10Q is out today.....I reprinted managements discussion below....the boldface is mine......
October 22, 1997
CD RADIO INC (CDRD)
Quarterly Report (SEC form 10-Q)
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.
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 $1,711,000from
$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.
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
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.
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.
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. |
