issue cost, net 8,519,000 8,617,000
Deposits 727,000 104,000
-------------------- ------------------
Total other assets 92,592,000 92,067,000
-------------------- ------------------
Total assets $297,899,000 $323,808,000
-------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,554,000 $ 401,000
Other - 15,000
-------------------- ------------------
Total current liabilities 2,554,000 416,000
Notes payable and accrued interest 138,369,000 131,387,000
Dividends payable 10,458,000 2,338,000
-------------------- ------------------
Total liabilities 151,381,000 134,141,000
-------------------- ------------------
Commitments and contingencies
10.5% Series C Convertible Preferred Stock,
no par value: 2,025,000 shares authorized,
1,568,561 and 1,846,799 shares issued and outstanding
at June 30, 1998 and December 31, 1997,
respectively (liquidation preferences of
$156,856,100 and $184,679,900), at net carrying value 93,629,000 110,237,000
Stockholders' equity:
Preferred stock, $0.001 par value, 50,000,000 shares
authorized; 8,000,000 shares designated as 5% Delayed
Convertible Preferred Stock; none issued or outstanding - -
Common stock, $0.001 par value; 200,000,000 shares
authorized; and 17,608,456 and 16,048,691 shares issued
and outstanding as of June 30, 1998 and December 31, 1997,
respectively 18,000 16,000
Additional paid-in capital 112,159,000 102,687,000
Deficit accumulated during the development stage (59,288,000) (23,273,000)
-------------------- ------------------
Total stockholders' equity 52,889,000 79,430,000
-------------------- ------------------
Total liabilities and stockholders' equity $ 297,899,000 $ 323,808,000
=================== =================
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)
Cumulative for
the period
May 17, 1990
(date of
inception)
For the Six Months Ended June 30, to June 30, 1998
--------------------------------- ----------------
1998 1997
---- ----
Cash flows from development stage activities:
Net loss $(36,015,000) $ (835,000) $(59,288,000)
Adjustments to reconcile net loss to net cash provided by
(used in) development stage activities:
Depreciation expense 21,000 20,000 275,000
Amortization of debt issue costs 98,000 - 171,000
(Gain) loss on marketable securities 310,000 - (314,000)
Special charges 23,557,000 - 25,557,000
Accretion of note payable charged as interest expense 11,335,000 - 13,203,000
Sales (purchases) of marketable securities, net 103,288,000 - (65,570,000)
Compensation expense in connection with issuance of
stock options - - 2,164,000
Common stock issued for services rendered - - 902,000
Common stock options granted for services rendered - - 120,000
Increase (decrease) in cash and cash equivalents resulting
from changes in assets and liabilities:
Prepaid expense and other (675,000) (438,000) (1,603,000)
Due to related party - - 351,000
Deposits and other assets (623,000) - (927,000)
Accounts payable and accrued expenses 2,135,000 56,000 2,611,000
Accrued interest and other liabilities - (10,000) 14,000
------------ ------------ ------------
Net cash provided by (used in) development stage
activities 103,431,000 (1,207,000) (82,334,000)
------------ ------------ ------------
Cash flows form investing activities:
Purchase of FCC license - (16,669,000) (83,346,000)
Payments for satellite construction (14,407,000) (6,500,000) (63,707,000)
Designated cash - (66,677,000) -
Payments for launch services (25,071,000) (3,420,000) (31,363,000)
Capital expenditures (148,000) (5,000) (547,000)
Acquisition of Sky-Highway Radio Corp. - - (2,000,000)
------------ ------------ ------------
Net cash used in investing activities (39,626,000) (93,271,000) (180,963,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net - - 85,379,000
Proceeds from issuance of 5% Preferred Stock, net - 120,052,000 120,518,000
Proceeds from exercise of stock options 36,000 26,000 247,000
Proceeds from exercise of stock warrants - - 4,589,000
Proceeds from issuance of promissory note and Units - - 116,535,000
Proceeds from issuance of promissory notes to related
parties - - 2,965,000
Repayment of promissory note - - (200,000)
Repayment of promissory notes to related parties - - (2,435,000)
Loan from officer - - 440,000
------------ ------------ ------------
Net cash provided by financing activities 36,000 120,078,000 328,038,000
------------ ------------ ------------
Net increase in cash and cash equivalents 63,841,000 25,600,000 64,741,000
Cash and cash equivalents at the beginning of period 900,000 4,584,000 -
------------ ------------ ------------
Cash and cash equivalents at the end of period $ 64,741,000 $ 30,184,000 $ 64,741,000
============ ============ ============
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
June 30, 1998
(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, 1997 included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission (the "SEC").
Net Loss Per Share
Net loss per common share is based on the weighted average number of
common shares outstanding during such periods. Options and warrants granted by
the Company have not been included in the calculation of net loss per share
because such items were antidilutive. Since December 15, 1997, the Company is
required to report earnings (loss) per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
As long as the Company continues to experience net losses, there will be no
impact on the Company's net loss per share from adoption of SFAS No. 128.
Earnings per share for all periods presented conform to SFAS No. 128.
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. The Company has no
comprehensive income items to report for the current presentation.
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 June 30, 1998 financial statements from the adoption
of this standard.
4
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 $11,000 and $624,000 at June 30, 1998
and December 31, 1997, respectively.
Special Charges
During the quarter ended June 30, 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 approximately $25.7 million related primarily to the
termination of such contracts.
Reclassifications
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current period presentation.
5
CD RADIO INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made in
this report. Any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties that could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed in this report and under the
caption "Special Note Regarding Forward-Looking Statements" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. Among the key
factors that have a direct bearing on the Company's future results of operations
are the potential risk of delay in implementing the Company's business plan;
increased costs of construction and launch of necessary satellites; dependence
on satellite construction and launch contractors; risk of launch failure;
unproven market for the Company's proposed service; unproven applications of
existing technology; and the Company's need for substantial additional
financing.
Overview
The Company was organized in May 1990 and is in its development stage.
The Company's principal activities to date have included technology development,
obtaining regulatory approval for the CD Radio broadcasts, commencement of
construction of four satellites, acquisition of content for its programming,
market research, recruitment of its senior management team and securing
financing for working capital and capital expenditures. The Company does not
expect to generate any revenues from operations until 2000 at the earliest, and
expects that positive cashflow from operations will not be generated until late
2000 at the earliest. In addition, the Company will require substantial
additional capital to complete development and commence commercial operations of
CD Radio. There can be no assurance that CD Radio will ever commence operations,
that the Company will attain any particular level of revenues or that the
Company will achieve profitability.
6
Upon commencing commercial operations, the Company expects its primary
source of revenues to be monthly subscription fees. The Company currently
anticipates that its subscription fee will be approximately $9.95 per month to
receive CD Radio broadcasts, with a one time, modest activation fee per
subscriber. In addition, the Company expects to derive additional revenues from
providers of sports, news and talk programming for providing national
distribution of their programming to CD Radio subscribers or from directly
selling or bartering advertising time on the Company's sports, news and talk
channels. To receive CD Radio, subscribers will need to purchase a new
generation of radios capable of receiving S-band as well as AM and FM signals
("S-band radios") or a plug and play adapter card (a "radio card") that will
enable consumers to receive CD Radio in their cars by inserting the radio card
into existing cassette and CD players 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 its manufacturers at no charge.
The Company expects that the operating expenses associated with
commercial operations will consist primarily of marketing, sales, programming,
maintenance of the satellite and broadcasting system and general and
administrative costs. Costs to acquire programming are expected to include
payments to build and maintain an extensive music library and royalty payments
for broadcasting music (calculated based on a percentage of revenues).
Marketing, sales, general and administrative costs are expected to consist
primarily of advertising costs, salaries of employees, rent and other
administrative expenses. The Company expects that the number of its employees
will increase from 29, as of August 3, 1998, to approximately 140 by the time it
commences commercial operations.
In addition to funding initial operating losses, the Company will
require funds for working capital, interest and financing costs on borrowings
and capital expenditures. The Company's interest expense will increase
significantly as a result of the issuance in November 1997 of Units (the
"Units") consisting of the Company's 15% Senior Secured Discount Notes due 2007
(the "Senior Notes") and warrants (the "Warrants") to purchase additional Senior
Notes and additional debt which will be incurred in the future. However, a
substantial portion of this indebtedness will not require cash payments of
interest and principal for some time.
Results of Operations
Three Months Ended June 30, 1998 Compared with Three Months Ended June
30, 1997
The Company recorded net losses of $30,177,000 and $354,000 for the
three months ended June 30, 1998 and 1997, respectively. The Company's total
operating expenses were $28,565,000 and $1,591,000 for the three months ended
June 30, 1998 and 1997, respectively. In the 1998 quarter, the Company decided
to enhance its satellite delivery system to include a third in-orbit satellite
7
and to terminate certain launch and orbit related contracts. The Company
recorded special charges totaling approximately $25.7 million related primarily
to the termination of such contracts. Excluding these special charges, the
Company recorded a net loss of $4,495,000 and operating expenses of $2,883,000
for the three months ended June 30, 1998.
Legal, consulting and regulatory fees decreased to $949,000 in the
quarter ended June 30, 1998 from $1,009,000 in the quarter ended June 30, 1997.
In the 1998 quarter, the Company was working to finalize its new satellite
construction and launch contract and its chip set manufacturing agreement, while
during the 1997 quarter, the Company was working to obtain its FCC license and
to finalize its original satellite construction and launch contracts. The major
components of these fees in the 1998 quarter were legal (41%), consulting (55%)
and regulatory (4%), while in the 1997 quarter the major components were legal
(55%), consulting (40%) and regulatory (5%).
Research and development costs were $5,000 and $16,000 for the three
months ended June 30, 1998 and 1997, respectively. This level of research and
development cost is the result of the Company completing the majority of such
activities in 1994.
Other general and administrative expenses increased for the three
months ended June 30, 1998 to $1,929,000 from $566,000 for the three months
ended June 30, 1997. General and administrative costs have increased as the
Company continues to expand its management team and the workforce necessary to
develop and commence the broadcast of CD Radio. The major components of other
general and administrative costs in the 1998 quarter were salaries and
employment related costs (51%) and rent and occupancy costs (26%), while in the
1997 quarter the major components were salaries and employment related costs
(54%) and rent and occupancy costs (22%). The remaining portion of other general
and administrative costs (24% in the 1998 quarter and 23% in the 1997 quarter)
consists of other costs such as insurance, travel, depreciation and supplies,
with no amount exceeding 10% of the total.
Interest income increased to $1,585,000 for the three months ended June
30, 1998, from $1,237,000 in the three months ended June 30, 1997 as a result of
a higher average amount of funds invested during the 1998 second quarter. The
increase in the investment balance was due to the completion of the offering of
the Units in November 1997 and the sale to Loral Space & Communications, Ltd.
("Loral") of $25 million of Common Stock in August 1997.
Interest expense, net of capitalized interest, was $3,159,000 for the
three months ended June 30, 1998 and was $0 in the 1997 period. This increase
was due to interest expense accruing on the Senior Notes issued in November
1997. No cash interest on the Senior Notes will be paid until June 2003.
Six Months Ended June 30, 1998 Compared with Six Months Ended June 30,
1997
The Company recorded net losses of $36,015,000 and $835,000 for the six
months ended June 30, 1998 and 1997, respectively. The Company's total operating
expenses were $30,898,000 and $2,128,000 for the six months ended June 30, 1998
and
8
1997, respectively. Excluding the special charges totaling $25.7 million
recorded in the 1998 second quarter, the Company recorded a net loss of
$10,333,000 and operating expenses of $5,216,000 for the six months ended June
30, 1998.
Legal, consulting and regulatory fees increased to $1,928,000 in the
six months ended June 30, 1998 from $1,246,000 in the six months ended June 30,
1997. The increase in the level of expenditures was the result of greater
consulting expenses due to the accelerated execution of the Company's business
plan. Consulting fees were generated primarily in connection with the technical
aspects of the Company's business plan, such as satellite construction, chip set
design and terrestrial repeater network build-out. The major components of
legal, consulting and regulatory fees in the 1998 period were legal (35%),
consulting (63%) and regulatory (2%), while in the 1997 quarter the major
components were legal (52%), consulting (44%) and regulatory (4%).
Research and development costs were $21,000 and $35,000 for the six
months ended June 30, 1998 and 1997, respectively. This level of research and
development cost is the result of the Company completing the majority of such
activities in 1994.
Other general and administrative expenses increased for the six months
ended June 30, 1998 to $3,267,000 from $847,000 for the six months ended June
30, 1997. General and administrative activities have grown as the Company
continues to expand its management team and the workforce necessary to develop
and commence the broadcast of CD Radio. The major components of other general
and administrative costs in the 1998 period were salaries and employment related
costs (51%) and rent and occupancy costs (21%), while in the 1997 period the
major components were salaries and employment related costs (53%) and rent and
occupancy costs (25%). The remaining portion of other general and administrative
costs (28% in the 1998 period and 22% in the 1997 period) consists of other
costs such as insurance, travel, depreciation and supplies, with no amount
exceeding 10% of the total.
Interest income increased to $3,903,000 for the six months ended June
30, 1998, from $1,298,000 in the six months ended June 30, 1997 as a result of a
higher average amount of funds invested during the 1998 period. The increase in
the investment balance was due to the completion of the offering of the Units in
November 1997 and the sale to Loral of $25 million of Common Stock in August
1997.
Interest expense, net of capitalized interest, increased to $8,982,000
for the six months ended June 30, 1998, from $5,000 in the 1997 period. This
increase was due to interest expense accruing on the Senior Notes, which were
issued after the end of the 1997 period. No cash interest on the Senior Notes
will be paid until June 2003.
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of approximately
$129,673,000 compared with $170,894,000 at December 31, 1997. The decrease in
working capital was primarily the result of payments for satellite and launch
vehicle construction, the termination of the launch services agreement with
Arianespace S.A. and
9
operating expenses exceeding interest income during the period. The cash and
cash equivalents on hand were primarily obtained from the offerings of Common
Stock and the Units completed in November 1997, as well as the sale to Loral
of $25 million of Common Stock in August 1997.
Funding Requirements
The Company is a development stage company and as such will continue to
require substantial amounts of continued outside financing to acquire and
develop its assets and commence commercial operations. The Company estimates
that it will require approximately $964 million to develop and commence
commercial operation of CD Radio by the second quarter of 2000. Of this amount,
the Company has raised approximately $494 million and has entered into an
agreement with Bank of America National Trust and Savings Association ("Bank of
America") to attempt to arrange for the Company an additional $106 million,
leaving anticipated additional cash needs of approximately $364 million to fund
its operations through the first quarter of 2000. The Company anticipates
additional cash requirements of approximately $140 million to fund its
operations through the first full year of commercial operations. The Company
expects to finance the remainder of its funding requirements through the
issuance of debt or equity securities, or a combination thereof.
In April 1997, the Company was the winning bidder in a FCC auction for
one of two FCC Licenses with a winning bid of $83.3 million, of which $16.7
million was paid as a deposit. The Company paid the balance due the FCC in
October 1997 and was awarded the FCC License on October 10, 1997.
To build and launch the satellites necessary for the operations of CD
Radio, on July 28, 1998, the Company entered into an amended and restated
contract (the "Loral Satellite Contract") with Space Systems/Loral, Inc.
("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 $717 million under the Loral Satellite Contract. As of June 30,
1998, the Company had made aggregate payments of $70 million to SS/L. Under the
Loral Satellite Contract, with the exception of a payment made to SS/L in March
1993, payments are made in installments commencing in April 1997 and ending in
October 2000. Approximately half of these payments are contingent upon SS/L
meeting specified milestones in the manufacture of the satellites.
In the event of a satellite or launch failure, the Company will be
required to pay SS/L the full-deferred amount for the affected satellite no
later than 120 days after the date of the failure. If the Company should elect
to put one of the first three satellites into ground storage, rather than having
it shipped to the launch site, the full-deferred amount for the affected
satellite will become due within 60 days of such election.
The Company also will require funds for working capital, interest on
borrowings, acquisition of programming, financing costs and operating expenses
until
10
some time after the commencement of commercial operations of CD Radio. The
Company's interest expense will increase significantly as a result of its
financing plan; however, a substantial portion of its planned indebtedness will
not require cash payments of interest and principal for some time. The Senior
Notes do not require cash payments until June 2003. The Company believes that
its working capital at June 30, 1998 is sufficient to fund planned operations
and construction of its satellite system through the fourth quarter of 1998.
Sources of Funding
To date the Company has funded its capital needs through the issuance
of debt and equity securities. As of June 30, 1998, the Company had received a
total of $222 million in equity capital. A significant portion of the Company's
equity capital was received in 1997 as a result of the Company's issuance of
5,400,000 shares of 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 in August 1997 and
3,050,000 shares of Common Stock were sold to the public in November 1997. In
November 1997, the Company also exchanged (the "Exchange Offer") 1,846,799
shares of its newly issued 10 1/2% Series C Convertible Preferred Stock ("Series
C Preferred Stock") for all of the previously outstanding shares of 5% Preferred
Stock. The Company received no proceeds from the Exchange Offer.
In November 1997, the Company received net proceeds of $116 million
from the issuance of 12,910 Units, each Unit consisting of $20,000 aggregate
principal amount at maturity of Senior Notes and a Warrant to purchase
additional Senior 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 Notes originally issued and the Senior Notes resulting from the
exercise of Warrants is $258 million and $38 million, respectively. The Senior
Notes mature on November 15, 2007 with the first cash interest payment due in
June 2003. The Indenture under which the Senior Notes were issued (the "Senior
Notes Indenture") contains certain limitations on the Company's ability to incur
additional indebtedness. The Senior Notes are secured by a pledge of the stock
of Satellite CD Radio, Inc., the subsidiary of the Company that holds the
Company's FCC License.
The Company has entered into a credit agreement (the "Tranche A
Facility") with Bank of America pursuant to which Bank of America will provide
the Company a term loan facility in an aggregate principal amount of up to $115
million (the term loans thereunder, the "Tranche A Loans"). The proceeds of the
Tranche A Loans will be used by the Company to fund a portion of the progress
payments required to be made by the Company under the Loral Satellite Contract
for the purchase of launch services and to pay interest, fees and other expenses
related to the Tranche A Facility. The Tranche A Loans are due on September 30,
1999 and bear interest, at the option of the Company, at either (i) the London
Interbank Offered Rate plus 1.75% or (ii) the higher of (a) the rate publicly
announced by Bank of America as its reference rate and (b) 0.50% per annum above
the Federal Funds Rate then in effect. The Tranche A Loans are secured by the
grant of a security interest by the Company in the portion of the Loral
Satellite Contract relating to launch services. The Tranche A Facility also
contains covenants relating to
11
financial information, the conduct of business of the Company, payments under
the Loral Satellite Contract, maintenance of governmental and other approvals,
maintenance of existence and qualifications, maintenance of books and records,
maintenance of property and insurance, compliance with laws and notice of
defaults. In addition, the Tranche A Facility requires the Company to maintain a
minimum consolidated net worth of $125 million at all times prior to December
31, 1998 and $75 million thereafter.
In connection with the Tranche A Facility, Loral has agreed with Bank
of America that at maturity of the Tranche A Loans (including maturity as a
result of an acceleration), upon the occurrence of a bankruptcy of the Company
or upon the occurrence of an event of default by Loral under its agreement with
Bank of America, Loral will repurchase from Bank of America and the other
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, the Company will pay Loral a fee equal to 1.25% per annum of the
outstanding amount of the Tranche A Loans from time to time.
The Company has also entered into an agreement with Bank of America
pursuant to which Bank of America has agreed to attempt to arrange a syndicate
of lenders to provide a term loan facility (the "Tranche B Facility") 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 and
there are no assurances that such Tranche B Loans will be arranged or the terms
of any such Tranche B Loans. Consummation of the Tranche B Facility as set forth
in such agreement would also require the consent of the holders of certain
outstanding indebtedness of the Company.
SS/L has agreed that payment of $50 million of the amount related to
the construction of the satellites under the Loral Satellite Contract will be
payable in six installments of $8.33 million to be made in June 2002, September
2002, December 2002, June 2003, September 2003 and November 2003. These deferred
amounts will bear interest at 10% per annum and all interest on these deferred
amounts will accrue until December 2001, at which time interest (including
interest on previously accrued interest) will be payable quarterly in arrears in
cash. As collateral security for these deferred payments, the Company has agreed
to grant Loral a security interest in its terrestrial repeater network.
12
The Company expects it will require an additional $364 million in
financing through the first quarter of 2000. 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 Senior Notes Indenture and the
Tranche A Facility contain, and documents governing any indebtedness incurred in
the future are expected to contain, provisions limiting the ability of the
Company to incur additional indebtedness. The issuance by the Company of
additional equity securities could cause substantial dilution of the interest in
the Company of the Company's current stockholders. If additional financing were
not available on a timely basis, the Company would be required to delay
satellite and/or launch vehicle construction in order to conserve cash to fund
continued operations, which would cause delays in the commencement of operations
and increased costs.
The amount and timing of the Company's actual cash requirements will
depend upon numerous factors, including costs associated with the construction
and deployment of its satellite system and the rate of growth of its business
subsequent to commencing service, costs of financing and the possibility of
unanticipated costs. Additional funds would be required in the event of delay,
cost overruns, unanticipated expenses, launch failure, launch services or
satellite system change orders, or any shortfalls in estimated levels of
operating cash flow.
13
Part II
Other Information
Item 2. Changes in Securities
On April 20, 1998, the Company filed a Certificate of Increase under
Section 151(g) of the Delaware General Corporation Law which had the effect of
increasing the number of shares of Series C Preferred Stock that the Company is
authorized to issue from 2,000,000 to 2,025,000.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders held on April 20, 1998,
the persons whose names are set forth below were elected as directors. The
relevant voting information for each person is sent forth opposite such person's
name:
Votes Cast
For Withheld
David Margolese.................... 13,521,450 7,115
Robert D. Briskman................. 13,520,391 8,175
Lawrence F. Gilberti............... 13,520,491 8,075
Joseph V. Vittoria................. 15,520,421 8,145
Ralph V. Whitworth................. 13,521,421 7,145
In addition to the election of directors, the following matters were
acted upon:
(a) The reappointment of Coopers & Lybrand LLP as independent
auditors for the fiscal year ending December 31, 1998 was ratified by a vote of
13,479,755 shares in favor, 33,620 shares against, and 15,191 shares abstained.
(b) Amendments to the CD Radio 1994 Stock Option Plan and the
CD Radio 1994 Directors' Nonqualified Stock Option Plan were approved by a vote
of 8,679,847 shares in favor, 107,126 shares against, 35,211 shares abstained,
and 4,706,382 broker nonvotes.
Item 5. Other Information
Rule 14a-4(c)(1) under the Securities Exchange Act of 1934 provides
that a proxy may give discretionary authority to vote on any matter (including a
stockholder proposal) that may come before an annual meeting of stockholders if
the registrant (that is, the Company) had less than 45-days notice of such
proposal prior to mailing of the proxy statement relating to such meeting even
though such proxy statement contains no discussion of the matter to be voted on.
The Company intends to utilize this authority at the next annual meeting of
stockholders. Based on the mailing date of the proxy statement for the last
annual meeting of stockholders, the notice contemplated by Rule 14a-4(c)(1) will
need to be given not later than February 10, 1999.
14
Item 6. Exhibits and Reports on Form 8-K
(a) See the Exhibit Index for a list of exhibit filed
herewith.
(b) The Company filed a Current Report on Form 8-K, dated May
28, 1998, describing the enhancement of its broadcast system as a result of the
addition of a third in-orbit satellite.
15
SIGNATURES
Pursuant to the requirements of the Securities and 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.
By: /s/ John T. McClain
-----------------------
John T. McClain
Vice President and Controller
(Chief Accounting Officer)
August 14, 1998
16
Exhibits
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).
3.5.1 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).
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 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 Form 8-A).
4.4 Form of Right Certificate (incorporated by reference to Exhibit B
to Exhibit 1 to Form 8-A).
4.6 Form of Note (incorporated by reference to Exhibit 4.2 to the
Units Registration Statement).
4.7 Pledge Agreement, dated as of November 26, 1997, between the
Company, as Pledgor, and IBJ Schroder Bank & Trust Company, as
Collateral Agent (incorporated by reference to Exhibit 4.5 to the
Units Registration Statement).
4.8 Form of Warrant (incorporated by reference to Exhibit 4.4 to the
Units Registration Statement).
17
Exhibit Description
- ------- -----------
4.9 Form of Preferred Stock Warrant Agreement, dated as of April
9, 1997, between the Company and each Warrantholder thereof
(incorporated by reference to Exhibit 4.11 to the 1997 Form 10-K).
4.10 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 4.12 to the
1997 Form 10-K).
10.1.1 Lease Agreement, dated October 20, 1992, between 22nd & K Street
Office Building Limited Partnership and the Company (incorporated
by reference to Exhibit 10.3 to the S-1 Registration Statement).
10.1.2 Lease Agreement, dated as of March 31, 1998, between Rock-McGraw,
Inc. and the Company (filed herewith).
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).
+10.4 Amended and Restated Contract, dated as of June 30, 1998, between
the Company and Space Systems/Loral, Inc. (filed herewith).
10.5 Assignment of Technology Agreement, dated April 15, 1993, between
Robert D. Briskman and the Company (incorporated by reference to
Exhibit 10.10 to the S-1 Registration Statement).
*10.6.1 Amended and Restated Option Agreement between the Company and
Robert D. Briskman (incorporated by reference to Exhibit 10.13 to
the S-1 Registration Statement).
*10.6.2 Stock Option Agreement, dated as of October 15, 1997, between the
Company and Robert D. Briskman. (incorporated by reference to
Exhibit 10.6.2 to the 1997 Form 10-K).
18
Exhibit Description
- ------- -----------
*10.7.1 Employment and Noncompetition Agreement between the Company and
David Margolese (incorporated by reference to Exhibit 10.18.1 to
the S-1 Registration Statement).
*10.7.2 First Amendment to Employment Agreement between the Company and
David Margolese (incorporated by reference to Exhibit 10.18.2 to
the S-1 Registration Statement).
*10.8.1 Employment and Noncompetition Agreement between the Company and
Robert D. Briskman (incorporated by reference to Exhibit 10.19.1
to the S-1 Registration Statement).
*10.8.2 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).
*10.8.3 Second Amendment to Employment Agreement between the Company and
Robert D. Briskman (incorporated by reference to Exhibit 10.12.3
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (the "1996 Form 10-K")).
*10.9 Employment and Noncompetition Agreement, dated as of July 10,
1997, between the Company and Andrew J. Greenebaum (incorporated
by reference to Exhibit 10.10 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997).
*10.10 Employment and Noncompetition Agreement, dated as of April 16,
1997, between the Company and Joseph S. Capobianco (incorporated
by reference to Exhibit 10.17 to the Company's Quarterly Report on
Form 10-Q/A for the period ended March 31, 1997).
*10.11.1 Employment and Noncompetition Agreement, dated as of April 28,
1997, between the Company and Keno V. Thomas (incorporated by
reference to Exhibit 10.18 to the Company's Quarterly Report on
Form 10-Q/A for the period ended March 31, 1997).
*10.11.2 Separation Agreement, dated as of July 6, 1998, between the
Company and Keno V. Thomas (filed herewith).
*10.12 Employment and Noncompetition Agreement, dated as of May 18, 1998,
between the Company and Patrick L. Donnelly (filed herewith).
10.13 Registration Agreement, dated January 2, 1994, between the Company
and M.A. Rothblatt and B.A. Rothblatt (incorporated by reference
to Exhibit 10.20 to the S-1 Registration Statement).
*10.14 1994 Stock Option Plan (incorporated by reference to Exhibit 10.21
to the S-1 Registration Statement).
19
Exhibit Description
- ------- -----------
*10.15 Amended and Restated 1994 Directors' Nonqualified Stock Option
Plan (incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995).
10.16.1 Option Agreement, dated as of October 21, 1992, between the
Company and Batchelder & Partners, Inc. (incorporated by reference
to Exhibit 10.24 to the S-1 Registration Statement).
10.16.2 Form of Option Agreement, dated as of December 29, 1997, between
the Company and each Optionee (filed herewith).
10.17 Settlement Agreement, dated as of April 1, 1994, among the
Company, M.A. Rothblatt, B.A. Rothblatt and Marcor, Inc.
(incorporated by reference to Exhibit 10.27 to the S-1
Registration Statement).
*10.18 1995 Stock Compensation Plan (incorporated by reference to Exhibit
10.37 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.19.1 Preferred Stock Investment Agreement dated October 23, 1996
between the Company and certain investors (incorporated by
reference to Exhibit 10.24 to the 1996 Form 10-K).
10.19.2 First Amendment to Preferred Stock Investment Agreement dated
March 7, 1997 between the Company and certain investors
(incorporated by reference to Exhibit 10.24.1 to the 1996 Form
10-K).
10.19.3 Second Amendment to Preferred Stock Investment Agreement dated
March 14, 1997 between the Company and certain investors
(incorporated by reference to Exhibit 10.24.2 to the 1996 Form
10-K).
10.20 Stock Purchase Agreement, dated as of August 5, 1997, between the
Company, David Margolese and Loral Space & Communications Ltd.
(incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K, filed on August 19, 1997).
10.21 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. (filed herewith).
10.22 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 (filed herewith).
20
Exhibit Description
- ------- -----------
10.23 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 (filed herewith).
10.24 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).
10.25.1 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).
10.25.2 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).
10.26 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).
+10.27 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).
+10.28 Agreement, dated April 24, 1998, between Lucent Technologies Inc.
and the Company (filed herewith).
27.1 Financial Data Schedule.
- -----------------------
* This document has been identified as a management contract or compensatory
plan or arrangement.
+ 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 pursuant to Rule 406 of the
Securities Act of 1933, as amended.
21