I was interested in the story behind this company CD Radio (CDRD), and was
following this thread for awhile, because I thought that the story looked good. I was in
for some surprise. After doing my homework and reading through many of the filings
on EDGAR I have decided that this is not an investment I will ever make. Following is
an in depth analysis of what I turned up. I welcome any comments or additional info if
my research is not complete. Here goes:
According to the latest 10Q filed on May 19, 1997 the company has 10,313,391
shares outstanding. This is not entirely true as I will point out. This is also one of the
worst issues I have with this company. So at today's close of 16 3/4 the company is
valued at 172+ million dollars. What do you get for that? 1)they own an FCC license
which will cost them a total of 83.3 million dollars.. They have gone into contract with
Loral systems to construct a satellite for which they paid a deposit of 16.7 million
dollars. They have also paid a deposit to secure a launch date sometime in 1999
(another few million). The company intends to launch this satellite to create a national
radio network that will broadcast digital quality radio as a pay for service. That's the
essential stuff you need to know. Now let me post the bad news. Wherever possible I
will quote directly from the SEC filings 10Q and S-3 from May 19th.
Most important is the registration of 5.3 million Preferred shares of stock which were
privately placed
to 51 investors to raise a total of 135 million dollars. This preferred is convertible into
common shares at any time. There is a complicated formula for determining the
conversion price , but suffice it to say that the preferred holders are guaranteed a
profit for having made the investment. It is in fact the only type of financing CDRD
could procure since they have NO operating business, NO revenues and no chance at
revenues until 1999.It cost them a bundle. The S-3 registration is for 9.3 million shares
of common stock. That is ultimately the amount of dilution that will occur between now
and October 1997. On the 15th of each month, the guaranteed return to the preferred
shareholder is increased by 1 3/4 %. This is an incentive to hold off from dumping the
stock all at once. What is key here is that no matter what the price of the common at
the time of conversion, the price is a factor of the selling price. ex. On May 15 (when
the stock last tanked from 20 to 14) if you converted stock and sold the common, you
took your selling price and multiplied by a factor (in this case 1-.14373) to determine
the price at which you were issued the new common stock. In other words ITS A
GUARANTEED PROFIT. This is significant because there is no incentive for the
preferred holders to hold their stock. Rather there is incentive to unlock it and sell the
common as soon as possible to take out the guaranteed profit and put their money to
work elsewhere.
So when is it unlocked? Anytime they want to between now and Oct 15. After the 15
th of each month the amount of discount that one receives when converting is slightly
increased to give incentive not to dump all the shares at once. But make no mistake. At
the end of Oct. 15 there will be 9.3 million more shares of common stock, bringing the
float at a minimum to 19.6 million shares. That's just the beginning. Let me quote now
from the 10Q:
"The Company has been unprofitable to date and expects to continue to incur
substantial losses through at least the first full year of CD Radio service. Since its
inception, the Company has not derived any revenues from operations and does
not expect to generate any revenues from operations prior to the commencement
of CD Radio, which is not expected to occur before the fall of 1999 at the
earliest."
This means that the only source of income the company can have to continue operating
will be through more stock dilution.
"The award of the FCC License is subject to the satisfaction of a number of
requirements, and it remains a possibility that the Company will not receive the
FCC License."
This means that the license they paid 83 million dollars for may NEVER be issued to
them........
"The Company has also hired, and intends to continue to hire, additional key
employees to manage the design, development, construction and launch of the
CD Radio system and to plan and implement marketing strategies and to develop
key relationships
in the entertainment and consumer electronics industries. These measures will
result in substantial increases in expenses in the three months ending June 30,
1997 and in subsequent periods over expense levels in past periods."
Expenses are going up......
"The Company estimates that, assuming receipt of the FCC License, the
aggregate cost of the FCC License, the contruction and launch of the
Company's satellites and the commencement of CD Radio service and cash
reserves for the first year of service will be at least $600 million."
WOW! They need to raise another 600 million after the end of this year if they ever
want to get this thing off the ground. How? MORE EQUITY FINANCING! Based
on what it cost them to get this last 135 million $ they will issue something around
another 50 million shares bringing the entire float to around 70 million shares in less
than 2 years, AND they still don't have any revenues from operations. That wont
commence until the end of the year 1999 IF everything goes to schedule as promised
and IF no other competing technology or company appears on the scene. THEN, we
will have to wait to see if there is even a market for this product. WHY would anyone
want to own this company now!?
Your shares are about to be heavily diluted. And the company will not be adding any
value until the year 2000. Every month around the 15 th there will be an overhang of
stock on the market as more preferred is converted and sold.
Back to my market cap at the beginning. The real float is 19.6 million. Multiply by 16
3/4 and you are paying 328 million dollars for a concept that will require another 600
million in financing ( bringing the total to 1 billion almost) for a concept company that
will not produce any revenues for 3 YEARS. Current shareholders will suffer constant
dilution.
My conclusion: The stock has made a great rise from 4 dollars in January to 20 just a
couple of weeks ago based solely on the awarding of the FCC license. The company
has made many press releases relating to this as well as the satellite contract and launch
dates etc. There is really no other good news that I see forthcoming. NOW, the only
thing forthcoming will be 9.3 million shares dumped on the market by shareholders
who are only in this for the guaranteed payoff. They will all sell over the next 5 months.
Who will buy? You will have to hold at least 3 years before any possible payoff. In the
meantime I expect that this stock will trade back down to 4 dollars again.
P.S. All of this information is buried in the SEC filings 10Q and S-3 which were filed
this May . The information is quite confusing and I believe purposefully arranged to be
so with the intent of making hard for the average investor to determine the coming
dilution. For example, the 10 Q states the number of shares outstanding on May 14 th
as 10.3 million, and the S-3 filing to register the common stock for conversion by the
preferred holders was made on May 15 th, one day later so that the 10 Q does not
reflect the true float of 19.6 million shares. It wont be for another 3 months until
another 10 Q is filed, and this information is better disseminated.
Lastly, remember this from the 10Q;
" ....there can be no assurance that the Company will be able to obtain
additional financing on favorable terms, if at all, or that such financing will be
available in a timely manner. 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." |
