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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission file number 0-24710
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SIRIUS SATELLITE RADIO INC.
(Exact name of registrant as specified in its charter)
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Delaware 52-1700207
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 Avenue of the Americas, 36th Floor
New York, New York 10020
(Address of principal executive offices)
(Zip code)
212-584-5100
(Registrant's telephone number, including area code)
_____________________________________________________________________
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 998,221,650 shares
- ----------------------------- ------------------
(Class) (Outstanding as of November 3, 2003)
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SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Part I - Financial Information
Item 1. Consolidated Statements of Operations for the three and nine months ended September 30, 2003
and 2002 (Unaudited)........................................................................ 1
Consolidated Balance Sheets as of September 30, 2003 (Unaudited) and December 31, 2002......... 2
Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2003
(Unaudited)................................................................................. 3
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002
(Unaudited)................................................................................. 4
Notes to Consolidated Financial Statements (Unaudited)......................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 15
Item 4. Controls and Procedures........................................................................ 27
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................... 28
Signatures............................................................................................... 29
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue:
Subscriber revenue, including effects of mail-in rebates... $ 4,197 $ (51) $ 7,780 $ 3
Advertising revenue, net of agency fees.................... 39 62 83 111
Other revenue.............................................. 22 6 59 6
--------- --------- --------- ---------
Total revenue................................................. 4,258 17 7,922 120
--------- --------- --------- ---------
Operating expenses:
Cost of services (excludes depreciation expense shown
separately below):
Satellite and transmission.............................. 7,986 8,140 23,541 25,347
Programming and content................................. 7,498 4,199 21,711 12,107
Customer service and billing............................ 2,236 1,855 20,758 5,579
Sales and marketing ....................................... 27,152 27,953 90,870 64,223
Subscriber acquisition costs .............................. 25,887 5,361 47,025 15,651
General and administrative................................. 7,156 8,121 28,714 24,249
Research and development................................... 3,884 2,561 13,771 23,699
Depreciation expense ...................................... 23,666 23,011 71,229 59,591
Non-cash stock compensation expense (benefit) (1).......... 2,280 538 2,716 (7,995)
--------- --------- --------- ---------
Total operating expenses...................................... 107,745 81,739 320,335 222,451
--------- --------- --------- ---------
Loss from operations.................................... (103,487) (81,722) (312,413) (222,331)
Other (expense) income:
Debt restructuring......................................... -- (1,905) 256,538 (1,905)
Interest and investment income............................. 1,341 1,013 4,011 4,530
Interest expense, net of amounts capitalized............... (4,543) (25,603) (26,573) (80,689)
--------- --------- --------- ---------
Total other (expense) income.................................. (3,202) (26,495) 233,976 (78,064)
--------- --------- --------- ---------
Net loss................................................ (106,689) (108,217) (78,437) (300,395)
Preferred stock dividends..................................... -- (11,287) (8,574) (33,494)
Preferred stock deemed dividends.............................. -- (171) (79,634) (513)
--------- --------- --------- ---------
Net loss applicable to common stockholders.............. $(106,689) $(119,675) $(166,645) $(334,402)
========= ========= ========= =========
Net loss per share applicable to common stockholders
(basic and diluted)........................................ $ (0.11) $ (1.56) $ (0.22) $ (4.41)
========= ========= ========= =========
Weighted average common shares outstanding (basic and
diluted)................................................... 998,156 76,852 755,009 75,820
========= ========= ========= =========
- ----------
(1) Allocation of non-cash stock compensation expense (benefit) to other
operating expenses:
Satellite and transmission............................... $ 166 $ 66 $ 275 $(1,446)
Programming and content.................................. 265 88 402 (1,774)
Customer service and billing............................. 32 4 42 (178)
Sales and marketing...................................... 718 222 649 (948)
General and administrative............................... 957 99 1,127 (1,672)
Research and development................................. 142 59 221 (1,977)
------ ---- ------ -------
Total non-cash stock compensation expense
(benefit).......................................... $2,280 $538 $2,716 $(7,995)
====== ==== ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
1
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 450,508 $ 18,375
Marketable securities........................................................ 28,603 155,327
Prepaid expenses............................................................. 20,301 24,562
Other current assets......................................................... 5,934 1,345
----------- ----------
Total current assets...................................................... 505,346 199,609
Property and equipment, net..................................................... 961,559 1,032,874
FCC license..................................................................... 83,654 83,654
Restricted investments.......................................................... 9,007 7,200
Other long-term assets.......................................................... 8,735 17,603
----------- ----------
Total assets.............................................................. $ 1,568,301 $1,340,940
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................ $ 53,786 $ 43,336
Accrued interest............................................................. 5,590 3,234
Deferred revenue............................................................. 6,703 1,750
----------- ----------
Total current liabilities................................................. 66,079 48,320
Long-term debt.................................................................. 259,686 670,357
Accrued interest, net of current portion........................................ -- 46,914
Deferred revenue, net of current portion........................................ 396 --
Other long-term liabilities..................................................... 10,544 7,350
----------- ----------
Total liabilities......................................................... 336,705 772,941
----------- ----------
Commitments and contingencies:
9.2% Series A Junior Cumulative Convertible Preferred Stock, $.001 par value:
4,300,000 shares authorized, no shares and 1,902,823 shares issued and
outstanding at September 30, 2003 and December 31, 2002, respectively
(liquidation preference of $ - and $190,282), at net carrying value
including accrued dividends............................................... -- 193,230
9.2% Series B Junior Cumulative Convertible Preferred Stock, $.001 par value:
2,100,000 shares authorized, no shares and 853,450 shares issued and
outstanding at September 30, 2003 and December 31, 2002, respectively
(liquidation preference of $ - and $85,345), at net carrying value
including accrued dividends............................................... -- 84,781
9.2% Series D Junior Cumulative Convertible Preferred Stock, $.001 par value:
10,700,000 shares authorized, no shares and 2,558,655 shares issued and
outstanding at September 30, 2003 and December 31, 2002, respectively
(liquidation preference of $ - and $255,866), at net carrying value
including accrued dividends............................................... -- 253,142
Stockholders' equity:
Common stock, $.001 par value: 2,500,000,000 shares authorized, 998,205,643
and 77,454,197 shares issued and outstanding at September 30, 2003 and
December 31, 2002, respectively........................................... 998 77
Additional paid-in capital................................................... 2,285,204 963,335
Deferred compensation........................................................ (48,676) --
Accumulated other comprehensive (loss) income................................ (14) 913
Accumulated deficit.......................................................... (1,005,916) (927,479)
----------- ----------
Total stockholders' equity................................................ 1,231,596 36,846
----------- ----------
Total liabilities and stockholders' equity................................ $ 1,568,301 $1,340,940
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share amounts)
(Unaudited)
Common Stock Additional
-------------------- Paid-In Deferred
Shares Amount Capital Compensation
----------- ------ ---------- ------------
Balances, December 31, 2002............................................... 77,454,197 $ 77 $ 963,335 $ --
Net loss.................................................................. -- -- -- --
Change in unrealized gain (loss) on available-for-sale securities......... -- -- -- --
Issuance of common stock to employees and employee benefit plans.......... 766,040 1 429 --
Compensation in connection with the issuance of stock options............. -- -- 160 --
Issuance of stock-based awards............................................ -- -- 50,803 (50,803)
Amortization of deferred compensation..................................... -- -- -- 2,127
Warrant expense associated with sales and marketing agreement............. -- -- 9 --
Sale of common stock, par value $.001 per share, at $0.92 and $1.04
per share, net of expenses............................................. 211,730,379 212 192,641 --
Exchange of Lehman term loans, including accrued interest................. 120,988,793 121 85,781 --
Exchange of Loral term loans, including accrued interest.................. 58,964,981 59 41,806 --
Exchange of 15% Senior Secured Discount Notes due 2007, including accrued
interest............................................................... 204,319,915 204 144,863 --
Exchange of 14 1/2% Senior Secured Notes due 2009, including accrued
interest............................................................... 148,301,817 148 105,146 --
Exchange of 8 3/4% Convertible Subordinated Notes due 2009, including
accrued interest....................................................... 12,436,656 13 24,342 --
Exchange of 9.2% Series A and B Junior Cumulative Convertible Preferred
Stock, including accrued dividends..................................... 39,927,796 40 304,807 --
Exchange of 9.2% Series D Junior Cumulative Convertible Preferred Stock,
including accrued dividends............................................ 37,065,069 37 283,748 --
Issuance of warrants in connection with the exchange of 9.2% Series A, B
and D Junior Cumulative Convertible Preferred Stock, at $0.92 and
$1.04 per share........................................................ -- -- 30,731 --
Sale of common stock, par value $.001 per share, $1.80 per share, net of
expenses............................................................... 86,250,000 86 144,811 --
Preferred stock dividends................................................. -- -- (8,574) --
Preferred stock deemed dividends.......................................... -- -- (79,634) --
----------- ---- ---------- --------
Balances, September 30, 2003.............................................. 998,205,643 $998 $2,285,204 $(48,676)
=========== ==== ========== ========
Accumulated
Other
Comprehensive Accumulated
(Loss) Income Deficit Total
------------- ----------- ----------
Balances, December 31, 2002............................................... $ 913 $ (927,479) $ 36,846
Net loss.................................................................. -- (78,437) (78,437)
Change in unrealized gain (loss) on available-for-sale securities......... (927) -- (927)
Issuance of common stock to employees and employee benefit plans.......... -- -- 430
Compensation in connection with the issuance of stock options............. -- -- 160
Issuance of stock-based awards............................................ -- -- --
Amortization of deferred compensation..................................... -- -- 2,127
Warrant expense associated with sales and marketing agreement............. -- -- 9
Sale of common stock, par value $.001 per share, at $0.92 and $1.04
per share, net of expenses............................................. -- -- 192,853
Exchange of Lehman term loans, including accrued interest................. -- -- 85,902
Exchange of Loral term loans, including accrued interest.................. -- -- 41,865
Exchange of 15% Senior Secured Discount Notes due 2007, including accrued
interest............................................................... -- -- 145,067
Exchange of 14 1/2% Senior Secured Notes due 2009, including accrued
interest............................................................... -- -- 105,294
Exchange of 8 3/4% Convertible Subordinated Notes due 2009, including
accrued interest....................................................... -- -- 24,355
Exchange of 9.2% Series A and B Junior Cumulative Convertible Preferred
Stock, including accrued dividends..................................... -- -- 304,847
Exchange of 9.2% Series D Junior Cumulative Convertible Preferred Stock,
including accrued dividends............................................ -- -- 283,785
Issuance of warrants in connection with the exchange of 9.2% Series A, B
and D Junior Cumulative Convertible Preferred Stock, at $0.92 and
$1.04 per share........................................................ -- -- 30,731
Sale of common stock, par value $.001 per share, $1.80 per share, net of
expenses............................................................... -- -- 144,897
Preferred stock dividends................................................. -- -- (8,574)
Preferred stock deemed dividends.......................................... -- -- (79,634)
----- ----------- ----------
Balances, September 30, 2003.............................................. $ (14) $(1,005,916) $1,231,596
===== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss ................................................................. $ (78,437) $(300,395)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation expense .................................................. 71,229 59,591
Non-cash interest expense ............................................. 2,735 49,032
Non-cash stock compensation expense (benefit) ......................... 2,716 (7,995)
Loss on disposal of assets ............................................ 14,465 3,666
Non-cash gain associated with debt restructuring ...................... (261,275) --
Costs associated with debt restructuring .............................. 4,737 1,905
Other ................................................................. 9 21
Increase (decrease) in cash and cash equivalents resulting from changes in
assets and liabilities:
Marketable securities ................................................. (1,184) (76,157)
Prepaid expenses and other assets ..................................... (327) (9,017)
Accrued interest ...................................................... 16,921 13,043
Deferred revenue ...................................................... 5,349 882
Accounts payable and accrued expenses ................................. 12,325 6,837
--------- ---------
Net cash used in operating activities .............................. (210,737) (258,587)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment ................................... (14,379) (37,274)
Maturities of restricted investments .................................. -- 14,500
Purchases of available-for-sale securities ............................ (24,826) (198,396)
Maturities of available-for-sale securities ........................... 150,000 395,000
--------- ---------
Net cash provided by investing activities .......................... 110,795 173,830
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net ......................... 194,224 --
Proceeds from issuance of common stock, net ........................... 342,659 147,500
Costs associated with debt restructuring .............................. (4,737) (3,500)
Other ................................................................. (71) (3)
--------- ---------
Net cash provided by financing activities .......................... 532,075 143,997
--------- ---------
Net increase in cash and cash equivalents ................................... 432,133 59,240
Cash and cash equivalents at the beginning of period ........................ 18,375 4,726
--------- ---------
Cash and cash equivalents at the end of period .............................. $ 450,508 $ 63,966
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
1. Business
Sirius Satellite Radio Inc. broadcasts over 100 streams of
digital-quality entertainment: 60 streams of 100% commercial-free music and over
40 streams of sports, news, and entertainment programming for a monthly
subscription fee of $12.95.
Since inception, we have used substantial resources to develop our
satellite radio system. Our satellite radio system consists of our FCC license,
satellite system, national broadcast studio, terrestrial repeater network and
satellite telemetry, tracking and control facilities.
As of September 30, 2003, we had 149,612 subscribers. Subscriptions,
including those currently in promotional periods and those which have been
prepaid, and active SIRIUS radios under our agreement with Hertz, are included
in our subscriber totals.
Our primary source of revenue is subscription and activation fees. In
addition, we derive revenues from selling advertising on our non-music streams.
2. Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements,
including the accounts of Sirius Satellite Radio Inc. and our wholly owned
subsidiary, have been prepared in accordance with accounting principles
generally accepted in the United States and the instructions to Form 10-Q and
Article 10 of Regulation S-X for interim financial reporting. All intercompany
transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting only of
normal, recurring adjustments) considered necessary for a fair presentation of
the consolidated financial statements as of September 30, 2003 and December 31,
2002, and for the three and nine months ended September 30, 2003, have been
included. The results of operations for the three and nine months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the full year. Our consolidated financial statements should be read
together with our consolidated financial statements and the notes thereto
contained in our Annual Report on Form 10-K for the year ended December 31,
2002.
3. Recent Financings; Recapitalization
In June 2003, we sold 86,250,000 shares of our common stock in an
underwritten public offering resulting in net proceeds of $145,547.
In May 2003, we issued $201,250 in aggregate principal amount of our 3
1/2% Convertible Notes due 2008 in an underwritten public offering resulting in
net proceeds of $194,224. Our 3 1/2% Convertible Notes due 2008 are convertible,
at the option of the holder, into shares of our common stock at any time at a
conversion rate of 724.6377 shares of common stock for each $1,000.00 principal
amount, or $1.38 per share of common stock, subject to certain adjustments.
In March 2003, we completed a series of transactions to restructure
our debt and equity capitalization. As part of these transactions:
o we issued 545,012,162 shares of our common stock in exchange
for approximately 91% of our then outstanding debt,
including all of our Lehman term loans, all of our Loral
term loans, $251,230 in aggregate principal amount at
maturity of our 15% Senior Secured Discount Notes due 2007,
$169,742 in aggregate principal amount of our 14 1/2% Senior
Secured Notes due 2009, and $14,717 in aggregate principal
amount of our 8 3/4% Convertible Subordinated Notes due
2009;
5
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
o we issued 39,927,796 shares of our common stock and warrants
to purchase 45,416,690 shares of our common stock in
exchange for all outstanding shares of our 9.2% Series A
Junior Cumulative Convertible Preferred Stock and 9.2%
Series B Junior Cumulative Convertible Preferred Stock held
by affiliates of Apollo Management, L.P. ("Apollo");
o we issued 37,065,069 shares of our common stock and warrants
to purchase 42,160,424 shares of our common stock in
exchange for all outstanding shares of our 9.2% Series D
Junior Cumulative Convertible Preferred Stock held by
affiliates of The Blackstone Group L.P. ("Blackstone");
o we sold 24,060,271 shares of our common stock to Apollo for
an aggregate of $25,000;
o we sold 24,060,271 shares of our common stock to Blackstone
for an aggregate of $25,000; and
o we sold 163,609,837 shares of our common stock to affiliates
of OppenheimerFunds, Inc. ("Oppenheimer") for an aggregate
of $150,000.
During the three months ended March 31, 2003, we recorded a gain of
$256,538 and a deemed dividend of $79,510 as a result of the exchange
transactions. In connection with the exchange offer relating to our debt, we
also amended the indentures under which our 15% Senior Secured Discount Notes
due 2007, 14 1/2% Senior Secured Notes due 2009 and 8 3/4% Convertible
Subordinated Notes due 2009 were issued to eliminate substantially all of the
restrictive covenants. Holders of our debt also waived any existing events of
default or events of default caused by the restructuring.
4. Summary of Significant Accounting Policies
Revenue Recognition
Revenue from subscribers consists of subscription fees, including
revenue derived from our agreement with Hertz, and non-refundable activation
fees. We recognize subscription fees as our service is provided. Activation fees
are recognized ratably over the estimated term of a subscriber relationship,
currently 3.5 years. The estimated term of a subscriber relationship is based on
market research and management's judgment and, if necessary, will be refined in
the future as historical data becomes available. We record an estimate of
mail-in rebates that are paid by us directly to subscribers as a reduction to
subscription revenue in the period the subscriber activates our service. In
subsequent periods estimates are adjusted when necessary.
We recognize revenues from the sale of advertising on our non-music
streams as the advertising is broadcast. Agency fees are calculated based on a
stated percentage applied to gross billing revenue for our advertising inventory
and are reported as a reduction of advertising revenue.
Stock-Based Compensation
In accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," we use the intrinsic value method to
measure the compensation costs of stock-based awards granted to employees.
Accordingly, we record non-cash compensation expense for stock-based awards
granted to employees and directors over the vesting period equal to the excess
of the market price of the underlying common stock at the date of grant over the
exercise price of the stock-related award. The intrinsic value of restricted
stock units as of the date of grant is amortized to non-cash stock compensation
expense over the vesting period. To the extent any performance criteria are
satisfied and the vesting of any stock options and/or restricted stock units
accelerate, the unamortized non-cash stock compensation expense is recorded in
the period in which the performance criteria are satisfied.
6
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
We account for stock-based awards granted to non-employees at fair
value in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation."
In accordance with Financial Accounting Standards Board ("FASB")
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," we record compensation charges or benefits related to repriced
stock options based on the market value of our common stock until the repriced
stock options are exercised, forfeited or expire.
We have adopted the disclosure provisions of SFAS No. 148, "Accounting
for Stock-Based Compensation--Transition and Disclosure--An Amendment of FASB
Statement No. 123." The following table illustrates the effect on net loss
applicable to common stockholders and net loss per share applicable to common
stockholders had stock-based employee compensation been recorded based on the
fair value method under SFAS No. 123:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss applicable to common stockholders--as
reported.......................................... $(106,689) $(119,675) $(166,645) $(334,402)
Non-cash stock compensation expense (benefit)--as
reported.......................................... 2,280 538 2,716 (7,995)
Stock-based compensation--pro forma.................. (8,748) (7,839) (22,067) (25,275)
--------- --------- --------- ---------
Net loss applicable to common stockholders--pro
forma............................................. $(113,157) $(126,976) $(185,996) $(367,672)
========= ========= ========= =========
Net loss per share applicable to common stockholders:
Basic and diluted--as reported.................... $ (0.11) $ (1.56) $ (0.22) $ (4.41)
Basic and diluted--pro forma...................... $ (0.11) $ (1.65) $ (0.25) $ (4.85)
The measure of fair value most often employed under SFAS No. 123, and
used by us, is the Black-Scholes option valuation model ("Black-Scholes").
Black-Scholes has become the standard for estimating the fair value of traded
options.
Traded options, unlike our stock-based awards, are not subject to
vesting restrictions, are fully transferable and use significantly lower
expected stock price volatility measures than those assumed below. It is our
opinion that this model (and other similar option valuation models) does not
produce a single reliable measure of the fair value of our stock-based awards.
The pro forma stock-based employee compensation was estimated using
Black-Scholes with the following assumptions for each period:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- --------- ----
Risk-free interest rate........... 2.84% 2.48% 0.91-2.84% 2.48%
Expected life of options--years... 5.88 4.75 4.89-5.87 4.75
Expected stock price volatility... 118% 110% 115-118% 110%
Expected dividend yield........... N/A N/A N/A N/A
Debt Restructuring
We recorded a gain of $256,538 in connection with the restructuring of
our long-term debt in March 2003. This gain represents the difference between
the carrying value of our 15% Senior Secured Discount Notes due 2007, 14 1/2%
Senior Secured Notes due 2009, Lehman term loans and Loral term loans, including
accrued interest, and the fair market value of the common stock issued, adjusted
for unamortized debt issuance costs and direct costs associated with the
restructuring. This gain is net of a loss on our 8 3/4% Convertible Subordinated
Notes due 2009 exchanged in the restructuring. This loss represents the
difference between the fair market value of the common stock issued in the
exchange and the fair market value of the common stock which would have been
issued under the
7
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
original conversion ratio, including accrued interest, adjusted for unamortized
debt issuance costs and direct costs associated with the restructuring.
Preferred Stock Deemed Dividend
We recorded a deemed dividend of $79,510 in connection with the
exchange in March 2003 of all outstanding shares of our preferred stock for
shares of our common stock and warrants. This deemed dividend represents the
difference between the fair market value of the common stock and warrants issued
in exchange for all outstanding shares of our 9.2% Series A Junior Cumulative
Convertible Preferred Stock, 9.2% Series B Junior Cumulative Convertible
Preferred Stock and 9.2% Series D Junior Cumulative Convertible Preferred Stock
and the fair market value of the common stock which would have been issued under
the original conversion ratios, adjusted for unamortized issuance costs and
direct costs associated with the exchange of the preferred stock.
Net Loss Per Share
Basic net loss per share is based on the weighted average common
shares outstanding during each reporting period. Diluted net loss per share
adjusts the weighted average for the potential dilution that could occur if
common stock equivalents (convertible preferred stock, convertible debt,
warrants and stock options) were exercised or converted into common stock.
Common stock equivalents of approximately 203,192,000 and 93,788,000 for the
three and nine months ended September 30, 2003, respectively, and 16,038,000 and
16,050,000 for the three and nine months ended September 30, 2002, respectively,
were not considered in the calculation of diluted net loss per share for the
three and nine months ended September 30, 2003 and 2002 as the effect would have
been anti-dilutive.
Marketable Securities
Marketable securities consist of U.S. government notes and U.S.
government agency obligations. Effective April 2002, we began classifying
marketable securities as available-for-sale securities rather than trading
securities because we no longer intend to actively buy and sell marketable
securities with the objective of generating trading profits. Available-for-sale
securities are carried at fair market value and unrealized gains and losses are
included as a component of stockholders' equity. Prior to April 2002, marketable
securities were classified as trading securities and unrealized holding gains
and losses were recognized in earnings. Marketable securities held at September
30, 2003 and December 31, 2002 mature within one year from the date of purchase.
We had an unrealized holding loss on marketable securities of $14 as of
September 30, 2003 and an unrealized holding gain of $913 as of December 31,
2002.
Classification of Long-Term Debt and Accrued Interest
In accordance with SFAS No. 6, "Classification of Short-Term
Obligations Expected to be Refinanced," the current portion of long-term debt
and accrued interest that was exchanged for shares of our common stock in March
2003 was classified as long-term liabilities as of December 31, 2002.
Asset Retirement Obligation
In accordance with SFAS No. 143, "Accounting for Asset Retirement
Obligations," we recorded costs equal to the present value of the future
obligation associated with the retirement of our terrestrial repeater equipment.
These costs, which are included in other long-term liabilities, include an
amount that we estimate will be sufficient to satisfy our obligations under
leases to remove our terrestrial repeater equipment and restore the sites to
their original condition. The following table reconciles the beginning and
ending aggregate carrying amount of this asset retirement obligation:
Asset
Retirement
Obligation
----------
Balance, December 31, 2002...................................................... $ --
Present value of asset retirement obligation upon adoption of SFAS No. 143...... 153
Accretion expense............................................................... 70
----
Balance, September 30, 2003..................................................... $223
====
8
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
Reclassifications
Certain amounts in the prior period consolidated financial statements
have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which is effective for all financial instruments created or modified after May
31, 2003 and otherwise effective at the beginning of the first interim period
after June 15, 2003. SFAS No. 150 establishes standards for classifying and
measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity. The
adoption of SFAS No. 150 did not have an impact on our consolidated results of
operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships after June 30, 2003.
All provisions of SFAS No. 149 should be applied prospectively. This statement
did not have an impact on our consolidated results of operations or financial
position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interests in variable interest entities obtained after January 31,
2003. This Interpretation did not have an impact on our consolidated results of
operations or financial position.
5. Subscriber Revenue
Subscriber revenue consists of subscription revenue, non-refundable
activation revenue and the effects of mail-in rebate programs. An estimate of
mail-in rebates that are paid by us directly to subscribers are recorded as a
reduction to subscriber revenue in the period the subscriber activates service.
In subsequent periods estimates are adjusted when necessary. During the three
months ended September 30, 2003, we decreased the estimated cost of a mail-in
rebate program that ended during the third quarter of 2003, resulting in a $335
positive adjustment to subscriber revenue. Subscriber revenue consists of the
following:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
------ ----- ------ -----
Subscription revenue..................................... $3,687 $ 259 $7,929 $ 310
Activation revenue....................................... 175 9 281 12
Effects of mail-in rebates............................... 335 (319) (430) (319)
------ ----- ------ -----
Total subscriber revenue, including effects of mail-in
rebates............................................ $4,197 $ (51) $7,780 $ 3
====== ===== ====== =====
6. Non-Cash Stock Compensation
We record non-cash stock compensation expenses or benefits in
connection with the grant of certain stock options and restricted stock units,
and the issuance of common stock to employees and employee benefit plans. We
recognized non-cash stock compensation expense of $2,280 and $2,716 for the
three and nine months ended September 30, 2003, respectively. We recognized
non-cash stock compensation expense of $538 and a non-cash stock compensation
benefit of $7,995 for the three and nine months ended September 30, 2002,
respectively.
The non-cash stock compensation expense for the nine months ended
September 30, 2003 includes a $314 benefit related to certain performance
conditions of restricted stock issued to an employee that we anticipate
9
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
will not be satisfied. The non-cash stock compensation benefit for the nine
months ended September 30, 2002 includes a non-cash stock compensation benefit
of $9,717 related to options that were repriced in April 2001.
7. Supplemental Cash Flow Disclosures
We paid $6,935 and $24,039 for interest during the nine months ended
September 30, 2003 and 2002, respectively. The following represents non-cash
operating, investing and financing activities:
For the Nine Months Ended
September 30,
-------------------------
2003 2002
-------- -------
Supplemental non-cash operating activities:
Common stock issued in satisfaction of accrued compensation.................. $ -- $ 1,720
Supplemental non-cash investing and financing activities:
Capitalized interest......................................................... -- 5,426
Common stock issued in exchange of 15% Senior Secured Discount Notes due
2007, including accrued interest.......................................... 145,067 --
Common stock issued in exchange of 14 1/2% Senior Secured Notes due 2009,
including accrued interest................................................ 105,294 --
Common stock issued in exchange of Lehman term loans, including accrued
interest.................................................................. 85,902 --
Common stock issued in exchange of Loral term loans, including accrued
interest.................................................................. 41,865 --
Common stock issued in exchange of 8 3/4% Convertible Subordinated Notes due
2009, including accrued interest.......................................... 24,355 39,300
Common stock issued in exchange of 9.2% Series A and B Junior Cumulative
Convertible Preferred Stock, including accrued dividends.................. 304,847 --
Common stock issued in exchange of 9.2% Series D Junior Cumulative
Convertible Preferred Stock, including accrued dividends.................. 283,785 --
Warrants issued in exchange of 9.2% Series A, B and D Junior Cumulative
Convertible Preferred Stock, including accrued dividends.................. 30,731 --
8. Property and Equipment
Subscriber Management System
In April 2003, we terminated our agreement with Sentraliant, the
company that developed and operated our previous subscriber management system.
Pursuant to that agreement, we paid Sentraliant $5,000 to terminate our
agreement, of which approximately $1,000 related to fees for operating the
system through the date of termination. As a result of this termination, we
recorded a non-cash charge of $14,465 related to the write-off of the net book
value of our subscriber management system. These costs are included in customer
service and billing in the accompanying consolidated statements of operations
for the nine months ended September 30, 2003.
In May 2003, we began using a replacement subscriber management system
operated by IntegraTouch LLC. Our new system effectively manages our subscriber
data, bills subscribers and interfaces with our conditional access system;
however, portions of our new system have not yet been implemented, including
certain billing, credit card and collections functions. We continue to evaluate
the effectiveness of our new system, and continue to modify essential functions
and implement enhancements to the system.
9. Long-Term Debt
Our long-term debt consists of the following:
As of As of
September 30, December 31,
2003 2002
------------- ------------
15% Senior Secured Discount Notes due 2007........... $ 29,200 $280,430
14 1/2% Senior Secured Notes due 2009................ 27,492 179,382
3 1/2% Convertible Notes due 2008.................... 201,250 --
10
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
8 3/4% Convertible Subordinated Notes due 2009....... 1,744 16,461
Lehman term loans.................................... -- 144,084
Loral term loans..................................... -- 50,000
-------- --------
Total long-term debt.............................. $259,686 $670,357
======== ========
Debt Restructuring
In March 2003, we issued 545,012,162 shares of our common stock in
exchange for approximately 91% of our then outstanding debt, including all of
our Lehman term loans, all of our Loral term loans and $435,689 in aggregate
principal amount at maturity of our 15% Senior Secured Discount Notes due 2007,
14 1/2% Senior Secured Notes due 2009 and 8 3/4% Convertible Subordinated Notes
due 2009. During the three months ended March 31, 2003, we recorded a gain of
$256,538 as a result of the exchange transactions. In connection with the
exchange offer relating to our debt, we also amended the indentures under which
our 15% Senior Secured Discount Notes due 2007, 14 1/2% Senior Secured Notes due
2009 and 8 3/4% Convertible Subordinated Notes due 2009 were issued to eliminate
substantially all of the restrictive covenants. Holders of our debt also waived
any existing events of default or events of default caused by the restructuring.
Refer to Note 3 for further information regarding our recapitalization.
3 1/2% Convertible Notes due 2008
In May 2003, we issued $201,250 in aggregate principal amount of our 3
1/2% Convertible Notes due 2008 in an underwritten public offering resulting in
net proceeds of $194,224. Our 3 1/2% Convertible Notes due 2008 are convertible,
at the option of the holder, into shares of our common stock at any time at a
conversion rate of 724.6377 shares of common stock for each $1,000.00 principal
amount, or $1.38 per share of common stock, subject to certain adjustments. Our
3 1/2% Convertible Notes due 2008 mature on June 1, 2008 and interest is payable
semi-annually on June 1 and December 1 of each year, commencing on December 1,
2003. The obligations under our 3 1/2% Convertible Subordinated Notes due 2008
are not secured by any of our assets.
8 3/4% Convertible Subordinated Notes due 2009
Our 8 3/4% Convertible Subordinated Notes mature on September 29,
2009. Cash interest is payable semi-annually on each March 29 and September 29,
through September 29, 2009. Our 8 3/4% Convertible Notes due 2009 are
convertible, at the option of the holder, into shares of our common stock at any
time at a conversion rate of 35.134 shares of common stock for each $1,000.00
principal amount, or $28.4625 per share of common stock, subject to certain
adjustments. The obligations under our 8 3/4% Convertible Subordinated Notes due
2009 are not secured by any of our assets.
We recorded a non-cash charge of $9,650 related to the issuance of
2,913,483 shares of our common stock in exchange for $29,475 in aggregate
principal amount of our 8 3/4% Convertible Subordinated Notes due 2009,
including accrued interest, during the nine months ended September 30, 2002,
respectively. This non-cash charge of $9,650 is included in interest expense for
the nine months ended September 30, 2002.
14 1/2% Senior Secured Notes due 2009
Our 14 1/2% Senior Secured Notes mature on May 15, 2009. Cash interest
is payable semi-annually on each May 15 and November 15, through May 15, 2009.
As of September 30, 2003, $30,258 in aggregate principal amount of our 14 1/2%
Senior Secured Notes due 2009 were outstanding. The aggregate principal amount
of our 14 1/2% Senior Secured Notes due 2009 is reduced by $2,766, the
unamortized portion of the fair market value of warrants issued in connection
with these notes. The obligations under our 14 1/2% Senior Secured Notes due
2009 are secured by a lien on the stock of our subsidiary that holds our FCC
license and a lien on our spare satellite.
15% Senior Secured Discount Notes due 2007
Our 15% Senior Secured Discount Notes mature on December 1, 2007. Cash
interest is payable semi-annually on each June 1 and December 1, through
December 1, 2007. The obligations under our 15% Senior Secured Discount Notes
due 2007 are secured by a lien on the stock of our subsidiary that holds our FCC
license and a lien on our spare satellite.
11
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
10. Stockholders' Equity
Common Stock, par value $.001 per share
In June 2003, we sold 86,250,000 shares of our common stock in an
underwritten public offering resulting in net proceeds of $145,547.
In March 2003, we sold 24,060,271 shares of our common stock to Apollo
for an aggregate of $25,000; 24,060,271 shares of our common stock to Blackstone
for an aggregate of $25,000; and 163,609,837 shares of our common stock to
Oppenheimer for an aggregate of $150,000. We received net proceeds of $197,112
in connection with these sales.
In March 2003, our stockholders approved an amendment and restatement
of our certificate of incorporation to increase our authorized shares of common
stock from 500,000,000 to 2,500,000,000. We filed this amended and restated
certificate of incorporation with the Secretary of State of the State of
Delaware on March 4, 2003.
Stock-Based Compensation
In January 2003, our board of directors adopted the Sirius Satellite
Radio 2003 Long-Term Stock Incentive Plan (the "2003 Plan"), and on March 4,
2003 our stockholders approved this plan. As of September 30, 2003,
approximately 110,787,000 shares of our common stock were available for grant
under the 2003 Plan.
The purpose of the 2003 Plan is to promote our long-term financial
success by enhancing our ability to attract, retain and reward individuals who
contribute to our success and to further align our personnel with stockholders.
Employees and consultants are eligible to receive awards under the 2003 Plan.
The 2003 Plan provides for the grant of stock options, restricted
stock, restricted stock units and other stock-based awards that the compensation
committee of our board of directors may deem appropriate. Vesting and other
terms of stock-based awards are set forth in the agreements with the individuals
receiving the awards. Stock-based awards granted under the 2003 Plan generally
vest over three to five years from the date of grant and expire in ten years.
During the third quarter of 2003, we granted a total of 43,607,250
nonqualified stock options to employees and consultants with an exercise price
of $1.04 per share. Since the exercise price of these stock-based awards was
less than the fair market value of the underlying shares of common stock at the
date of grant, we recorded deferred compensation, a component of stockholders'
equity, of $25,312 during the third quarter of 2003. Such deferred compensation
will be amortized to non-cash stock compensation expense over the vesting
period. Approximately 44% of these options vest ratably over three years, 22%
vest in July 2008 with acceleration to March 2004 if performance criteria are
satisfied in 2003 and 34% vest in July 2008 with acceleration to March 2005 if
performance criteria are satisfied in 2004.
We also granted 15,735,000 restricted stock units to certain employees
during the third quarter of 2003. Each restricted stock unit entitles the holder
to receive one share of common stock upon vesting in July 2008 with acceleration
to March 2006 if performance criteria are satisfied in 2005. We recorded
deferred compensation of $25,491 during the third quarter of 2003 in connection
with these restricted stock units, which will be amortized to non-cash stock
compensation expense over the vesting period.
Preferred Stock
In March 2003, we issued 39,927,796 shares of our common stock to
Apollo in exchange for all of our outstanding 9.2% Series A Junior Cumulative
Convertible Preferred Stock and 9.2% Series B Junior Cumulative Convertible
Preferred Stock, and 37,065,069 shares of our common stock to Blackstone in
exchange for all of our outstanding 9.2% Series D Junior Cumulative Convertible
Preferred Stock, including, in each case, accrued dividends. During the three
months ended March 31, 2003, we recorded a deemed dividend of $79,510 as a
result of the exchange transactions. Refer to Note 3 for further information
regarding our recapitalization.
12
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
Warrants
We issued warrants to purchase 45,416,690 shares of our common stock
in exchange for all our outstanding 9.2% Series A Junior Cumulative Convertible
Preferred Stock and 9.2% Series B Junior Cumulative Convertible Preferred Stock
held by Apollo. Warrants to purchase 27,250,013 shares of our common stock have
an exercise price of $1.04 per share, and warrants to purchase 18,166,677 shares
of our common stock have an exercise price of $0.92 per share. These warrants
are exercisable and expire on March 7, 2005.
We issued warrants to purchase 42,160,424 shares of our common stock
in exchange for all our outstanding 9.2% Series D Junior Cumulative Convertible
Preferred Stock held by Blackstone. Warrants to purchase 25,296,255 shares of
our common stock have an exercise price of $1.04 per share, and warrants to
purchase 16,864,169 shares of our common stock have an exercise price of $0.92
per share. These warrants are exercisable and expire on September 7, 2004.
11. Commitments and Contingencies
The following table summarizes our contractual commitments as of
September 30, 2003:
2003 2004 2005 2006 2007 Thereafter Total
------- ------- ------- ------- ------- ---------- --------
Operating leases ............. $ 7,764 $ 8,066 $ 7,302 $ 6,393 $ 6,181 $36,243 $ 71,949
Satellite and transmission ... 573 2,291 2,291 2,291 2,291 18,328 28,065
Programming and content ...... 1,423 28,013 30,954 21,507 1,002 -- 82,899
Customer service and billing.. 1,095 1,440 1,440 360 -- -- 4,335
Sales and marketing .......... 22,903 23,023 11,057 6,216 4,500 -- 67,699
Chip set development and
production ................ 4,800 14,400 -- -- -- -- 19,200
------- ------- ------- ------- ------- ------- --------
Contractual commitments ...... $38,558 $77,233 $53,044 $36,767 $13,974 $54,571 $274,147
======= ======= ======= ======= ======= ======= ========
Operating Leases
We have entered into operating leases related to our national
broadcast studio, office space, terrestrial repeater sites and equipment.
Satellite and Transmission
We have entered into an agreement with a provider of satellite
services to operate our off-site satellite telemetry, tracking and control
facilities.
Programming and Content
We have entered into agreements with licensors of music and non-music
programming and, in certain instances, are obligated to pay license fees,
guarantee minimum advertising revenue share or purchase advertising on
properties owned or controlled by these licensors. In addition, we have
agreements with various rights organizations pursuant to which we pay royalties
for public performances of music.
Customer Service and Billing
We have entered into agreements with third parties to provide customer
service, billing and subscriber management.
Sales and Marketing
We have entered into various marketing and sponsorship agreements to
promote our brand and are obligated to make payments to sponsors, retailers,
automakers and radio manufacturers.
13
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
Chip Set Development and Production
We have entered into an agreement with Agere Systems, Inc. ("Agere")
to develop and produce chip sets for use in SIRIUS radios. This agreement
requires Agere to produce a minimum quantity of chip sets during each year of
the agreement.
Joint Development Agreement
Under the terms of a joint development agreement with XM Satellite
Radio, the other holder of a FCC satellite radio license, each party is
obligated to fund one half of the development cost for a unified standard for
satellite radios. During the three and nine months ended September 30, 2003, we
incurred costs of $48 and $117, respectively, under this agreement. We did not
incur any costs associated with the joint development agreement during the three
and nine months ended September 30, 2002. The costs related to the joint
development agreement are being expensed as incurred in research and
development. We are currently unable to determine the expenditures necessary to
complete this process, but they may be significant.
Other Commitments
We have agreed to use reasonable efforts to assist certain
manufacturers of SIRIUS radios and components for those radios in the event that
production of such radios and components are greater than sales. In certain
circumstances, these reasonable efforts may include the purchase of unsold
SIRIUS radios or components. In addition, we have also entered into agreements
with automakers, radio manufacturers and others that include per-radio and
per-subscriber required payments and revenue sharing arrangements. These future
costs are dependent upon many factors and are difficult to anticipate; however,
these costs may be substantial. We may enter into additional programming,
marketing and other agreements that contain provisions similar to our current
agreements.
12. Subsequent Event
On November 5, 2003, Blackstone exercised 21,027,512 warrants, each
with an exercise price of $1.04 per share, through a cashless exercise. In
connection with this exercise, we will issue 11,531,805 shares of our common
stock to Blackstone.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(All dollar amounts are in thousands, unless otherwise stated)
Special Note Regarding Forward-Looking Statements
The following cautionary statements identify important factors that
could cause our actual results to differ materially from those projected in
forward-looking statements made in this Quarterly Report on Form 10-Q and in
other reports and documents published by us from time to time. Any statements
about our beliefs, plans, objectives, expectations, assumptions, future events
or performance are not historical facts and may be forward-looking. These
statements are often, but not always, made 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." Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed throughout our Annual Report on Form 10-K for the year ended
December 31, 2002 (the "Form 10-K") and in other reports and documents published
by us from time to time, particularly the risk factors described under "Business
- -- Risk Factors" in Part I of the Form 10-K.
Among the significant factors that could cause our actual results to
differ materially from those expressed in the forward-looking statements are:
o our competitive position; XM Satellite Radio, the other
satellite radio service provider in the United States, has
substantially more subscribers than us and may have certain
competitive advantages;
o our dependence upon third parties to manufacture,
distribute, market and sell SIRIUS radios and components for
those radios;
o the unproven market for our service; and
o the useful life of our satellites, which have experienced
circuit failures on their solar arrays and may not be
covered by insurance.
Because the risk factors referred to above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance on
any of these forward-looking statements. In addition, any forward-looking
statement speaks only as of the date on which it is made, and we undertake no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which the statement is made, to
reflect the occurrence of unanticipated events or otherwise. New factors emerge
from time to time, and it is not possible for us to predict which will arise or
to assess with any precision the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Overview
We broadcast over 100 streams of digital-quality entertainment: 60
streams of 100% commercial-free music and over 40 streams of sports, news, and
entertainment programming for a monthly subscription fee of $12.95. We hold one
of only two licenses issued by the FCC to operate a national satellite radio
system.
As of September 30, 2003, we had 149,612 subscribers. The following
chart contains a breakdown of our subscribers as of:
December 31, March 31, June 30, September 30,
2002 2003 2003 2003
---------------------------------------------------
Retail 26,203 51,969 77,713 110,821
OEM and Special Markets 1,800 4,252 7,630 15,358
Hertz 1,944 11,838 19,843 23,433
---------------------------------------------------
Total Subscribers 29,947 68,059 105,186 149,612
15
Subscriptions, including those currently in promotional periods and
those which have been prepaid, and active SIRIUS radios under our agreement with
Hertz, are included in our subscriber totals.
We derive revenue from:
o subscription fees, including revenue derived from our
agreement with Hertz;
o activation fees collected from our subscribers; and
o advertising on our non-music streams.
Results of Operations
Three Months Ended September 30, 2003 Compared with Three Months Ended September
30, 2002
Total Revenue. Total revenue increased to $4,258 from $17 for the
three months ended September 30, 2003 and 2002, respectively. Total revenue for
the three months ended September 30, 2003 included subscriber revenue of $4,197,
consisting of subscription and non-refundable activation fees, net advertising
revenue of $39 and revenue from other sources of $22. Total revenue for the
three months ended September 30, 2002 included negative subscriber revenue of
$51, net advertising revenue of $62 and revenue from other sources of $6.
Subscriber Revenue. The increase in subscriber revenue of $4,248 was
attributable to the growth of subscribers to our service. We added 44,426 net
new subscribers during the three months ended September 30, 2003 and had 149,612
subscribers as of September 30, 2003. We added 8,474 net new subscribers during
the three months ended September 30, 2002 and had 11,821 subscribers as of
September 30, 2002. Subscriber revenue for the three months ended September 30,
2003 included subscription revenue of $3,687, activation revenue of $175 and a
$335 positive adjustment to subscriber revenue to decrease the estimated cost of
a mail-in rebate program that ended during the third quarter of 2003. Subscriber
revenue for the three months ended September 30, 2002 included subscription
revenue of $259 and activation revenue of $9, which was offset by $319 of costs
associated with mail-in rebate programs. Activation fees are recognized ratably
over the term of the subscriber relationship, currently estimated to be 3.5
years. An estimate of mail-in rebates that are paid by us directly to
subscribers are recorded as a reduction to subscription revenue in the period
the subscriber activates our service. In subsequent periods estimates are
adjusted when necessary. Future subscription revenue will be dependent upon,
among other things, the growth of our subscriber base, discounts and mail-in
rebates offered to subscribers and the identification of additional revenue
streams from subscribers.
Average monthly revenue per subscriber, or ARPU. ARPU, which is
not a measure of financial performance under accounting principles
generally accepted in the United States, is derived from total
subscriber revenue over the daily weighted average number of
subscribers for the period. ARPU for the three months ended September
30, 2003 was $11.20. This amount included the effects of mail-in
rebate programs of $0.89 and the effects of Hertz subscribers of
$(1.78). The effects of mail-in rebates had a positive impact to ARPU
for the three months ended September 30, 2003 due to a $335 positive
adjustment to decrease our estimate of mail-in rebates for the period.
The Hertz program generated $2.12 per subscriber for the three months
ended September 30, 2003, resulting in dilution to ARPU. Future ARPU
will be dependent upon the amount and timing of subscriber discounts,
mail-in rebate programs, and the identification of additional revenue
streams from subscribers.
Set forth below is a chart showing the calculation of ARPU and
the average revenue per Hertz subscriber for the three months ended
September 30, 2003:
Average revenue per subscriber $12.09
Effects of Hertz subscribers (1.78)
------
ARPU before effects of rebates 10.31
Effects of rebate programs 0.89
------
Reported ARPU $11.20
Average revenue per Hertz subscriber $ 2.12
16
Advertising Revenue. Advertising revenue, net of agency fees of $5,
was $39 for the three months ended September 30, 2003. Advertising revenue, net
of agency fees of $11, was $62 for the three months ended September 30, 2002. We
recognize advertising revenue from the sale of advertising on our non-music
streams as it is broadcast. Sales of advertising inventory were higher for the
three months ended September 30, 2002 due to higher demand as a result of the
introduction of our service during 2002.
Satellite and Transmission. Satellite and transmission expenses
decreased to $7,986 for the three months ended September 30, 2003 from $8,140
for the three months ended September 30, 2002. Satellite and transmission
expenses consist primarily of personnel costs, in-orbit satellite insurance
expense and costs associated with the operation and maintenance of our satellite
tracking, telemetry and control system, terrestrial repeater network and
national broadcast studio. The decrease in satellite and transmission expense
was primarily attributable to decreased in-orbit satellite insurance expense as
a result of reduced insurance coverage. We currently have $110,000 of insurance
for each of our satellites in the event of a total or constructive total loss.
We expect that a significant portion of our satellite and transmission costs
will remain relatively constant, and that increases or decreases in satellite
and transmission costs will be due to costs of insuring our in-orbit satellites
and modest additions to our terrestrial repeater network.
Programming and Content. Programming and content expenses increased to
$7,498 for the three months ended September 30, 2003 from $4,199 for the three
months ended September 30, 2002. Programming and content expenses include costs
to acquire programming from third parties, on-air talent costs, broadcast
royalties and programming personnel costs. The increase in costs was primarily
attributable to broadcast royalties and the costs of acquiring additional talk
programming.
Acquired programming. We have entered into various agreements
with third parties for music and non-music programming. These
agreements require us to share advertising revenue, pay license fees
and purchase advertising on media properties owned or controlled by
the licensor. In addition, certain agreements include guaranteed
obligations which we recognize on a straight-line basis over the term
of the applicable agreement. Advertising revenue share is expensed as
the associated revenue is recognized; license fees are expensed as the
programming is aired; and purchased advertising is recorded as a sales
and marketing expense when the advertising is aired.
Broadcast royalties. We have entered into agreements with various
rights organizations pursuant to which we pay royalties for public
performances of music. These agreements include fixed and variable
payment obligations. We record variable broadcast royalties as they
are incurred and fixed obligations on a straight-line basis over the
term of the applicable agreement.
We anticipate that our programming costs will increase over time as we
continue to develop our streams and share advertising revenue from the sale of
advertising on our non-music streams.
Customer Service and Billing. Customer service and billing costs
increased to $2,236 for the three months ended September 30, 2003 from $1,855
for the three months ended September 30, 2002. Customer service and billing
costs include costs associated with the operation of our customer service center
and subscriber management system. The increase in costs during the 2003 quarter
was due to an increase in the number of representatives at our customer service
center which was offset by a decrease in the cost to operate our subscriber
management system.
Sales and Marketing. Sales and marketing expenses decreased to $27,152
for the three months ended September 30, 2003 from $27,953 for the three months
ended September 30, 2002. Sales and marketing expenses include costs related to
sales and marketing personnel, advertising media and production activities,
sponsorships and payments to reimburse retailers, distributors and automakers
for marketing and promotional activities.
Advertising Media and Production. These costs include promotional
events, media, advertising production and market research. Media is
expensed when it is aired and advertising production costs are
expensed as incurred.
Retail and Distribution. These costs include advertising,
residuals, market development funds and in-store merchandising.
Advertising is expensed as incurred. Residuals are monthly fees paid
based upon the number of subscribers using a SIRIUS radio purchased
from a retailer and are expensed as incurred. Market development funds
are fixed and variable payments to reimburse retailers for the cost
17
of advertising and other product awareness activities. Fixed market
development funds are expensed over the periods specified in the
applicable agreement; variable costs are expensed at the time a
subscriber is activated.
Automakers. We have entered into agreements with DaimlerChrysler,
Ford, BMW and other automakers which anticipate that such automakers
will manufacture, market and sell vehicles which are equipped with
SIRIUS radios ("Enabled Vehicles"). Under many of these agreements, we
share a portion of the revenue we derive from subscribers using
Enabled Vehicles. This revenue share is expensed as the corresponding
subscription revenue is earned. We also reimburse automakers for
certain advertising, promotional, hardware and engineering costs. We
record expenses associated with these reimbursements as incurred or on
a straight-line basis over the contract period for guaranteed
obligations.
We have issued a warrant to purchase 4,000,000 shares of our
common stock to each of DaimlerChrysler and Ford. These warrants
become exercisable based on, among other conditions, the number of
Enabled Vehicles the automakers manufacture. We record warrant expense
for interim reporting periods based upon the performance of the
automakers in manufacturing Enabled Vehicles and the fair value of the
warrants at each reporting date. The final measurement date of these
warrants will be the date that each performance commitment for such
warrants is satisfied.
We expect sales and marketing expenses to increase in the future as we
continue to build brand awareness through national advertising and promotional
activities.
Subscriber Acquisition Costs. Subscriber acquisition costs increased
to $25,887 for the three months ended September 30, 2003 from $5,361 for the
three months ended September 30, 2002. Subscriber acquisition costs include
incentives for the purchase, installation and activation of SIRIUS radios, as
well as subsidies paid to radio manufacturers, automakers, retailers and
payments to Agere for chip set production. Certain subscriber acquisition costs
are recorded in advance of acquiring a subscriber, since we currently pay our
subsidies upon shipment, not activation, of SIRIUS radios. Subscriber
acquisition costs do not include advertising, loyalty payments to distributors
and dealers of SIRIUS radios, revenue sharing payments to manufacturers of
SIRIUS radios and guaranteed payments to automakers. We retain ownership of the
SIRIUS radios used in our agreement with Hertz; as a result, amounts capitalized
in connection with this program are not included in our subscriber acquisition
costs.
The increase in subscriber acquisition costs is attributable to:
higher shipments of SIRIUS radios to support sales in the period and an increase
in retail inventory for anticipated fourth quarter sales; an increase in chip
set subsidies as a result of purchase commitments under our contract with Agere
which were not required to support third quarter sales; and the effect of
introductory promotional activities. In addition to chip set subsidies included
in subscriber acquisition costs during the three months ended September 30,
2003, approximately $3,050 of chip sets that have been delivered to us by Agere
under our contract, but have not yet been shipped to radio manufacturers, are
included under other current assets on our Consolidated Balance Sheets as of
September 30, 2003.
Subscriber acquisition costs per gross activation, which is not a
measure of financial performance under accounting principles generally accepted
in the United States, is derived from total subscriber acquisition costs over
the number of gross activations for the period. Total subscriber acquisition
costs per gross activation for the three months ended September 30, 2003 was
$522. Of this amount, approximately $197 per gross activation results from our
contract with Agere and approximately $127 per gross activation represents
introductory promotional activities. Subscriber acquisition costs per gross
activation, net of these two items, was approximately $198 per gross activation
for the three months ended September 30, 2003.
We expect total subscriber acquisition costs to increase in the future
as we continue to offer subsidies, commissions and other incentives to acquire
subscribers. We anticipate that the costs of certain subsidized components of
SIRIUS radios will decrease as manufacturers experience economies of scale in
production and we secure additional manufacturers of these components.
General and Administrative. General and administrative expenses
decreased to $7,156 for the three months ended September 30, 2003 from $8,121
for the three months ended September 30, 2002. General and administrative
expenses include rent and occupancy, accounting, legal and public relations
costs and costs of general
18
and administrative personnel. The decrease was a result of a $924 loss on
disposal of assets associated with the termination of non-essential office space
during the three months ended September 30, 2002.
Research and Development. Research and development costs increased to
$3,884 for the three months ended September 30, 2003 from $2,561 for the three
months ended September 30, 2002. Research and development costs include
personnel costs and costs to develop our next generation chip sets and new
products. The increase related to additional development work associated with
future generations of chip sets.
Chip Set Development. We have an agreement with Agere to develop
and produce chip sets for use in SIRIUS radios. This agreement
requires Agere to manufacture a minimum quantity of chip sets during
each year of the agreement. The agreement requires us to pay Agere
fixed monthly payments. These costs are allocated between research and
development and subscriber acquisition costs for development work and
chip set production, respectively.
Depreciation Expense. Depreciation expense increased to $23,666 for
the three months ended September 30, 2003 from $23,011 for the three months
ended September 30, 2002. We expect depreciation expense to remain relatively
constant as our satellite radio system is complete.
Non-Cash Stock Compensation. We recognized non-cash stock compensation
expense of $2,280 and $538 for the three months ended September 30, 2003 and
2002, respectively. Non-cash stock compensation includes charges and benefits
associated with the grant of certain stock options and restricted stock units
and the issuance of our common stock to employees and employee benefit plans.
The increase is a result of the issuance of approximately 59 million stock-based
awards, which includes a combination of stock options with an exercise price of
$1.04 per share and restricted stock units, to employees. Future non-cash stock
compensation is contingent upon a number of factors, including the price of our
common stock and the vesting date of these stock options and restricted stock
units, and could materially change.
Interest and Investment Income. Interest and investment income
increased to $1,341 for the three months ended September 30, 2003 from $1,013
for the three months ended September 30, 2002. This increase was attributable to
a higher average balance of cash, cash equivalents and marketable securities
during the three months ended September 30, 2003.
Interest Expense. Interest expense decreased to $4,543 for the three
months ended September 30, 2003 from $25,603, net of amounts capitalized of
$5,426, for the three months ended September 30, 2002. The decrease in interest
expense was a result of the exchange of approximately $636,000 in aggregate
principal amount at maturity of our outstanding long-term debt for common stock
in March 2003.
Nine Months Ended September 30, 2003 Compared with Nine Months Ended September
30, 2002
Total Revenue. Total revenue increased to $7,922 from $120 for the
nine months ended September 30, 2003 and 2002, respectively. Total revenue for
the nine months ended September 30, 2003 included subscriber revenue of $7,780,
consisting of subscription and non-refundable activation fees, net advertising
revenue of $83 and revenue from other sources of $59. Total revenue for the nine
months ended September 30, 2002 included subscriber revenue of $3, net
advertising revenue of $111 and revenue from other sources of $6.
Subscriber Revenue. The increase in subscriber revenue of $7,777 was
attributable to the growth of subscribers to our service. We added 119,665 net
new subscribers during the nine months ended September 30, 2003 and had 149,612
subscribers as of September 30, 2003. We added 11,821 net new subscribers during
the nine months ended September 30, 2002 and had 11,821 subscribers as of
September 30, 2002. Subscriber revenue for the nine months ended September 30,
2003 included subscription revenue of $7,929 and activation revenue of $281,
which was offset by $430 of costs associated with mail-in rebate programs.
Subscriber revenue for the nine months ended September 30, 2002 included
subscription revenue of $310 and activation revenue of $12, which was offset by
$319 of costs associated with mail-in rebate programs.
Average monthly revenue per subscriber, or ARPU. ARPU for the
nine months ended September 30, 2003 was $10.01. This amount included
the effects of mail-in rebate programs of $(0.55) and the effects of
Hertz subscribers of $(1.52). The Hertz program generated $3.39 per
subscriber for the nine months ended September 30, 2003, resulting in
dilution to ARPU.
19
Set forth below is a chart showing the calculation of ARPU and
the average revenue per Hertz subscriber for the nine months ended
September 30, 2003:
Average revenue per subscriber $12.08
Effects of Hertz subscribers (1.52)
------
ARPU before effects of rebates 10.56
Effects of rebate programs (0.55)
------
Reported ARPU $10.01
Average revenue per Hertz subscriber $ 3.39
Advertising Revenue. Advertising revenue, net of agency fees of $13,
was $83 for the nine months ended September 30, 2003. Advertising revenue, net
of agency fees of $19, was $111 for the nine months ended September 30, 2002.
Sales of advertising inventory were higher for the nine months ended September
30, 2002 due to higher demand as a result of the introduction of our service
during that period.
Satellite and Transmission. Satellite and transmission expenses
decreased to $23,541 for the nine months ended September 30, 2003 from $25,347
for the nine months ended September 30, 2002. The decrease in satellite and
transmission expense was primarily attributable to decreased in-orbit satellite
insurance expense as a result of reduced insurance coverage.
Programming and Content. Programming and content expenses increased to
$21,711 for the nine months ended September 30, 2003 from $12,107 for the nine
months ended September 30, 2002. The increase in costs was primarily
attributable to broadcast royalties, on-air talent costs and costs of acquiring
additional talk programming.
Customer Service and Billing. Customer service and billing costs
increased to $20,758 for the nine months ended September 30, 2003 from $5,579
for the nine months ended September 30, 2002. The increase in costs during the
period was due to a $14,465 loss on the disposal of our prior subscriber
management system as a result of the termination of our agreement with
Sentraliant and an increase in the number of representatives at our customer
service center.
In May 2003, we began using a replacement subscriber management
system operated by IntegraTouch LLC. Our new system effectively manages our
subscriber data, bills subscribers and interfaces with our conditional
access system; however, portions of our new system have not yet been
implemented, including certain billing, credit card and collections
functions. We continue to evaluate the effectiveness of our new system, and
continue to modify essential functions and implement enhancements to the
system.
Sales and Marketing. Sales and marketing expenses increased to $90,870
for the nine months ended September 30, 2003 from $64,223 for the nine months
ended September 30, 2002. Sales and marketing expenses increased due to the
launch of our national advertising campaign, certain marketing activities by
automakers and radio manufacturers and sponsorship activities.
Subscriber Acquisition Costs. Subscriber acquisition costs increased
to $47,025 for the nine months ended September 30, 2003 from $15,651 for the
nine months ended September 30, 2002. The increase in subscriber acquisition
costs is attributable to hardware subsidies on SIRIUS radios as a result of the
increase in gross activations for the nine months ended September 30, 2003 as
compared to the nine months ended September 30, 2002. In addition, during the
third quarter of 2003 we recorded additional hardware subsidies on SIRIUS radios
shipped to distribution channels, including retailers, in advance of the holiday
selling season. Chip set subsidies also increased as a result of purchase
commitments under our contract with Agere, which were not required to support
third quarter sales. The remaining increase in subscriber acquisition costs is
attributable to the effect of introductory promotional activities that were
offered during 2003. Total subscriber acquisition costs per gross activation
for the nine months ended September 30, 2003 was $362.
General and Administrative. General and administrative expenses
increased to $28,714 for the nine months ended September 30, 2003 from $24,249
for the nine months ended September 30, 2002. The increase was a result of costs
to terminate our agreement with Sentraliant, increased corporate insurance
premiums offset by
20
reduced rent and occupancy costs and a loss on disposal of assets as a result of
the termination of non-essential office space during the 2002 period.
Research and Development. Research and development costs decreased to
$13,771 for the nine months ended September 30, 2003 from $23,699 for the nine
months ended September 30, 2002. The decrease related primarily to a payment of
$8,134 to Panasonic in the second quarter of 2002, which released us from a
purchase commitment and reduced the factory price of SIRIUS radios.
Depreciation Expense. Depreciation expense increased to $71,229 for
the nine months ended September 30, 2003 from $59,591 for the nine months ended
September 30, 2002. The increase was due to a full period of depreciation of our
satellite radio system, which began in February 2002.
Non-Cash Stock Compensation. We recognized non-cash stock compensation
expense of $2,716 and a non-cash stock compensation benefit of $7,995 for the
nine months ended September 30, 2003 and 2002, respectively. The non-cash stock
compensation expense of $2,716 for the nine months ended September 30, 2003
includes costs associated with the issuance of approximately 59 million
stock-based awards to employees offset by a $314 benefit related to certain
performance conditions of restricted stock that we anticipate will not be
satisfied. The non-cash stock compensation benefit for the nine months ended
September 30, 2002 was principally a result of a $9,717 benefit related to the
repricing of certain employee stock options in April 2001.
Debt Restructuring. We recorded a gain of $256,538 in connection with
the restructuring of our long-term debt in March 2003. This gain represents the
difference between the carrying value of our 15% Senior Secured Discount Notes
due 2007, 14 1/2% Senior Secured Notes due 2009, Lehman term loans and Loral
term loans, including accrued interest, and the fair market value of the common
stock issued, adjusted for unamortized debt issuance costs and direct costs
associated with the restructuring. This gain is net of a loss on our 8 3/4%
Convertible Subordinated Notes due 2009 exchanged in the restructuring. The loss
represents the difference between the fair market value of the common stock
issued in the exchange and the fair market value of the common stock which would
have been issued under the original conversion ratio, including accrued
interest, adjusted for unamortized debt issuance costs and direct costs
associated with the restructuring.
Interest and Investment Income. Interest and investment income
decreased to $4,011 for the nine months ended September 30, 2003 from $4,530 for
the nine months ended September 30, 2002. This decrease was attributable to
lower returns on our investments in U.S. government securities during the 2003
period, offset by a higher average balance of cash, cash equivalents and
marketable securities during the 2003 period.
Interest Expense. Interest expense decreased to $26,573 for the nine
months ended September 30, 2003 from $80,689, net of amounts capitalized of
$5,426, for the nine months ended September 30, 2002. Interest expense for the
nine months ended September 30, 2002 included non-cash costs of $9,650
associated with the induced conversion of $29,475 in aggregate principal amount
of our 8 3/4% Convertible Subordinated Notes due 2009. The decrease in interest
expense is a result of the exchange of approximately $636,000 in aggregate
principal amount at maturity of our outstanding long-term debt for common stock
in March 2003.
Liquidity and Capital Resources
As of September 30, 2003, we had cash, cash equivalents and marketable
securities totaling $479,111 and working capital of $439,267, compared with
cash, cash equivalents and marketable securities totaling $173,702 and working
capital of $151,289 as of December 31, 2002.
Net cash used in operating activities decreased to $210,737 from
$258,587 for the nine months ended September 30, 2003 and 2002, respectively.
The decrease in cash used in operations was primarily attributable to the change
in the classification of our marketable securities in the second quarter of 2002
to available-for-sale securities from trading securities. Transactions relating
to trading securities are considered operating activities; transactions relating
to available-for-sale securities are considered investing activities. Excluding
our transactions in marketable securities, cash used in operating activities
increased to $209,553 for the nine months ended September 30, 2003 from $182,430
for the nine months ended September 30, 2002. This increase was primarily due to
the cost of our advertising, the costs of acquiring subscribers and the cost of
producing our music and non-music streams.
Net cash provided by investing activities for the nine months ended
September 30, 2003 decreased to $110,795 from $173,830 for the nine months ended
September 30, 2002. The change from the prior period was
21
principally due to a change in the classification of our marketable securities
from trading securities to available-for-sale securities during the second
quarter of 2002. Excluding purchases and maturities of marketable securities and
maturities of restricted investments, cash used in investing activities
decreased to $14,379 from $37,274 for the nine months ended September 30, 2003
and 2002, respectively. This decrease was a result of a reduction in capital
expenditures as we substantially completed the construction of our satellite
radio system during 2002.
Net cash provided by financing activities was $532,075 and $143,997
for the nine months ended September 30, 2003 and 2002, respectively. During
2003, we sold 211,730,379 and 86,250,000 shares of common stock resulting in net
proceeds of $197,112 and $145,547, respectively. In addition, we issued $201,250
in principal amount of our 3 1/2% Convertible Notes due 2008 resulting in net
proceeds of $194,224, and incurred costs associated with our debt restructuring
of $4,737. During the nine months ended September 30, 2002, we sold 16,000,000
shares of common stock resulting in net proceeds of $147,500.
We estimate that our cash, cash equivalents and marketable securities
are sufficient to cover our estimated funding needs through cash flow breakeven,
the point at which our revenues are sufficient to fund expected operating
expenses, capital expenditures, working capital requirements, interest and
principal payments and taxes. Our actual funding requirements could vary
materially from our current estimates. We may have to raise more funds to remain
in business and continue to develop and market our satellite radio service.
Our financial projections are based on assumptions, which we believe
are reasonable but contain significant uncertainties, including the length of
time and level of costs necessary to obtain the number of subscribers required
to sustain our operations. As of September 30, 2003, we had 149,612 subscribers.
We currently expect that we will need approximately two million subscribers
before we achieve cash flow breakeven which we estimate to be in the second
quarter of 2005.
Recent Financings; Recapitalization
In June 2003, we sold 86,250,000 shares of our common stock in an
underwritten public offering resulting in net proceeds of $145,547.
In May 2003, we issued $201,250 in aggregate principal amount of our 3
1/2% Convertible Notes due 2008 in an underwritten public offering resulting in
net proceeds of $194,224. Our 3 1/2% Convertible Notes due 2008 are convertible,
at the option of the holder, into shares of our common stock at any time at a
conversion rate of 724.6377 shares of common stock for each $1,000.00 principal
amount, or $1.38 per share of common stock, subject to certain adjustments.
In March 2003, we completed a series of transactions to restructure
our debt and equity capitalization. As part of these transactions:
o we issued 545,012,162 shares of our common stock in exchange
for approximately 91% of our then outstanding debt,
including all of our Lehman term loans, all of our Loral
term loans, $251,230 in aggregate principal amount at
maturity of our 15% Senior Secured Discount Notes due 2007,
$169,742 in aggregate principal amount of our 14 1/2% Senior
Secured Notes due 2009, and $14,717 in aggregate principal
amount of our 8 3/4% Convertible Subordinated Notes due
2009;
o we issued 39,927,796 shares of our common stock and warrants
to purchase 45,416,690 shares of our common stock in
exchange for all outstanding shares of our 9.2% Series A
Junior Cumulative Convertible Preferred Stock and 9.2%
Series B Junior Cumulative Convertible Preferred Stock held
by Apollo;
o we issued 37,065,069 shares of our common stock and warrants
to purchase 42,160,424 shares of our common stock in
exchange for all outstanding shares of our 9.2% Series D
Junior Cumulative Convertible Preferred Stock held by
Blackstone;
o we sold 24,060,271 shares of our common stock to Apollo for
an aggregate of $25,000;
o we sold 24,060,271 shares of our common stock to Blackstone
for an aggregate of $25,000; and
22
o we sold 163,609,837 shares of our common stock to
Oppenheimer for an aggregate of $150,000.
During the three months ended March 31, 2003, we recorded a gain of
$256,538 and a deemed dividend of $79,510 as a result of the exchange
transactions. In connection with the exchange offer relating to our debt, we
also amended the indentures under which our 15% Senior Secured Discount Notes
due 2007, 14 1/2% Senior Secured Notes due 2009 and 8 3/4% Convertible
Subordinated Notes due 2009 were issued to eliminate substantially all of the
restrictive covenants. Holders of our debt also waived any existing events of
default or events of default caused by the restructuring.
2003 Long-Term Incentive Plan
In January 2003, our board of directors adopted the Sirius Satellite
Radio 2003 Long-Term Stock Incentive Plan (the "2003 Plan"), and on March 4,
2003 our stockholders approved this plan. As of September 30, 2003,
approximately 110,787,000 shares of our common stock were available for grant
under the 2003 Plan.
The purpose of the 2003 Plan is to promote our long-term financial
success by enhancing our ability to attract, retain and reward individuals who
contribute to our success and to further align our personnel with stockholders.
Employees and consultants are eligible to receive awards under the 2003 Plan.
The 2003 Plan provides for the grant of stock options, restricted
stock, restricted stock units and other stock-based awards that the compensation
committee of our board of directors may deem appropriate. Vesting and other
terms of stock-based awards are set forth in the agreements with the individuals
receiving the awards. Stock-based awards granted under the 2003 Plan generally
vest over three to five years from the date of grant and expire in ten years.
During the third quarter of 2003, we granted a total of 43,607,250
nonqualified stock options to employees and consultants with an exercise price
of $1.04 per share. Since the exercise price of these stock-based awards was
less than the fair market value of the underlying shares of common stock at the
date of grant, we recorded deferred compensation, a component of stockholders'
equity, of $25,312 during the third quarter of 2003. Such deferred compensation
will be amortized to non-cash stock compensation expense over the vesting
period. Approximately 44% of these options vest ratably over three years, 22%
vest in July 2008 with acceleration to March 2004 if performance criteria are
satisfied in 2003 and 34% vest in July 2008 with acceleration to March 2005 if
performance criteria are satisfied in 2004.
We also granted 15,735,000 restricted stock units to certain employees
during the third quarter of 2003. Each restricted stock unit entitles the holder
to receive one share of common stock upon vesting in July 2008 with acceleration
to March 2006 if performance criteria are satisfied in 2005. We recorded
deferred compensation of $25,491 during the third quarter of 2003 in connection
with these restricted stock units, which will be amortized to non-cash stock
compensation expense over the vesting period.
In accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," we use the intrinsic value method to
measure the compensation costs of stock-based awards granted to employees.
Accordingly, we record non-cash compensation expense for stock-based awards
granted to employees and directors over the vesting period equal to the excess
of the market price of the underlying common stock at the date of grant over the
exercise price of the stock-related award. The intrinsic value of restricted
stock units as of the date of grant is amortized to non-cash stock compensation
expense over the vesting period. To the extent any performance criteria are
satisfied and the vesting of any stock options and/or restricted stock units
accelerate, the unamortized non-cash stock compensation expense is recorded in
the period in which the performance criteria are satisfied.
Contractual Commitments
The following table summarizes our expected contractual commitments as
of September 30, 2003:
2003 2004 2005 2006 2007 Thereafter Total
------- ------- ------- ------- ------- ---------- --------
Long-term debt obligations .... $ 8,025 $15,964 $15,964 $15,964 $45,164 $249,376 $350,457
Operating leases .............. 7,764 8,066 7,302 6,393 6,181 36,243 71,949
23
Satellite and transmission .... 573 2,291 2,291 2,291 2,291 18,328 28,065
Programming and content ....... 1,423 28,013 30,954 21,507 1,002 -- 82,899
Customer service and billing .. 1,095 1,440 1,440 360 -- -- 4,335
Sales and marketing ........... 22,903 23,023 11,057 6,216 4,500 -- 67,699
Chip set development and
production ................. 4,800 14,400 -- -- -- -- 19,200
------- ------- ------- ------- ------- -------- --------
Contractual commitments ....... $46,583 $93,197 $69,008 $52,731 $59,138 $303,947 $624,604
======= ======= ======= ======= ======= ======== ========
Long-Term Debt Obligations
Long-term debt obligations include principal and interest payments. As
of September 30, 2003, we had $262,452 in aggregate principal amount of
outstanding debt, consisting of $29,200 in aggregate principal amount at
maturity of our 15% Senior Secured Discount Notes due 2007, $30,258 in aggregate
principal amount of our 14 1/2% Senior Secured Notes due 2009, $201,250 in
aggregate principal amount of our 3 1/2% Convertible Notes due 2008 and $1,744
in aggregate principal amount of our 8 3/4% Convertible Subordinated Notes due
2009.
Operating Leases
We have entered into operating leases related to our national
broadcast studio, office space, terrestrial repeater sites and equipment.
Satellite and Transmission
We have entered into an agreement with a provider of satellite
services to operate our off-site satellite telemetry, tracking and control
facilities.
Programming and Content
We have entered into agreements with licensors of music and non-music
programming and, in certain instances, are obligated to pay license fees,
guarantee minimum advertising revenue share or purchase advertising on
properties owned or controlled by these licensors. In addition, we have
agreements with various rights organizations pursuant to which we pay royalties
for public performances of music.
Customer Service and Billing
We have entered into agreements with third parties to provide customer
service, billing and subscriber management.
Sales and Marketing
We have entered into various marketing and sponsorship agreements to
promote our brand and are obligated to make payments to sponsors, retailers,
automakers and radio manufacturers.
Chip Set Development and Production
We have entered into an agreement with Agere to develop and produce
chip sets for use in SIRIUS radios. This agreement requires Agere to manufacture
a minimum quantity of chip sets during each year of the agreement.
Joint Development Agreement
Under the terms of a joint development agreement with XM Satellite
Radio, the other holder of a FCC satellite radio license, each party is
obligated to fund one half of the development cost for a unified standard for
satellite radios. During the three and nine months ended September 30, 2003, we
incurred costs of $48 and $117, respectively, under this agreement. We did not
incur any costs associated with the joint development agreement during the three
and nine months ended September 30, 2002. The costs related to the joint
development agreement
24
are being expensed as incurred in research and development. We are currently
unable to determine the expenditures necessary to complete this process, but
they may be significant.
Other Commitments
We have agreed to use reasonable efforts to assist certain
manufacturers of SIRIUS radios and components for those radios in the event that
production of such radios and components are greater than sales. In certain
circumstances, these reasonable efforts may include the purchase of unsold
SIRIUS radios or components. In addition to the contractual commitments
described above, we have also entered into agreements with automakers, radio
manufacturers and others that include per-radio and per-subscriber required
payments and revenue sharing arrangements. These future costs are dependent upon
many factors and are difficult to anticipate; however, these costs may be
substantial. We may enter into additional programming, marketing and other
agreements that contain provisions similar to our current agreements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods. We have disclosed all
significant accounting policies in note 3 to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2002. We have identified the following policies, which were
discussed with the audit committee of our board of directors, as critical to our
business and understanding our results of operations.
Subscription Revenue Recognition
Revenue from subscribers consists of subscription fees, including
revenue derived from our agreement with Hertz, and non-refundable
activation fees. We recognize subscription fees as our service is provided.
Activation fees are recognized ratably over the term of the subscriber
relationship, currently estimated to be 3.5 years. The estimated term of a
subscriber relationship is based on market research and management's
judgment and, if necessary, will be refined in the future as historical
data becomes available. As required by Emerging Issues Task Force No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)," an estimate of mail-in
rebates that are paid by us directly to subscribers is recorded as a
reduction to subscription revenue in the period the subscriber activates
our service.
Stock-Based Compensation
In accordance with APB Opinion No. 25 we use the intrinsic value
method to measure the compensation costs of stock-based awards granted to
employees. Accordingly, we record non-cash compensation expense for
stock-based awards granted to employees and directors over the vesting
period equal to the excess of the market price of the underlying common
stock at the date of grant over the exercise price of the award. The
intrinsic value of restricted stock units as of the date of grant is
amortized to non-cash stock compensation expense over the vesting period.
To the extent any performance criteria are met and the vesting of stock
options and/or restricted stock units accelerate, the unamortized non-cash
stock compensation expense is recorded in the period in which the options
and/or restricted stock units accelerate.
We account for stock-based awards granted to non-employees at fair
value in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
In accordance with Financial Accounting Standards Board ("FASB")
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," we record compensation charges or benefits related to
repriced stock options based on the market value of our common stock until
the repriced stock options are exercised, forfeited or expire.
25
Subscriber Acquisition Costs
Subscriber acquisition costs include incentives for the purchase,
installation and activation of SIRIUS radios, as well as subsidies paid to
radio manufacturers, retailers and payments to Agere for chip set
production. Certain subscriber acquisition costs are recorded in advance of
acquiring a subscriber, since we currently pay subsidies upon shipment, not
activation, of SIRIUS radios. Subscriber acquisition costs do not include
advertising, loyalty payments to distributors and dealers of SIRIUS radios,
revenue sharing payments to manufacturers of SIRIUS radios and guaranteed
payments to automakers. Subscriber acquisition costs are expensed as
incurred. We retain ownership of the SIRIUS radios used in our agreement
with Hertz; as a result, amounts capitalized in connection with this
program are not included in our subscriber acquisition costs.
We have an agreement with Agere to develop and produce chip sets for
use in SIRIUS radios. This agreement requires Agere to manufacture a
minimum quantity of chip sets during each year of the agreement. We pay
Agere fixed monthly payments under this agreement. These costs are
allocated between research and development and subscriber acquisition costs
for development work and chip set production, respectively. Costs allocated
to chip set production are expensed as subscriber acquisition costs when
the chip sets are shipped to manufacturers.
Marketable Securities
Marketable securities consist of U.S. government agency obligations.
Effective April 1, 2002, marketable securities were classified as
available-for-sale securities because we no longer intend to buy and sell
marketable securities with the objective of generating profits.
Available-for-sale securities are carried at fair market value and
unrealized gains and losses are included as a component of stockholders'
equity. In prior periods, marketable securities were classified as trading
securities and unrealized holding gains and losses were recognized in
earnings.
Long-Lived Assets
We carry our long-lived assets at cost less accumulated depreciation.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," we review our long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset is not recoverable. At such time as an impairment in
value of a long-lived asset is identified, the impairment will be measured
as the amount by which the carrying amount of a long-lived asset exceeds
its fair value. To determine fair value we would employ an expected present
value technique, which utilizes multiple cash flow scenarios that reflect
the range of possible outcomes and an appropriate discount rate.
Useful Life of Satellite System
Our satellite system includes the cost of satellite construction,
launch vehicles, launch insurance, capitalized interest, our spare
satellite and our terrestrial repeater network. In accordance with SFAS No.
144, we monitor our satellites for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset is not
recoverable. The expected useful lives of our in-orbit satellites are
fifteen years from the date they were placed into orbit. We are
depreciating our three in-orbit satellites over their respective remaining
useful lives beginning February 14, 2002 or, in the case of our spare
satellite, from the date it was delivered to ground storage on April 19,
2002. If placed into orbit, our spare satellite is expected to operate
effectively for fifteen years.
FCC License
We carry our FCC license at cost. Our FCC license has an indefinite
life and will be evaluated for impairment on an annual basis. In accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets," we completed an
impairment analysis of our FCC license on November 1, 2002, and determined
that there was no impairment. We use projections regarding estimated future
cash flows and other factors in assessing the fair value of our FCC
license. If these estimates or projections change in the future, we may be
required to record an impairment charge related to our FCC license.
26
Accrued Expenses
Payments owed to our manufacturing and distribution partners and other
service providers are expensed during the month in which the applicable
service is performed. The amount of these expenses is dependent upon
information provided by our internal systems and processes and partner
systems and processes. Due to the length of time necessary to receive
accurate information from these partners, estimates of amounts due are
necessary in order to record monthly expenses. In subsequent months
expenses are reconciled, and adjusted where necessary. Since launching
commercial operations, we continue to refine the estimation process based
on an increased understanding of the time requirements, and close working
relationships with our partners.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which is effective for all financial instruments created or modified after May
31, 2003 and otherwise effective at the beginning of the first interim period
after June 15, 2003. SFAS No. 150 establishes standards for classifying and
measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity. The
adoption of SFAS No. 150 did not have an impact on our consolidated results of
operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships after June 30, 2003.
All provisions of SFAS No. 149 should be applied prospectively. This statement
did not have an impact on our consolidated results of operations or financial
position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interests in variable interest entities obtained after January 31,
2003. This Interpretation did not have an impact on our consolidated results of
operations or financial position.
Item 4. Controls and Procedures
As of September 30, 2003, an evaluation was performed under the supervision
and with the participation of our management, including Joseph P. Clayton, our
President and Chief Executive Officer, and David J. Frear, our Executive Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure and control procedures. Based on that evaluation,
our management, including our chief executive officer and our chief financial
officer, concluded that our disclosure controls and procedures were effective as
of September 30, 2003. There have been no significant changes in our internal
controls or in other factors that could significantly affect these internal
controls subsequent to September 30, 2003.
27
Part II
Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Exhibit Index attached hereto.
(b) Reports on Form 8-K.
On July 30, 2003, we filed a Current Report on Form 8-K to report that
our board of directors had extended the expiration date of the rights
issued under the Rights Agreement between The Bank of New York and
ourselves from August 1, 2003 to January 15, 2004.
On August 6, 2003, we filed a Current Report on Form 8-K to report our
financial results for the quarter ended June 30, 2003.
28
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.
SIRIUS SATELLITE RADIO INC.
By: /s/ DAVID J. FREAR
-------------------------------------
David J. Frear
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
November 6, 2003
29
Exhibit Index
-------------
Exhibit Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation dated March 4, 2003
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002).
3.2 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001).
3.3 Form of Certificate of Designations of Series B Preferred Stock
(incorporated by reference to Exhibit A to Exhibit 1 to the Company's
Registration Statement on Form 8-A filed on October 30, 1997 (the
"Form 8-A")).
4.1 Form of certificate for shares of Common Stock (incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1 (File No. 33-74782) (the "S-1 Registration Statement")).
4.2.1 Rights Agreement, dated as of October 22, 1997 (the "Rights
Agreement"), between the Company and Continental Stock Transfer &
Trust Company, as rights agent (incorporated by reference to Exhibit 1
to the Form 8-A).
4.2.2 Form of Right Certificate (incorporated by reference to Exhibit B to
Exhibit 1 to the Form 8-A).
4.2.3 Amendment to the Rights Agreement dated as of October 13, 1998
(incorporated by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K dated October 13, 1998).
4.2.4 Amendment to the Rights Agreement dated as of November 13, 1998
(incorporated by reference to Exhibit 99.7 to the Company's Current
Report on Form 8-K dated November 17, 1998).
4.2.5 Amended and Restated Amendment to the Rights Agreement dated as of
December 22, 1998 (incorporated by reference to Exhibit 6 to Amendment
No. 1 to the Form 8-A filed on January 6, 1999).
4.2.6 Amendment to the Rights Agreement dated as of June 11, 1999
(incorporated by reference to Exhibit 4.1.8 to the Company's
Registration Statement on Form S-4 (File No. 333-82303) (the "1999
Units Registration Statement")).
4.2.7 Amendment to the Rights Agreement dated as of September 29, 1999
(incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on October 13, 1999).
4.2.8 Amendment to the Rights Agreement dated as of December 23, 1999
(incorporated by reference to Exhibit 99.4 to the Company's Current
Report on Form 8-K filed on
Exhibit Description
- ------- -----------
December 29, 1999).
4.2.9 Amendment to the Rights Agreement dated as of January 28, 2000
(incorporated by reference to Exhibit 4.6.9 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (the "1999
Form 10-K")).
4.2.10 Amendment to the Rights Agreement dated as of August 7, 2000
(incorporated by reference to Exhibit 4.6.10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000).
4.2.11 Amendment to the Rights Agreement dated as of January 8, 2002
(incorporated by reference to Exhibit 4.6.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 (the "2001
Form 10-K")).
4.2.12 Amendment to the Rights Agreement dated as of October 22, 2002
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K filed on October 24, 2002).
4.2.13 Amendment to the Rights Agreement dated as of March 6, 2003
(incorporated by reference to Exhibit 4.2.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002).
4.2.14 Amendment to the Rights Agreement dated as of March 31, 2003
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K dated March 31, 2003).
4.2.15 Amendment to the Rights Agreement dated as of July 30, 2003
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K dated July 30, 2003).
4.3 Indenture, dated as of November 26, 1997, between the Company and IBJ
Schroder Bank & Trust Company, as trustee, relating to the Company's
15% Senior Secured Discount Notes due 2007 (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-3
(File No. 333-34769) (the "1997 Units Registration Statement")).
4.4 Supplemental Indenture, dated as of March 7, 2003, between the Company
and The Bank of New York (as successor to IBJ Schroder Bank & Trust
Company), as trustee, relating to the Company's 15% Senior Secured
Discount Notes due 2007 (incorporated by reference to Exhibit 4.4 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2002).
4.5 Form of 15% Senior Secured Discount Note due 2007 (incorporated by
reference to Exhibit 4.2 to the 1997 Units Registration Statement).
Exhibit Description
- ------- -----------
4.6 Warrant Agreement, dated as of November 26, 1997, between the Company
and IBJ Schroder Bank & Trust Company, as warrant agent (incorporated
by reference to Exhibit 4.3 to the 1997 Units Registration Statement).
4.7 Form of Warrant (incorporated by reference to Exhibit 4.4 to the 1997
Units Registration Statement).
4.8 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 4.11 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
4.9 Indenture, dated as of May 15, 1999, between the Company and United
States Trust Company of New York, as trustee, relating to the
Company's 14 1/2% Senior Secured Notes due 2009 (incorporated by
reference to Exhibit 4.4.2 to the 1999 Units Registration Statement).
4.10 Supplemental Indenture, dated as of March 7, 2003, between the Company
and The Bank of New York (as successor to United States Trust Company
of New York), as trustee, relating to the Company's 14 1/2% Senior
Secured Notes due 2009 (incorporated by reference to Exhibit 4.10 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2002).
4.11 Form of 14 1/2% Senior Secured Note due 2009 (incorporated by
reference to Exhibit 4.4.3 to the 1999 Units Registration Statement).
4.12 Warrant Agreement, dated as of May 15, 1999, between the Company and
United States Trust Company of New York, as warrant agent
(incorporated by reference to Exhibit 4.4.4 to the 1999 Units
Registration Statement).
4.13 Common Stock Purchase Warrant granted by the Company to Ford Motor
Company dated October 7, 2002 (incorporated by reference to Exhibit
4.16 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002).
4.14 Indenture, dated as of September 29, 1999, between the Company and
United States Trust Company of Texas, N.A., as trustee, relating to
the Company's 8 3/4% Convertible Subordinated Notes due 2009
(incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K filed on October 13, 1999).
4.15 First Supplemental Indenture, dated as of September 29, 1999, between
the Company and United States Trust Company of Texas, N.A., as
trustee, relating to the Company's 8 3/4% Convertible Subordinated
Notes due 2009 (incorporated by reference to Exhibit 4.01 to the
Company's Current Report on Form 8-K filed on October 1, 1999).
4.16 Second Supplemental Indenture, dated as of March 4, 2003, among the
Company, The Bank of New York (as successor to United States Trust
Company of Texas, N.A.), as resigning trustee, and HSBC Bank USA, as
successor trustee, relating to the Company's 8 3/4% Convertible
Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.16
to the Company's Annual Report on Form 10-K for the year ended
Exhibit Description
- ------- -----------
December 31, 2002).
4.17 Third Supplemental Indenture, dated as of March 7, 2003, between the
Company and HSBC Bank USA, as trustee, relating to the Company's
8 3/4% Convertible Subordinated Notes due 2009 (incorporated by
reference to Exhibit 4.17 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2002).
4.18 Form of 8 3/4% Convertible Subordinated Note due 2009 (incorporated by
reference to Article VII of Exhibit 4.01 to the Company's Current
Report on Form 8-K filed on October 1, 1999).
4.19 Common Stock Purchase Warrant granted by the Company to
DaimlerChrysler Corporation dated October 25, 2002 (incorporated by
reference to Exhibit 4.20 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002).
4.20 Form of Series A Common Stock Purchase Warrant dated March 7, 2003
(incorporated by reference to Exhibit 4.20 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002).
4.21 Form of Series B Common Stock Purchase Warrant dated March 7, 2003
(incorporated by reference to Exhibit 4.21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002).
4.22 Amended and Restated Warrant Agreement, dated as of December 27, 2000,
between the Company and United States Trust Company of New York, as
warrant agent and escrow agent (incorporated by reference to Exhibit
4.27 to the Company's Registration Statement on Form S-3 (File No.
333-65602)).
4.23 Second Amended and Restated Pledge Agreement, dated as of March 7,
2001, among the Company, as pledgor, The Bank of New York, as trustee
and collateral agent, United States Trust Company of New York, as
trustee, and Lehman Commercial Paper Inc., as administrative agent
(incorporated by reference to Exhibit 4.25 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).
4.24 Collateral Agreement, dated as of March 7, 2001, between the Company,
as borrower, and The Bank of New York, as collateral agent
(incorporated by reference to Exhibit 4.26 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).
4.25 Amended and Restated Intercreditor Agreement, dated as of March 7,
2001, by and between The Bank of New York, as trustee and collateral
agent, United States Trust Company of New York, as trustee, and Lehman
Commercial Paper Inc., as administrative agent (incorporated by
reference to Exhibit 4.27 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001).
10.1.1 Lease Agreement, dated as of March 31, 1998, between Rock-McGraw, Inc.
and the Company (incorporated by reference to Exhibit 10.1.2 to the
Company's Quarterly
Exhibit Description
- ------- -----------
Report on Form 10-Q for the quarter ended June 30, 1998).
10.1.2 Supplemental Indenture, dated as of March 22, 2000, between
Rock-McGraw, Inc. and the Company (incorporated by reference to
Exhibit 10.1.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
10.1.3 Supplemental Indenture, dated as of November 30, 2001, between
Rock-McGraw, Inc. and the Company (incorporated by reference to
Exhibit 10.1.3 to the 2001 Form 10-K).
*10.2 Employment Agreement, dated as of February 28, 2003, between the
Company and Patrick L. Donnelly (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003).
*10.3 Employment Agreement, dated as of August 29, 2001, between the Company
and Michael S. Ledford (incorporated by reference to Exhibit 10.6 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001).
*10.4 Employment Agreement, dated as of November 26, 2001, between the
Company and Joseph P. Clayton (incorporated by reference to Exhibit
10.6 to the 2001 Form 10-K).
*10.5 Amended and Restated Employment Agreement, dated as of October 20,
2003, between the Company and Guy D. Johnson (filed herewith).
*10.6 Employment Agreement, dated as of May 3, 2002, between the Company and
Mary Patricia Ryan (incorporated by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
*10.7 Employment Agreement, dated as of June 3, 2003, between the Company
and David J. Frear (incorporated by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
*10.8 Agreement, dated as of October 16, 2001, between the Company and David
Margolese (incorporated by reference to Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001).
*10.9 1994 Stock Option Plan (incorporated by reference to Exhibit 10.21 to
the S-1 Registration Statement).
*10.10 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).
*10.11 CD Radio Inc. 401(k) Savings Plan (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement on Form S-8 (File
No. 333-65473)).
*10.12 Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan
(incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002).
Exhibit Description
- ------- -----------
*10.13 Form of Option Agreement, dated as of December 29, 1997, between the
Company and each Optionee (incorporated by reference to Exhibit
10.16.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
'D'10.14 Joint Development Agreement, dated as of February 16, 2000, between
the Company and XM Satellite Radio Inc. (incorporated by reference to
Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
31.1 Certificate of Joseph P. Clayton, President and Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
31.2 Certificate of David J. Frear, Executive Vice President and Chief
Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
32.1 Certificate of Joseph P. Clayton, President and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certificate of David J. Frear, Executive Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
- -----------------
* This document has been identified as a management contract or compensatory
plan or arrangement.
'D' Portions of this exhibit have been omitted pursuant to Applications for
Confidential treatment filed by the Company with the Securities and
Exchange Commission.
STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as................................ 'D'