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CD RADIO SWITCHES AUDITORS, FACES FINANCING HURDLES
(Mobile Satellite; 04/15/99)
Apr. 15, 1999 (MOBILE SATELLITE NEWS, Vol. 11, No. 8 via COMTEX) -- CD Radio
Inc., one of two digital audio radio satellite services (DARS) licensed by the
FCC to operate in the United States, dismissed its independent auditor,
PricewaterhouseCoopers LLP, and named Arthur Andersen LLP as the replacement.
The seeds of the departure appear to have been planted late last year when
Pricewaterhouse modified its audit report on CD Radio to include an explanatory
paragraph about the satellite radio service's ability to continue as a "going
concern," according to an 8-K filed by the company with the Securities and
Exchange Commission (SEC). Pricewaterhouse questioned whether CD Radio had the
financial resources to meet its capital needs through year-end 1999, but
company officials disagreed and concluded that sufficient financing could be
obtained through the sale of debt and/or equity securities.
However, CD Radio's financial future has yet to be assured. The company
confirmed in its latest 10-K filed with the SEC that it needed near-term
funding to continue building its CD Radio system.
"We believe we can fund our planned operations and the construction of our
satellite system into the fourth quarter of 1999 from our working capital at
Dec. 31, 1998," according to the CD Radio 10-K.
CD Radio officials estimated that the company would need an additional $250
million to develop and start commercial operation by the fourth quarter of
2000. An additional $350 million will be required to fund the business through
the first full year of operations. Further funding could be required if
delays, cost overruns, launch failures or other "adverse developments" arise,
the 10-K revealed.
Existing debt instruments limit the company's ability to finance its needs
with additional debt, according to the 10-K. Any future indebtedness further
will limit the company's debt financing.
"We will have to satisfy a variety of conditions before we can obtain any
syndicated bank borrowings," CD Radio reported in its 10-K.
Specifically, CD Radio entered into a credit agreement with Bank of America
and other lenders in July 1998 to obtain a term loan facility of up to $115
million that matured Sept. 30, 1999. Additionally, Bank of America is
attempting to lead a syndicate of lenders to provide a second term loan of $225
million. A portion of the proceeds from the second term loan facility would
be used to repay the existing term loan facility and for other general
corporate purposes. The second term loan facility would give an infusion of
approximately $106 million in net additional funds after repayment of the
existing term loan facility, fees and expenses.
"We have substantial near-term requirements for additional funds," CD Radio
reported to the SEC. "Over the near-term, we require substantial funds to
construct and launch the satellites that will be part of our broadcast system.
We are committed to pay a total of approximately $718 million under the
**Loral** Satellite contract for the construction, launch and in-orbit
delivery of three satellites and construction of our spare fourth satellite.
Of this total, we must pay $438 million for the construction of satellites and
$280 million for launch services."
By year-end 1998, CD Radio met $221 million of the amount it owed to
**Loral**. CD Radio also must make further installment payments through
December 2003 that it began paying to construct satellites in April 1997.
In the course of preparing the most recent 10-K, CD Radio officials
discovered that certain executive officers and directors failed to file timely
reports that are required by the SEC under Section 16(a) of the Exchange Act.
Specifically, Andrew Greenebaum failed to file a Form 3 when he was elected
executive vice president and chief financial officer in August 1997.
Joseph Vittoria failed to file a Form 3 in April 1998 when he was elected a
director. Lawrence Gilberti, a director, failed to file a Form 4 in September
1996 when he received 10,000 stock options and in April 1998 when he received
an additional 15,000 stock options. CEO David Margolese failed to file a Form 4
in April 1996 when he received 400,000 stock options. Joseph Capobianco
failed to file a Form 4 in July 1997 when he received 25,000 options and again
in May 1998 when he received an additional 25,000 options.
Robert Briskman failed to file a Form 4 in April of 1996 when he received
30,000 options, in October 1997 when he received an additional 30,000 options
and in April 1998 when he received an additional 57,500 options. These
omissions have been corrected.
If CD Radio Fails To Secure Required Financing To Pay **Loral**, It Risks:
* Delays in launching our satellites and starting broadcasting operations;
* Increases in the cost of building or launching its satellites or other
activities needed to put CD Radio into operation;
* A default on its commitments to **Loral** or creditors to start CD Radio
service; and
* The forced discontinuance of its operations or the sale of its business.
Source: CD Radio's 10-K
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