10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
Commission file number 0-24710
SIRIUS SATELLITE RADIO INC.
(Exact name of registrant as specified in its charter)
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Delaware
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52-1700207 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
1221 Avenue of the Americas, 36th Floor
New York, New York 10020
(Address of principal executive offices)
(Zip code)
212-584-5100
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
þ |
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Accelerated filer
o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Common Stock, $0.001 par value |
|
1,499,315,416 shares |
(Class)
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(Outstanding as of May 7, 2008) |
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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For the Three Months |
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Ended March 31, |
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2008 |
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2007 |
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Revenue: |
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|
|
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Subscriber revenue, including effects of rebates |
|
$ |
255,640 |
|
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$ |
190,796 |
|
Advertising revenue, net of agency fees |
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8,408 |
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6,721 |
|
Equipment revenue |
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6,063 |
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4,671 |
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Other revenue |
|
|
239 |
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1,849 |
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|
|
|
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Total revenue |
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270,350 |
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|
204,037 |
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Operating expenses (excludes depreciation shown separately below) (1): |
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Cost of services: |
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Satellite and transmission |
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7,822 |
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7,986 |
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Programming and content |
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61,692 |
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59,998 |
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Revenue share and royalties |
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42,320 |
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27,134 |
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Customer service and billing |
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26,922 |
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|
21,853 |
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Cost of equipment |
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7,588 |
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6,458 |
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Sales and marketing |
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38,467 |
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|
40,996 |
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Subscriber acquisition costs |
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89,824 |
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|
100,117 |
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General and administrative |
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48,778 |
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35,343 |
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Engineering, design and development |
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8,656 |
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|
12,411 |
|
Depreciation |
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26,906 |
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26,786 |
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Total operating expenses |
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358,975 |
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|
339,082 |
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Loss from operations |
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|
(88,625 |
) |
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|
(135,045 |
) |
Other income (expense): |
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Interest and investment income |
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2,802 |
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6,042 |
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Interest expense, net of amounts capitalized |
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(17,675 |
) |
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(15,192 |
) |
Other (expense) income |
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(77 |
) |
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5 |
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|
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Total other expense |
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(14,950 |
) |
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(9,145 |
) |
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Loss before income taxes |
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|
(103,575 |
) |
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|
(144,190 |
) |
Income tax expense |
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(543 |
) |
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|
(555 |
) |
|
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|
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Net loss |
|
$ |
(104,118 |
) |
|
$ |
(144,745 |
) |
|
|
|
|
|
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Net loss per share (basic and diluted) |
|
$ |
(0.07 |
) |
|
$ |
(0.10 |
) |
|
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Weighted average common shares outstanding (basic and diluted) |
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1,475,496 |
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1,457,011 |
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(1) Amounts related to stock-based compensation included in operating
expenses were as follows: |
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Satellite and transmission |
|
$ |
797 |
|
|
$ |
656 |
|
Programming and content |
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|
2,789 |
|
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2,935 |
|
Customer service and billing |
|
|
276 |
|
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|
199 |
|
Sales and marketing |
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5,240 |
|
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|
5,644 |
|
Subscriber acquisition costs |
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14 |
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|
1,880 |
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General and administrative |
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11,998 |
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|
11,940 |
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Engineering, design and development |
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1,148 |
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1,006 |
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Total stock-based compensation |
|
$ |
22,262 |
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$ |
24,260 |
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|
See Notes to Unaudited Consolidated Financial Statements
1
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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March 31, 2008 |
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December 31, 2007 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
252,508 |
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$ |
438,820 |
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Marketable securities |
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461 |
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|
469 |
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Accounts receivable, net of allowance for doubtful accounts of
$2,975
and $4,608 at March 31, 2008 and December
31, 2007, respectively |
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22,743 |
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44,068 |
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Receivables from distributors |
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69,992 |
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60,004 |
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Inventory, net |
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25,344 |
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29,537 |
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Prepaid expenses |
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34,779 |
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|
31,392 |
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Restricted investments |
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35,000 |
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|
35,000 |
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Other current assets |
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17,937 |
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39,567 |
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Total current assets |
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458,764 |
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678,857 |
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Property and equipment, net |
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798,852 |
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806,263 |
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FCC license |
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83,654 |
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83,654 |
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Restricted investments, net of current portion |
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21,000 |
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18,000 |
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Deferred financing fees |
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11,785 |
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13,864 |
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Other long-term assets |
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95,768 |
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93,511 |
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Total assets |
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$ |
1,469,823 |
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$ |
1,694,149 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
320,897 |
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$ |
464,943 |
|
Accrued interest |
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|
12,626 |
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|
24,772 |
|
Deferred revenue |
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|
561,710 |
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|
548,330 |
|
Current maturities of long-term debt |
|
|
304,749 |
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|
35,801 |
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Total current liabilities |
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1,199,982 |
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1,073,846 |
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Long-term debt |
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977,994 |
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1,278,617 |
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Deferred revenue, net of current portion |
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|
111,857 |
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|
110,525 |
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Other long-term liabilities |
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|
19,424 |
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|
23,898 |
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Total liabilities |
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2,309,257 |
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2,486,886 |
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Commitments and contingencies (Note 11) |
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Stockholders deficit: |
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Common stock, $0.001 par value: 2,500,000,000 shares authorized,
1,499,138,083 and 1,471,143,570 shares issued and outstanding at
March 31, 2008 and December 31, 2007, respectively |
|
|
1,499 |
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|
1,471 |
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Additional paid-in capital |
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3,662,157 |
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3,604,764 |
|
Accumulated deficit |
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|
(4,503,090 |
) |
|
|
(4,398,972 |
) |
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|
|
|
|
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Total stockholders deficit |
|
|
(839,434 |
) |
|
|
(792,737 |
) |
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|
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Total liabilities and stockholders deficit |
|
$ |
1,469,823 |
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|
$ |
1,694,149 |
|
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|
|
|
|
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|
See Notes to Unaudited Consolidated Financial Statements
2
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(In thousands, except share and per share amounts)
(Unaudited)
|
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|
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|
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Additional |
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|
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Common Stock |
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Paid-In |
|
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Accumulated |
|
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Shares |
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Amount |
|
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Capital |
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Deficit |
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|
Total |
|
Balances, December 31, 2007 |
|
|
1,471,143,570 |
|
|
$ |
1,471 |
|
|
$ |
3,604,764 |
|
|
$ |
(4,398,972 |
) |
|
$ |
(792,737 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104,118 |
) |
|
|
(104,118 |
) |
Issuance of common stock to
employees and employee benefit plans |
|
|
4,532,344 |
|
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|
5 |
|
|
|
11,430 |
|
|
|
|
|
|
|
11,435 |
|
Compensation in connection with the
issuance of stock-based awards |
|
|
|
|
|
|
|
|
|
|
13,897 |
|
|
|
|
|
|
|
13,897 |
|
Exercise of options, $2.69 to $3.36 per share |
|
|
62,335 |
|
|
|
|
|
|
|
840 |
|
|
|
|
|
|
|
840 |
|
Exercise of warrants, $2.392 per share |
|
|
899,836 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Exchange of 31/2% Convertible Notes due
2008, including accrued interest |
|
|
22,499,998 |
|
|
|
22 |
|
|
|
31,227 |
|
|
|
|
|
|
|
31,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2008 |
|
|
1,499,138,083 |
|
|
$ |
1,499 |
|
|
$ |
3,662,157 |
|
|
$ |
(4,503,090 |
) |
|
$ |
(839,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements
3
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
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|
|
|
|
|
|
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|
|
For the Three Months |
|
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|
Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(104,118 |
) |
|
$ |
(144,745 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
26,906 |
|
|
|
26,786 |
|
Non-cash interest expense |
|
|
1,004 |
|
|
|
754 |
|
Provision for doubtful accounts |
|
|
2,560 |
|
|
|
2,088 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(4 |
) |
Stock-based compensation |
|
|
22,262 |
|
|
|
24,260 |
|
Deferred income taxes |
|
|
543 |
|
|
|
555 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
18,765 |
|
|
|
6,639 |
|
Inventory |
|
|
4,193 |
|
|
|
(473 |
) |
Receivables from distributors |
|
|
(9,988 |
) |
|
|
(7,569 |
) |
Prepaid expenses and other current assets |
|
|
14,256 |
|
|
|
(9,173 |
) |
Other long-term assets |
|
|
3,256 |
|
|
|
(23 |
) |
Accounts payable and accrued expenses |
|
|
(116,741 |
) |
|
|
(47,811 |
) |
Accrued interest |
|
|
(11,885 |
) |
|
|
(11,763 |
) |
Deferred revenue |
|
|
14,712 |
|
|
|
21,731 |
|
Other long-term liabilities |
|
|
(5,017 |
) |
|
|
7,702 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(139,292 |
) |
|
|
(131,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(39,225 |
) |
|
|
(12,458 |
) |
Sales of property and equipment |
|
|
|
|
|
|
96 |
|
Purchases of restricted and other investments |
|
|
(3,000 |
) |
|
|
(310 |
) |
Sale of investments |
|
|
5,000 |
|
|
|
|
|
Merger related costs |
|
|
(10,018 |
) |
|
|
(2,901 |
) |
Sales of available-for-sale securities |
|
|
8 |
|
|
|
10,850 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(47,235 |
) |
|
|
(4,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayment of long-term borrowings |
|
|
(625 |
) |
|
|
|
|
Proceeds from exercise of stock options |
|
|
840 |
|
|
|
1,510 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
215 |
|
|
|
1,510 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(186,312 |
) |
|
|
(134,259 |
) |
Cash and cash equivalents at the beginning of period |
|
|
438,820 |
|
|
|
393,421 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period |
|
$ |
252,508 |
|
|
$ |
259,162 |
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements
4
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
Ended March 31, |
|
|
2008 |
|
2007 |
Supplemental Disclosure of Cash and Non-Cash Flow Information |
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized |
|
$ |
28,554 |
|
|
$ |
26,200 |
|
Income taxes |
|
|
3 |
|
|
|
123 |
|
Non-cash operating activities: |
|
|
|
|
|
|
|
|
Common stock issued in satisfaction of accrued compensation |
|
|
8,729 |
|
|
|
7,949 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Common stock issued in exchange of 31/2% Convertible Notes due 2008,
including accrued interest |
|
|
31,249 |
|
|
|
902 |
|
Common stock issued in exchange of 21/2% Convertible Notes due 2009,
including accrued interest |
|
|
|
|
|
|
2 |
|
Common stock issued to third parties |
|
|
|
|
|
|
82,941 |
|
See Notes to Unaudited Consolidated Financial Statements
5
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
1. Business
We are a satellite radio provider in the United States. We offer over 130 channels to our
subscribers 69 channels of 100% commercial-free music and 65 channels of sports, news, talk,
entertainment, data and weather for a monthly subscription fee of $12.95.
We broadcast through our proprietary satellite radio system, which currently consists of three
orbiting satellites, 124 terrestrial repeaters that receive and retransmit our signal, a satellite
uplink facility and our studios. Subscribers receive our service through SIRIUS radios, which are
sold by automakers, consumer electronics retailers, mobile audio dealers and through our website.
Subscribers can also receive our music channels and certain other channels over the Internet. As of
March 31, 2008, we had 8,644,319 subscribers.
SIRIUS Canada Inc., a Canadian corporation owned by us, Canadian Broadcasting Corporation and
Slaight Communications Ltd. offers a satellite radio service in Canada. SIRIUS Canada offers 110
channels of commercial-free music and news, sports, talk and entertainment programming, including
11 channels of Canadian content. Subscribers to the SIRIUS Canada service are not included in our
subscriber count.
On
February 19, 2007, we and XM Satellite Radio Holdings Inc.
(XM Radio) entered into an Agreement and Plan of Merger (the
Merger Agreement), pursuant to which we and XM Radio will combine our businesses through a merger
of XM Radio and a newly formed, wholly owned subsidiary of ours (the Merger). Our Board of
Directors and stockholders, and the Board of Directors and stockholders of XM Radio, have approved
the Merger and the Merger Agreement. On March 24, 2008, the U.S. Department of Justice informed us
that it ended its investigation into the Merger, that it has concluded that the Merger is not
anti-competitive, and that it will allow the transaction to proceed. The Merger is still subject,
among other conditions, to approval of the Federal Communications Commission.
2. Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements of Sirius Satellite Radio Inc.
and subsidiaries have been prepared in accordance with U.S. generally accepted accounting
principles and the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial
reporting. Accordingly, they do not include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial statements. All intercompany
transactions have been eliminated in consolidation.
In presenting unaudited consolidated financial statements, management makes estimates and
assumptions that affect the amounts reported and related disclosures. Estimates, by their nature,
are based on judgment and available information. Actual results could differ from those estimates.
In the opinion of management, all normal recurring adjustments necessary for a fair presentation of
the consolidated financial statements as of March 31, 2008 and for the three months ended March 31,
2008 and 2007 have been recorded. The results of operations for the three months ended March 31,
2008 are not necessarily indicative of the results that may be expected for the full year. Our
unaudited consolidated financial statements should be read together with our consolidated financial
statements and footnotes contained in our Annual Report on Form 10-K for the year ended December
31, 2007.
3. Summary of Significant Accounting Policies
Revenue Recognition
Revenue from subscribers consists of subscription fees; revenue derived from our agreement
with Hertz; non-refundable activation fees; and the effects of rebates. We recognize subscription
fees as our service is provided to a subscriber. We record deferred revenue for prepaid
subscription fees and amortize these prepayments to revenue ratably over the term of the respective
subscription plan.
At the time of sale, vehicle owners purchasing or leasing a vehicle with a subscription to our
service typically receive between a six month and one year prepaid subscription. We receive payment
from automakers for these subscriptions in advance of our service being activated. Such prepayments
are recorded to deferred revenue and amortized ratably over the service period upon activation and
sale to a customer. We also reimburse automakers for certain costs associated with the SIRIUS radio
installed in the applicable vehicle at the time the vehicle is manufactured. The associated
payments to the automakers are included in subscriber acquisition costs. Although we receive
payments from the automakers, they do not resell our service; rather, automakers facilitate the
sale of our service to our customers, acting
6
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
similar to an agent. We believe this is the appropriate characterization of our relationship since
we are responsible for providing service to our customers including being obligating to the
customer if there was interruption of service.
Activation fees are recognized ratably over the estimated term of a subscriber relationship,
currently estimated to be 3.5 years. The estimated term of a subscriber relationship is based on
market research and managements judgment and, if necessary, will be refined in the future.
As required by Emerging Issues Task Force (EITF) No. 01-09, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products), an estimate of
rebates that are paid by us directly to subscribers is recorded as a reduction to revenue in the
period the subscriber activates our service. For certain rebate promotions, a subscriber must
remain active for a specified period of time to be considered eligible. In those instances, such
estimate is recorded as a reduction to revenue over the required activation period. We estimate the
effects of mail-in rebates based on actual take-rates for rebates offered in prior periods,
adjusted as deemed necessary based on take-rate data available at the time. In subsequent periods,
estimates are adjusted when necessary. For instant rebate promotions, we have recorded the
consideration paid to the consumer as a reduction to revenue in the period the customer
participated in the promotion.
In September 2006, the FASB issued EITF No. 06-01, Accounting for Consideration Given by a
Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to
Receive Service from the Service Provider. The EITF concluded that if consideration given by a
service provider to a third-party manufacturer or reseller that is not the service providers
customer can be linked contractually to the benefit received by the service providers customer, a
service provider should account for the consideration in accordance with EITF No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer. EITF No. 06-01 is effective for
annual reporting periods beginning after June 15, 2007. We
adopted EITF No. 06-01 for the year ended December 31, 2007.
We recognize revenues from the sale of advertising on some of our non-music channels 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. We pay certain third parties a percentage of advertising revenue. Advertising revenue is
recorded gross of such revenue share payments in accordance with EITF No. 99-19, Reporting Revenue
Gross as a Principal versus Net as an Agent, as we are the primary obligor in the transaction.
Advertising revenue share is recorded in the period the advertising is broadcast.
Equipment revenue from the direct sale of SIRIUS radios and accessories is recognized upon
shipment. Shipping and handling costs billed to customers are recorded as revenue. Shipping and
handling costs associated with shipping goods to customers are recorded to cost of equipment.
EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, provides
guidance on how and when to recognize revenues for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. Revenue arrangements with
multiple deliverables are required to be divided into separate units of accounting if the
deliverables in the arrangement meet certain criteria. Arrangement consideration must be allocated
among the separate units of accounting based on their relative fair values.
We have determined that the sale of our service through our direct to consumer channel with
accompanying equipment constitutes a revenue arrangement with multiple deliverables. In these types
of arrangements, fair value of all deliverables is determined and then allocated to each element
based on their relative fair value; amounts received for equipment are recognized as equipment
revenue; amounts received for service are recognized as subscription revenue; and amounts received
for the non-refundable, up-front activation fees that are not contingent on the delivery of the
service are allocated to equipment revenue. Activation fees are recorded to equipment revenue only
to the extent that the aggregate equipment and activation fee proceeds do not exceed the fair value
of the equipment. Any activation fees not allocated to the equipment are deferred upon activation
and recognized as subscriber revenue on a straight-line basis over the estimated term of a
subscriber relationship.
Stock-Based Compensation
We account for stock-based compensation in accordance with SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R). The stock-based compensation cost recognized includes
compensation cost for all stock-based awards granted to employees and members of our board of
directors (i) prior to, but not vested as of, January 1, 2006 based on the grant date fair value
originally estimated in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, and (ii) subsequent to December 31, 2005 based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123R.
7
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
Compensation cost under SFAS No. 123R is recognized ratably using the straight-line
attribution method over the expected vesting period.
SFAS No. 123R requires forfeitures to be estimated on the grant date and revised in subsequent
periods if actual forfeitures differ from those estimates. Prior to the adoption of SFAS No. 123R
we accounted for forfeitures as they occurred.
Pursuant to SFAS No. 123R, we recognized $17,601 and $16,935 of compensation cost for
stock-based awards granted to employees and members of our board of directors for the three months
ended March 31, 2008 and 2007, respectively. Total unrecognized compensation related to unvested
stock-based awards granted to employees and members of our board of directors at March 31, 2008,
net of estimated forfeitures, is $102,541 and is expected to be recognized over a weighted-average
period of three years.
We account for stock-based awards granted to non-employees, other than non-employee members of
our board of directors, at fair value in accordance with SFAS No. 123R and SEC guidance contained
in Staff Accounting Bulletin (SAB) No. 107. The fair value of equity instruments granted to
non-employees is measured in accordance with EITF No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. The final measurement date of equity instruments with performance criteria is the date
that each performance commitment for such equity instrument is satisfied or there is a significant
disincentive for non-performance.
Stock-based awards granted to employees, non-employees and members of our board of directors
generally include warrants, stock options, restricted stock and restricted stock units.
We estimate the fair value of stock-based awards using the Black-Scholes option valuation
model (Black-Scholes). Black-Scholes was developed to estimate the fair market value of traded
options, which have no vesting restrictions and are fully transferable. Option valuation models
require the input of highly subjective assumptions. Because our stock-based awards have
characteristics significantly different from those of traded options and because changes in the
subjective assumptions can materially affect the fair market value estimate, existing option
valuation models do not necessarily provide a reliable single measure of the fair value of our
stock-based awards.
Fair value determined using Black-Scholes varies based on assumptions used for the expected
life, expected stock price volatility and risk-free interest rates. We estimate the fair value of
awards granted using the implied volatility of actively traded options on our stock. The expected
life assumption represents the weighted-average period stock-based awards are expected to remain
outstanding. These expected life assumptions are established through a review of historical
exercise behavior of stock-based award grants with similar vesting periods. Where historical
patterns do not exist contractual terms are used. The risk-free interest rate represents the daily
treasury yield curve rate at the reporting date based on the closing market bid yields on actively
traded U.S. treasury securities in the over-the-counter market for the expected term. Our
assumptions may change in future periods.
The following table summarizes the weighted-average assumptions used to compute reported
stock-based compensation to employees and members of our board of directors for the periods set
forth below:
8
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
Ended March 31, |
|
|
2008 |
|
2007 |
Risk-free interest rate |
|
|
2.6 |
% |
|
|
4.8 |
% |
Expected life of options years |
|
|
4.06 |
|
|
|
4.45 |
|
Expected stock price volatility |
|
|
80 |
% |
|
|
60 |
% |
Expected dividend yield |
|
|
N/A |
|
|
|
N/A |
|
The following table summarizes the range of assumptions used to compute reported stock-based
compensation to third parties, other than non-employee members of our board of directors, for the
periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
Ended March 31, |
|
|
2008 |
|
2007 |
Risk-free interest rate |
|
|
1.6-2.5 |
% |
|
|
4.5-4.9 |
% |
Expected life of options years |
|
|
2.0-4.08 |
|
|
|
2.50-8.91 |
|
Expected stock price volatility |
|
|
80 |
% |
|
|
60 |
% |
Expected dividend yield |
|
|
N/A |
|
|
|
N/A |
|
SFAS No. 123R requires such realized tax benefits to be presented as part of cash flows from
financing activities. No income tax benefits have been realized from stock option exercises during
the three months ended March 31, 2008 and 2007 because a valuation allowance was maintained for all
net deferred tax assets.
Subscriber Acquisition Costs
Subscriber acquisition costs include hardware subsidies paid to radio manufacturers,
distributors and automakers, including subsidies paid to automakers who include a SIRIUS radio and
a prepaid subscription to our service in the sale or lease price of a new vehicle; subsidies paid
for chip sets and certain other components used in manufacturing radios; device royalties for
certain SIRIUS radios; commissions paid to retailers and automakers as incentives to purchase,
install and activate SIRIUS radios; product warranty obligations; provisions for inventory
allowance; and compensation costs associated with stock-based awards granted in connection with
certain distribution agreements. The majority of subscriber acquisition costs are incurred in
advance of acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty
payments to distributors and dealers of SIRIUS radios and revenue share payments to automakers and
retailers of SIRIUS radios. Subscriber acquisition costs also do not include amounts capitalized in
connection with our agreement with Hertz, as we retain ownership of certain SIRIUS radios used by
Hertz.
Subsidies paid to radio manufacturers and automakers are expensed upon shipment or
installation. Commissions paid to retailers and automakers are expensed either upon activation or
sale of the SIRIUS radio. Chip sets that are shipped to radio manufacturers and held on consignment
are recorded as inventory and expensed as subscriber acquisition costs when placed into production
by radio manufacturers. Costs for chip sets not held on consignment are expensed as subscriber
acquisition costs when the chip sets are shipped to radio manufacturers.
We record product warranty obligations in accordance with Financial Accounting Standards Board
Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN No. 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of the obligation
undertaken by issuing the guarantee. We warrant that certain products sold through our retail and
direct to consumer distribution channels will perform in all material respects in accordance with
specifications in effect at the time of the purchase of the products by the customer. We provide a
12-month warranty on our products from purchase date for repair or replacement of components and/or
products that contain defects of material or workmanship. Customers may exchange products directly
to the retailer within 30 days of purchase. We record a liability for an estimate of costs that we
expect to incur under our warranty when the product is shipped from the manufacturer. Factors
affecting our warranty liability include the number of units sold and historical and anticipated
rates of claims and costs per claim. We periodically assess the adequacy of our warranty liability
based on changes in these factors.
9
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
The following table reconciles the beginning and ending aggregate product warranty liability:
|
|
|
|
|
Balance, December 31, 2007 |
|
$ |
2,536 |
|
Accrual for warranties issued during the period |
|
|
2,010 |
|
Settlements during the period |
|
|
(1,609 |
) |
|
|
|
|
Balance, March 31, 2008 |
|
$ |
2,937 |
|
|
|
|
|
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs for
the three months ended March 31, 2008 and 2007 were $7,836 and $10,050, respectively. These costs
are included in engineering, design and development expenses in our accompanying unaudited
consolidated statements of operations.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes and
FIN No. 48, Accounting for Uncertainty in Income Taxes. Deferred income taxes are recognized for
the tax consequences related to temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for tax purposes at each
year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is established when
necessary based on the weight of available evidence if it is considered more likely than not that
all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum
of current income tax plus the change in deferred tax assets and liabilities.
Net Loss Per Share
We compute net loss per share in accordance with SFAS No. 128, Earnings Per Share. Basic net
loss per share is calculated using the weighted average common shares outstanding during each
reporting period. Diluted net loss per share adjusts the weighted average common shares outstanding
for the potential dilution that could occur if common stock equivalents (convertible debt,
warrants, stock options and restricted stock units) were exercised or converted into common stock.
Common stock equivalents of approximately 151,000,000 and 167,000,000 for the three months ended
March 31, 2008, and 2007, respectively, were not considered in the calculation of diluted net loss
per share as the effect would have been anti-dilutive.
Inventory
Inventory consists of finished goods, refurbished goods, chip sets and other raw material
components used in manufacturing SIRIUS radios. Inventory is stated at the lower of cost,
determined on a first-in, first-out basis, or market. We record an estimated adjustment for
inventory that is considered slow moving and obsolete or whose carrying value is in excess of net
realizable value. The provision related to product purchased for our direct to consumer
distribution channel is recorded to cost of equipment in our unaudited consolidated statements of
operations. The remaining provision is recorded to subscriber acquisition costs in our unaudited
consolidated statements of operations.
10
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
Inventory, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
12,030 |
|
|
$ |
9,987 |
|
Finished goods |
|
|
13,314 |
|
|
|
19,550 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
25,344 |
|
|
$ |
29,537 |
|
|
|
|
|
|
|
|
Investments
Our investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Marketable securities |
|
$ |
461 |
|
|
$ |
469 |
|
Restricted investments |
|
|
56,000 |
|
|
|
53,000 |
|
Investment, stated at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
56,461 |
|
|
$ |
53,469 |
|
|
|
|
|
|
|
|
Marketable Securities
We account for marketable securities in accordance with the provisions of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Marketable securities consist
of certificates of deposit. As of March 31, 2008 and December 31, 2007 certificates of deposit were
$461 and $469, respectively. The basic objectives of our investment policy are the preservation of
capital, maintaining sufficient liquidity to meet operating requirements and maximizing yield. We
classify our marketable securities as available-for-sale securities. Available-for-sale securities
are carried at fair market value. Unrealized gains and losses are included in accumulated other
comprehensive (loss) income as a separate component of stockholders equity. Realized gains and
losses, dividends and interest income, including amortization of the premium and discount arising
at purchase, are included in interest and investment income. The specific-identification method is
used to determine the cost of all securities and the basis by which amounts are reclassified from
accumulated comprehensive (loss) income into earnings.
We received proceeds from the sale or maturity of marketable securities of $8 and $10,850 for
the three months ended March 31, 2008 and 2007, respectively. There were no unrealized holding
gains or losses on marketable securities as of March 31, 2008 and December 31, 2007.
Restricted Investments
As of March 31, 2008 and December 31, 2007, short-term restricted investments were $35,000 and
primarily included certificates of deposit placed in escrow for the benefit of a third party
pursuant to a programming agreement.
As of March 31, 2008 and December 31, 2007, long-term restricted investments were $21,000 and
$18,000, respectively, and primarily included certificates of deposit and money market funds
deposited in escrow for the benefit of third parties pursuant to programming agreements and
certificates of deposit placed in escrow to secure our reimbursement obligations under letters of
credit issued for the benefit of lessors of our office space.
Investment, stated at cost
In September 2006, we invested in a third party for strategic purposes. We accounted for this
investment under the cost method. We terminated our investment in this third party in 2008 and
our original investment was returned in March 2008. The carrying value of our investment was $0 as of
March 31, 2008. $5,000 was classified as a receivable in other current assets as of December 31,
2007.
11
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
Equity Method Investment
We have a 49.9% economic interest in SIRIUS Canada. Our investment in SIRIUS Canada is
recorded using the equity method since we have significant influence, but less than a controlling
voting interest. Under this method, our investment in SIRIUS Canada, originally recorded at cost,
is adjusted to recognize our share of net earnings or losses as they occur rather than as dividends
or other distributions are received, limited to the extent of our investment in, advances to and
commitments to fund SIRIUS Canada. Our share of net earnings or losses of SIRIUS Canada is recorded
to equity in net loss of affiliate in our accompanying unaudited consolidated statements of
operations. We recorded $0 for both the three months ended March 31, 2008 and 2007 for our share of
SIRIUS Canadas net loss.
As of March 31, 2008, our investment in SIRIUS Canada was $0 as we fully recognized our share
of SIRIUS Canadas net loss to the extent we have funded it. We do not expect to recognize future
net losses unless we commit to additional funding.
Merger Costs
We
have incurred approximately $43,000 in direct costs through March 31, 2008 in connection
with our pending merger with XM Radio. In accordance with SFAS No. 141, Business Combinations,
which specifies that the cost of an entity acquired in a business combination include the direct
costs of the business combination, we have capitalized and included such costs in other long-term
assets in our accompanying unaudited consolidated balance sheet.
Reclassifications
Certain amounts in the prior period unaudited consolidated financial statements have been
reclassified to conform to the current period presentation. Specifically, during the first quarter
of 2008, we reclassified equipment related retention costs from cost of equipment to sales and
marketing expense. Equipment related retention costs are associated with efforts to retain
existing subscribers that we believe will result in higher revenue and lower churn.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value and expands the related disclosure
requirements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and for
interim periods within those years. The adoption of SFAS No. 157 in 2008 did not have a material
impact on our consolidated results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, which permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective of SFAS No. 159 is to provide entities a
method to mitigate volatility in reporting earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159
is effective for annual reporting periods beginning after November 15, 2007. The adoption of SFAS
No. 159 in 2008 did not have a material impact on our consolidated results of operations and
financial position.
In November 2007, the FASB issued SFAS No. 141R, Business Combinations, which continues to
require that all business combinations be accounted for by applying the acquisition method. Under
the acquisition method, the acquirer recognizes and measure the identifiable assets acquired, the
liabilities assumed, and any contingent consideration and contractual contingencies, as a whole, at
their face value as of the acquisition date. Under SFAS No. 141R, all transaction costs are
expenses as incurred. SFAS No. 141R rescinds EITF 93-07 Uncertainties Related to Income Taxes in a
Purchase Business Combination. Under EITF 93-07, the effect of any subsequent adjustments to
uncertain tax positions were generally applied to goodwill, except for post-acquisition interest on
uncertain tax provisions, which was recognized as an adjustment to income tax expense. Under SFAS
No. 141R, all subsequent adjustments to these uncertain tax positions that otherwise would have
impacted goodwill will be recognized in the income statement. The guidance in SFAS No. 141R will be
applied prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning after December 15, 2008.
12
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
In November 2007, the FASB issued SFAS No. 160, Accounting and Reporting of Noncontrolling
Interest (SFAS No. 160). SFAS No. 160 requires that a noncontrolling interest (previously
referred to as a minority interest) be separately reported in the equity section of the
consolidated entitys balance sheet. SFAS No. 160 also established accounting and reporting
standards for: (i) ownership interest in subsidiaries held by parties other than the parent, (ii)
the amount of consolidated net income attributable to the parent and to the noncontrolling
interest, (iii) changes in a parents ownership interest and (iv) the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 is effective
beginning January 1, 2009. We are currently evaluating the impact that the adoption of SFAS No. 160
will have on our consolidated results of operations and financial position.
In June 2007, the FASB issued EITF No. 07-03, Accounting for Nonrefundable Advance Payments
for Goods or Services to Be Used in Future Research and Development Activities, which states that
nonrefundable advance payments for future research and development activities should be deferred
and capitalized and that such amounts should be recognized as an expense as the goods are delivered
or the related services are performed. If an entity does not expect the goods to be delivered or
services to be rendered, the capitalized advance payment should be charged to expense. EITF No.
07-03 is effective for the first annual or interim reporting period beginning after December 15,
2007. The adoption of EITF 07-03 did not have a material impact on our consolidated results of
operations and financial position.
4. Subscriber Revenue
Subscriber revenue consists of subscription fees, revenue derived from our agreement with
Hertz, non-refundable activation fees and the effects of rebates. Revenues received from automakers
for prepaid subscriptions included in the sale or lease price of a new vehicle are also included in
subscriber revenue over the service period upon activation and sale to the customer.
Subscriber revenue consists of the following:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Subscription fees |
|
$ |
250,467 |
|
|
$ |
189,969 |
|
Activation fees |
|
|
6,298 |
|
|
|
5,319 |
|
Effect of rebates |
|
|
(1,125 |
) |
|
|
(4,492 |
) |
|
|
|
|
|
|
|
Total subscriber revenue |
|
$ |
255,640 |
|
|
$ |
190,796 |
|
|
|
|
|
|
|
|
5. Interest Costs
We capitalize a portion of the interest on funds borrowed to finance the construction and
launch of our fifth and sixth satellites. The following is a summary of our interest costs:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Interest costs charged to expense |
|
$ |
17,675 |
|
|
$ |
15,192 |
|
Interest costs capitalized |
|
|
3,262 |
|
|
|
1,814 |
|
|
|
|
|
|
|
|
Total interest costs incurred |
|
$ |
20,937 |
|
|
$ |
17,006 |
|
|
|
|
|
|
|
|
13
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
6. Related Party Transactions
In 2005, we entered into a license and services agreement with SIRIUS Canada. Pursuant to such
agreement, we are reimbursed for certain costs incurred by us to provide SIRIUS Canada service,
including certain costs we incur for the production and distribution of radios as well as
information technology support costs. In consideration for the rights granted pursuant to this
license and services agreement, SIRIUS Canada pays us a royalty based on a percentage of its annual
gross revenues. Additionally, the initial financing we provided to SIRIUS Canada is by way of
subscription to non-voting shares which carry an 8% cumulative dividend.
Total
costs that have been or will be reimbursed by SIRIUS Canada for the three months ended March 31, 2008 and 2007
were $4,702 and $1,877, respectively. We recorded $0 and $516 in royalty income for the three
months ended March 31, 2008 and 2007, respectively. Such royalty income was recorded to other
income in our accompanying unaudited consolidated statements of operations. We also recorded
dividend income of $0 and $206 for the three months ended March 31, 2008 and 2007, respectively,
which was included in interest and investment income in our accompanying unaudited consolidated
statements of operations.
The amount due from SIRIUS Canada at March 31, 2008 was $7,088, of which $3,851 and $3,237 are
included in other current assets and other long-term assets, respectively, on our accompanying
unaudited consolidated balance sheet. The amount due from SIRIUS Canada at December 31, 2007 was
$5,398, of which $2,161 and $3,237 are included in other current assets and other long-term assets,
respectively, on our accompanying consolidated balance sheet. The amount payable to SIRIUS Canada
at March 31, 2008 and December 31, 2007 to fund its remaining capital requirements was $1,386 and
$1,148, respectively, and is included in other long-term liabilities in the accompanying unaudited
consolidated balance sheet.
7. Debt
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion Price |
|
|
As of |
|
|
|
(Per Share) |
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Senior Secured Term Credit Agreement |
|
|
N/A |
|
|
$ |
248,750 |
|
|
$ |
249,375 |
|
9 5/8% Senior Notes due 2013 |
|
|
N/A |
|
|
|
500,000 |
|
|
|
500,000 |
|
3 1/4% Convertible Notes due 2011 |
|
$ |
5.30 |
|
|
|
230,000 |
|
|
|
230,000 |
|
2 1/2% Convertible Notes due 2009 |
|
|
4.41 |
|
|
|
299,998 |
|
|
|
299,998 |
|
3 1/2% Convertible Notes due 2008 |
|
|
1.38 |
|
|
|
2,251 |
|
|
|
33,301 |
|
8 3/4% Convertible Subordinated Notes due 2009 |
|
|
28.4625 |
|
|
|
1,744 |
|
|
|
1,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,282,743 |
|
|
|
1,314,418 |
|
Less Current Maturities |
|
|
|
|
|
|
304,749 |
|
|
|
35,801 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt |
|
|
|
|
|
$ |
977,994 |
|
|
$ |
1,278,617 |
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Credit Agreement
In June 2007, we entered into a senior secured Term Credit Agreement (the Term Credit
Agreement) with a syndicate of financial institutions. The Term Credit Agreement provides for a
term loan of $250,000, which has been drawn. Interest under the Term Credit Agreement is based, at
our option, on (i) adjusted LIBOR plus 2.25% or (ii) the higher of (a) the prime rate and (b) the
Federal Funds Effective Rate plus 1/2 of 1.00%, plus 1.25%. As of March 31, 2008, the interest rate
was 5.00%. LIBOR borrowings may be made for interest periods, at our option, of one, two, three or
six months (or, if agreed by all of the lenders, nine or twelve months). The loan amortizes in
equal quarterly installments of 0.25% of the initial aggregate principal amount for the first four
and a half years, with the balance of the loan thereafter being repaid in four equal quarterly
installments. The loan matures on December 20, 2012.
The loan is guaranteed by our material wholly owned subsidiaries, including Satellite CD
Radio, Inc. (the Guarantors). The Term Credit Agreement is secured by a lien on substantially all
of our and the Guarantors assets, including our four satellites
and the shares of the Guarantors.
The Term Credit Agreement contains customary affirmative covenants and event of default
provisions. The negative covenants contained in the Term Credit Agreement are substantially similar
to those contained in the indenture governing our 95/8% Senior Notes due 2013.
14
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
95/8% Senior Notes due 2013
In
August 2005, we issued $500,000 in aggregate principal amount of
our
95/8%
Senior Notes due 2013 resulting in net proceeds of $493,005. Our
95/8% Senior Notes due
2013 mature on August 1, 2013 and interest is payable semi-annually on February 1 and August 1 of
each year. The obligations under our
95/8% Senior Notes due 2013 are not secured by any
of our assets.
31/4% Convertible Notes due 2011
In October 2004, we issued $230,000 in aggregate principal amount of our 31/4% Convertible Notes
due 2011 resulting in net proceeds of $224,813. These notes are convertible, at the option of the
holder, into shares of our common stock at any time at a conversion rate of 188.6792 shares of
common stock for each $1,000.00 principal amount, or $5.30 per share of common stock, subject to
certain adjustments. Our 31/4% Convertible Notes due 2011 mature on October 15, 2011 and interest is
payable semi-annually on April 15 and October 15 of each year. The obligations under our 31/4%
Convertible Notes due 2011 are not secured by any of our assets.
21/2% Convertible Notes due 2009
In February 2004, we issued $250,000 in aggregate principal amount of our 21/2% Convertible
Notes due 2009 resulting in net proceeds of $244,625. In March 2004, we issued an additional
$50,000 in aggregate principal amount of our 21/2% Convertible Notes due 2009 pursuant to an option
granted in connection with the initial offering of the notes, resulting in net proceeds of $48,975.
These notes are convertible, at the option of the holder, into shares of our common stock at any
time at a conversion rate of 226.7574 shares of common stock for each $1,000.00 principal amount,
or $4.41 per share of common stock, subject to certain adjustments. Our 21/2% Convertible Notes due
2009 mature on February 15, 2009 and interest is payable semi-annually on February 15 and August 15
of each year. The obligations under our 21/2% Convertible Notes due 2009 are not secured by any of
our assets.
31/2% Convertible Notes due 2008
In May 2003, we issued $201,250 in aggregate principal amount of our 31/2% Convertible Notes due
2008 resulting in net proceeds of $194,224. These notes 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. Our 31/2%
Convertible Notes due 2008 mature on June 1, 2008. The obligations under our 31/2% Convertible Notes
due 2008 are not secured by any of our assets.
During the three months ended March 31, 2008, holders of $31,050 in aggregate principal amount
of our 31/2% Convertible Notes due 2008 presented such notes for conversion in accordance with the
terms of the indenture. We issued 22,499,998 shares of our common stock upon conversion of these
notes.
Space Systems/Loral Credit Agreement
In July 2007, we amended and restated our existing Credit Agreement with Space Systems/Loral
(the Loral Credit Agreement). Under Loral Credit Agreement, Space Systems/Loral has agreed to
make loans to us in an aggregate principal amount of up to $100,000 to finance the purchase of our
fifth and sixth satellites. Loans made under the Loral Credit Agreement will be secured by our
rights under the Satellite Purchase Agreement with Space Systems/Loral, including our rights to
these satellites. The loans are also entitled to the benefits of a subsidiary guarantee from
Satellite CD Radio, Inc., our subsidiary that holds our FCC license, and any future material
subsidiary that may be formed by us. The maturity date of the loans is the earliest to occur of (i)
June 10, 2010, (ii) 90 days after the sixth satellite becomes available for shipment and (iii) 30
days prior to the scheduled launch of the sixth satellite. Any loans made under the Loral Credit
Agreement generally will bear interest at a variable rate equal to three-month LIBOR plus 4.75%.
The daily unused balance bears interest at a rate per annum equal to 0.50%, payable quarterly on
the last day of each March, June, September and December. The Loral Credit Agreement permits us to
prepay all or a portion of the loans outstanding without penalty. We have not borrowed under the
Loral Credit Agreement as of March 31, 2008.
15
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
Covenants and Restrictions
Our
95/8% Senior Notes due 2013, our Loral Credit Agreement and our Senior Secured
Term Loan require us to comply with certain covenants that restrict our ability to, among other
things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain
other restricted payments, investments or acquisitions, (iv) enter into certain transactions with
affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise
dispose of all or substantially all of our assets, and (vii) make voluntary prepayments of certain
debt, in each case subject to exceptions as provided in the
95/8% Senior Notes due 2013
indenture, the Loral Credit Agreement and the credit agreement governing our Senior Secured Term
Loan. If we fail to comply with these covenants, our
95/8% Senior Notes due 2013, our
Senior Secured Term Loan and any loans outstanding under the Loral Credit Agreement could become
immediately payable and the Loral Credit Agreement could be terminated. At March 31, 2008, we were
in compliance with all such covenants.
8. Stockholders Equity
Common Stock, par value $0.001 per share
We are authorized to issue 2,500,000,000 shares of our common stock as of March 31, 2008. As
of March 31, 2008, approximately 323,620,000 shares of our common stock were reserved for issuance
in connection with outstanding convertible debt, warrants, incentive stock plans and common stock
to be granted to third parties upon satisfaction of performance targets. During the three months
ended March 31, 2008, employees exercised 62,335 stock options at exercise prices ranging from
$2.69 to $3.36 per share, resulting in proceeds to us of $840. Of
this amount, $230 was collected
as of March 31, 2008. We also collected $610 in 2008 related to stock option exercises that
occurred in 2007.
In January 2004, we signed a seven-year agreement with the NFL. We delivered to the NFL
15,173,070 shares of our common stock valued at $40,967 upon execution of this agreement. These
shares of common stock are subject to transfer restrictions which lapse over time. We recognized
expense associated with these shares of $1,641 during each of the three months ended March 31, 2008
and 2007. Of the remaining $17,484 in common stock value, $5,852 and $11,632 are included in other
current assets and other long-term assets, respectively, on our accompanying unaudited consolidated
balance sheet as of March 31, 2008.
Warrants
We have issued warrants to purchase shares of our common stock in connection with distribution
and programming agreements and certain debt issuances. As of March 31, 2008, warrants to acquire
approximately 55,461,000 shares of our common stock with an average exercise price of $3.94 were
outstanding. These warrants vest over time or upon the achievement of milestones and expire at
various times through June 2014. For the three months ended March 31, 2008 and 2007, we recognized
expense of $2,770 and $5,199, respectively, in connection with these warrants.
9. Benefit Plans
Stock-Based Awards
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.
On May 25, 2004, our stockholders approved an amendment to the 2003 Plan to include members of our
board of directors as eligible participants. Employees, consultants and members of our board of
directors 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 are generally
subject to a vesting requirement. Stock-based awards generally expire ten years from the date of
grant. Each restricted stock unit entitles the holder to receive one share of our common stock upon
vesting.
16
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
As of March 31, 2008, approximately 100,431,000 stock options, shares of restricted stock and
restricted stock units were outstanding. As of March 31, 2008, approximately 53,750,000 shares of
our common stock were available for grant under the 2003 Plan.
The following table summarizes stock option activity under our stock incentive plans for the
three months ended March 31, 2008 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
|
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Life (Years) |
|
Value |
Outstanding at December 31, 2007 |
|
|
79,600 |
|
|
$ |
5.38 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
17,394 |
|
|
|
2.89 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(62 |
) |
|
|
2.05 |
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
(587 |
) |
|
|
2.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
96,345 |
|
|
|
4.94 |
|
|
|
7.01 |
|
|
$ |
8,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008 |
|
|
52,766 |
|
|
|
5.86 |
|
|
|
5.81 |
|
|
$ |
8,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the three months ended
March 31, 2008 and 2007 was $1.73 and $1.96, respectively. The total intrinsic value of stock
options exercised during the three months ended March 31, 2008 and 2007 was $62 and $716,
respectively.
We recognized stock-compensation expense associated with stock options of $11,054 and $10,694
for the three months ended March 31, 2008 and 2007, respectively.
The following table summarizes the non-vested restricted stock unit activity under our stock
incentive plans for the three months ended March 31, 2008 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
Shares |
|
Fair Value |
Outstanding at December 31, 2007 |
|
|
3,623 |
|
|
$ |
3.70 |
|
Granted |
|
|
3,165 |
|
|
|
2.87 |
|
Exercised |
|
|
(2,701 |
) |
|
|
3.58 |
|
Cancelled or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
4,087 |
|
|
|
2.73 |
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of restricted stock units granted during the three
months ended March 31, 2008 and 2007 was $2.87 and $3.70, respectively. The total intrinsic value
of restricted stock units that vested during the three months ended March 31, 2008 and 2007 was
$8,052 and $5,864, respectively.
We recognized stock compensation expense associated with restricted stock units and shares of
restricted stock of $2,813 and $3,698 for the three months ended March 31, 2008 and 2007,
respectively.
For the three months ended March 31, 2008, we also recognized stock compensation expense of
$1,460 for restricted stock units expected to be granted for services performed in 2008. For the
three months ended March 31, 2007, we recognized stock compensation expense of $1,178 for
restricted stock units expected to be granted for services performed in 2007.
17
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
401(k) Savings Plan
We sponsor the Sirius Satellite Radio 401(k) Savings Plan (the Plan) for eligible employees.
The Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax salary
subject to certain defined limits. Currently we match 50% of employee voluntary contributions, up
to 6% of an employees pre-tax salary, in the form of shares of our common stock. Our matching
contribution vests at a rate of 331/3% for each year of employment and is fully vested
after three years of employment. Expense resulting from our matching contribution to the Plan was
$865 and $498 for the three months ended March 31, 2008 and 2007, respectively.
We may also elect to contribute to the profit sharing portion of the Plan based upon the total
compensation of all eligible participants. These additional contributions, referred to as
profit-sharing contributions, are determined by the compensation committee of our board of
directors. Employees are only eligible to receive profit-sharing contributions during any year in
which they are employed on the last day of the year. Profit-sharing contribution expense was $1,657
and $1,352 for the three months ended March 31, 2008 and 2007, respectively.
10. Income Taxes
We recorded income tax expense of $543 and $555 for the three months ended March 31, 2008 and
2007, respectively. Such expense represents the recognition of a deferred tax liability related to
the difference in accounting for our FCC license, which is amortized over 15 years for tax purposes
but not amortized for book purposes.
We adopted the provisions of FIN No. 48 on January 1, 2007. FIN No. 48 prescribes a
recognition threshold and measurement attributes for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return, as well as criteria on
derecognition, measurement, classification, interest and penalties, accounting in interim periods,
disclosure and transition.
We provide a valuation allowance for all of our deferred tax assets. Accordingly, unrecognized
federal or state income tax positions should not impact the face of our financial statements, but
instead would reduce the gross tax benefit. We did not have any unrecognized tax benefits.
We have elected to record interest accrued related to unrecognized tax benefits as interest
expense and penalties as operating expense. As of March 31, 2008, we recorded no interest expense
or penalties related to unrecognized tax benefits. As of March 31, 2008, we were subject to
examination in the United States federal and various state tax jurisdictions for the 2003 to 2007
tax years.
11. Commitments and Contingencies
The following table summarizes our expected contractual cash commitments as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Thereafter |
|
|
Total |
|
Debt obligations |
|
$ |
4,126 |
|
|
$ |
304,242 |
|
|
$ |
2,500 |
|
|
$ |
232,500 |
|
|
$ |
239,375 |
|
|
$ |
500,000 |
|
|
$ |
1,282,743 |
|
Cash interest payments |
|
|
45,966 |
|
|
|
73,509 |
|
|
|
69,116 |
|
|
|
68,688 |
|
|
|
55,971 |
|
|
|
49,194 |
|
|
|
362,444 |
|
Lease obligations |
|
|
9,786 |
|
|
|
13,381 |
|
|
|
12,897 |
|
|
|
12,133 |
|
|
|
12,039 |
|
|
|
22,709 |
|
|
|
82,945 |
|
Satellite and transmission |
|
|
126,108 |
|
|
|
119,033 |
|
|
|
106,347 |
|
|
|
46,507 |
|
|
|
7,678 |
|
|
|
41,048 |
|
|
|
446,721 |
|
Programming and content |
|
|
112,257 |
|
|
|
170,346 |
|
|
|
160,347 |
|
|
|
42,072 |
|
|
|
19,423 |
|
|
|
9,667 |
|
|
|
514,112 |
|
Marketing and distribution |
|
|
56,310 |
|
|
|
23,024 |
|
|
|
26,190 |
|
|
|
18,173 |
|
|
|
5,500 |
|
|
|
|
|
|
|
129,197 |
|
Chip set development and production |
|
|
4,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,281 |
|
Other |
|
|
8,543 |
|
|
|
2,075 |
|
|
|
997 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
11,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash commitments |
|
$ |
367,377 |
|
|
$ |
705,610 |
|
|
$ |
378,394 |
|
|
$ |
420,087 |
|
|
$ |
339,986 |
|
|
$ |
622,618 |
|
|
$ |
2,834,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations. Debt obligations include principal payments on our outstanding debt.
Cash Interest Payments. Cash interest payments include interest due on our outstanding debt
through maturity.
Lease Obligations. We have entered into operating leases related to our studios, office space,
terrestrial repeaters and equipment.
Satellite and Transmission. We have entered into agreements with third parties to operate and
maintain our off-site satellite telemetry, tracking and control facilities and certain components
of our terrestrial repeater network.
18
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
We have also entered into an agreement with Space Systems/Loral to design and construct our
fifth and sixth satellites. Construction of our fifth satellite is expected to be completed in the
second quarter of 2009. We plan to launch this satellite on a Proton rocket under our contract with
International Launch Services. We expect to launch our sixth satellite in the fourth quarter of
2010. In January 2008, we entered into an agreement with International Launch Services to secure
two additional satellite launches on Proton rockets. We plan to use one of these rockets to launch
our sixth satellite. This agreement provides us the flexibility to defer launch dates if we choose.
We also have the ability to cancel the second of these launches upon payment of a cancellation fee.
Programming and Content. We have entered into agreements with licensors of programming and
other content providers and, in certain instances, are obligated to pay license fees and guarantee
minimum advertising revenue share.
Marketing and Distribution. We have entered into various marketing, sponsorship and
distribution agreements to promote our brand and are obligated to make payments to sponsors,
retailers, automakers and radio manufacturers under these agreements. Certain programming and
content agreements also require us to purchase advertising on properties owned or controlled by the
licensors. We also reimburse automakers for certain engineering and development costs associated
with the incorporation of SIRIUS radios into vehicles they manufacture. In addition, in the event
that certain new products are not shipped by our distributor to its customers within 90 days of
their receipt of the goods, we have agreed to purchase and take title to the product.
Chip Set Development and Production. We have entered into agreements with third parties to
develop, produce and supply chip sets; to develop products; and in certain instances to license
intellectual property related to chip sets.
Other. We have entered into various agreements with third parties for general operating
purposes.
In addition to the contractual cash commitments described above, we have entered into
agreements with automakers, radio manufacturers and others that include per-radio, per-subscriber,
per-show and other variable cost arrangements. These future costs are dependent upon many factors
including our subscriber growth and are difficult to anticipate; however, these costs may be
substantial. We may enter into additional programming, distribution, marketing and other agreements
that contain similar provisions.
Under the terms of a joint development agreement with XM 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. The costs related to the joint development agreement are
being expensed as incurred to engineering, design and development expense in the accompanying
unaudited consolidated statements of operations. We are currently unable to determine the
expenditures necessary to complete this process, but we do not expect that these expenditures will
be material.
We are required under the terms of certain agreements to provide letters of credit and deposit
monies in escrow, which place restrictions on our cash and cash equivalents. As of March 31, 2008
and December 31, 2007, $56,000 and $53,000, respectively, was classified as restricted investments
as a result of our reimbursement obligations under these letters of credit and escrow deposits.
We have not entered into any off-balance sheet arrangements or transactions.
Legal Proceedings
FCC Matters. In April 2006, we learned that XM Radio and two manufacturers of SIRIUS radios
had received inquiries from the FCC as to whether the FM transmitters in their products complied
with the FCCs emissions and frequency rules. We promptly began an internal review of the
compliance of the FM transmitters in a number of our radios. In June 2006, we learned that a third
manufacturer of SIRIUS radios had received an inquiry from the FCC as to whether the FM
transmitters in its products complied with the FCCs emissions and frequency rules. In June 2006,
we received a letter from the FCC making similar inquiries. In July 2006, we responded to the
letter from the FCC in respect of the preliminary results of our review. In August 2006, we
received a follow-up letter of inquiry from the FCC and responded to the FCCs further inquiry. We
continue to cooperate with the FCCs inquiry.
19
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Dollar amounts in thousands, unless otherwise stated)
During our internal review, we determined that certain of our radios with FM transmitters were
not compliant with FCC rules. We have taken a series of actions to correct the problem.
In connection with our internal review, we discovered that certain SIRIUS personnel requested
manufacturers to produce SIRIUS radios that were not consistent with the FCCs rules. As a result
of this review, we are taking significant steps to ensure that this situation does not happen
again, including the adoption of a compliance plan, approved by our board of directors, to ensure
that in the future our products comply with all applicable FCC rules.
The FCCs laboratory has tested a number of our products and found them to be compliant with
the FCCs rules. We believe SIRIUS radios that are currently in production comply with applicable
FCCs rules. No health or safety issues are involved with these SIRIUS radios and radios which are
factory-installed in new vehicles are not affected.
We have retained an engineering compliance officer to report to our Senior Vice President of
Internal Audit, who reports to our Audit Committee.
In October 2006, we ceased operating 11 of our terrestrial repeaters which we discovered had
been operating at variance to their specifications and applied to the FCC for new authority to
resume operating these repeaters.
Copyright Royalty Board Proceeding. In December 2007, the Copyright Royalty Board, or CRB, of
the Library of Congress issued its decision regarding the royalty rate payable by us under the
statutory license covering the performance of sound recordings over our satellite digital audio
radio service for the six-year period starting January 1, 2007 and ending December 31, 2012. Under
the terms of the CRBs decision, we will pay a royalty of 6.0% of gross revenues, subject to
certain exclusions, for 2007 and 2008, 6.5% for 2009, 7.0% for 2010, 7.5% for 2011 and 8.0% for
2012. SoundExchange has appealed the decision of the CRB to the United States Court of Appeals for
the District of Columbia Circuit.
U.S. Electronics Arbitration. In 2006, U.S. Electronics Inc., a former licensed distributor
manufacturer of SIRIUS radios, commenced an arbitration proceeding against us. U.S. Electronics
alleges that, among other things, we breached our contract; failed to pay monies owed under the
contract; tortiously interfered with U.S. Electronics relationships with retailers and
manufacturers; and otherwise acted in bad faith. U.S. Electronics is seeking between $75,000 and
$110,000 in damages. We believe that a substantial portion of these damages are barred by the
limitation of liability provisions contained in the contract between us and U.S. Electronics. U.S.
Electronics contends that these provisions do not bar its damages because of, among other reasons,
our alleged bad faith and tortious conduct.
We are vigorously defending this action. A hearing in this arbitration commenced in March 2008
and, absent a settlement, we expect the arbitrators to issue a decision in this matter in the third
quarter of 2008.
Other Matters. In the ordinary course of business, we are a defendant in various lawsuits and
arbitration proceedings, including actions filed by former employees, parties to contracts or
leases and owners of patents, trademarks, copyrights or other intellectual property. None of these
actions are, in our opinion, likely to have a material adverse effect on our business or financial
results.
20
|
|
|
Item 2. |
|
Managements 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, intend, plan, 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, 2007 (the Form
10-K) and in other reports and documents published by us from time to time, particularly the risk
factors described under BusinessRisk Factors in Item 1A 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:
|
|
|
our pending merger with XM Satellite Radio Holdings Inc. (XM Radio),
including related uncertainties and risks and the impact on our
business if the merger is not completed; |
|
|
|
|
the useful life of our satellites, which have experienced circuit
failures on their solar arrays and other component failures and are
not insured; |
|
|
|
|
our dependence upon third parties, including manufacturers and
distributors of SIRIUS radios, retailers, automakers and programming
providers; and |
|
|
|
|
our competitive position versus other forms of audio and video
entertainment including terrestrial radio, XM Radio, HD radio,
internet radio, mobile phones, iPods and other MP3 devices, and
emerging next generation networks and technologies. |
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.
21
Executive Summary
On February 19, 2007, we and XM Radio entered into an Agreement and Plan of Merger (the
Merger Agreement), pursuant to which we and XM Radio will combine our businesses through a merger
of XM Radio and a newly formed, wholly owned subsidiary of us (the Merger). Our Board of
Directors and the Board of Directors of XM Radio have approved the Merger and the Merger Agreement.
On March 24, 2008, the U.S. Department of Justice informed us that it ended its investigation
into the Merger, that it has concluded that the Merger is not anti-competitive, and that it will
allow the transaction to proceed. The Merger is still subject, among other conditions, to approval
of the Federal Communications Commission.
We are a satellite radio provider in the United States. We currently broadcast over 130
channels of programming to listeners across the country. We offer 69 channels of 100%
commercial-free music and feature 65 channels of sports, news, talk, entertainment, data and
weather for a monthly subscription fee of $12.95.
We broadcast through our proprietary satellite radio system, which currently consists of three
orbiting satellites, 124 terrestrial repeaters that receive and retransmit our signal, a satellite
uplink facility and our studios. Subscribers receive our service through SIRIUS radios, which are
sold by automakers, consumer electronics retailers and mobile audio dealers and through our
website. Subscribers can also receive our music channels and certain other channels over the
Internet.
SIRIUS Canada Inc., a Canadian corporation owned by us, Canadian Broadcasting Corporation and
Slaight Communications Ltd. offers a satellite radio service in Canada. SIRIUS Canada offers 110
channels of commercial-free music and news, sports, talk and entertainment programming, including
11 channels of Canadian content. Subscribers to the SIRIUS Canada service are not included in our
subscriber count.
SIRIUS radios are primarily distributed through retailers; automakers, or OEMs; and through
our website. SIRIUS radios can be purchased at major retailers, including Best Buy; Circuit City;
Costco; Crutchfield; Target; Wal-Mart; and on an exclusive basis through RadioShack. On March 31,
2008, SIRIUS radios were available at more than 20,000 retail locations. We have exclusive
agreements with Chrysler, Mercedes-Benz, Ford, Kia, Mitsubishi, BMW, Rolls-Royce, Volkswagen and
Bentley to offer SIRIUS radios as factory or dealer-installed equipment. We also have relationships
with Toyota and Scion to offer SIRIUS radios as dealer installed equipment, and a relationship with
Subaru to offer SIRIUS radios as factory and dealer-installed equipment. As of March 31, 2008,
SIRIUS radios were available as a factory-installed option in 125 vehicle models and as a
dealer-installed option in 29 vehicle models. SIRIUS radios are also offered to renters of Hertz
vehicles at airport locations nationwide.
As of March 31, 2008, we had 8,644,319 subscribers compared with 8,321,785 subscribers as of
December 31, 2007 and 6,581,045 subscribers as of March 31, 2007. Our subscriber totals include
subscribers under our regular pricing plans; subscribers that have prepaid, including payments
received from automakers for prepaid subscriptions included in the sale or lease price of a new
vehicle; active SIRIUS radios under our agreement with Hertz; and subscribers to SIRIUS Internet
Radio, our Internet service.
Our primary source of revenue is subscription fees, with most of our customers subscribing to
SIRIUS on either an annual, semi-annual, quarterly or monthly basis. We offer discounts for
pre-paid and long-term subscriptions as well as discounts for multiple subscriptions. Currently we
receive an average of approximately eight months of prepaid revenue per subscriber upon activation.
We also derive revenue from activation fees, the sale of advertising on select non-music channels
and the direct sale of SIRIUS radios and accessories. We believe our ability to attract and retain
subscribers depends in large part on creating and sustaining distribution channels for SIRIUS
radios, the strength of the SIRIUS brand, and on the quality and entertainment value of our
programming.
In certain cases, automakers include a subscription to our radio service in the sale or lease
price of vehicles. The length of these prepaid subscriptions varies, but is typically six months to
one year. In many cases, we receive subscription payments from automakers in advance of the
activation of our service. We also reimburse various automakers for certain costs associated with
SIRIUS radios installed in their vehicles.
22
Pending Merger with XM Radio
On February 19, 2007, we entered into an Agreement and Plan of Merger with XM Radio Holdings
Inc. Pursuant to the Merger Agreement, we and XM Radio will combine our businesses through a merger
of XM Radio and a newly formed, wholly owned subsidiary of ours.
On
March 24, 2008, the U.S. Department of Justice informed us
that it ended its investigation into the Merger, that it has
concluded that the Merger is not anti-competitive, and that it will
allow the transaction to proceed. The Merger is still subject, among
other conditions, to approval of the Federal Communications
Commission.
Each of SIRIUS and XM has made customary representations and warranties and covenants in the
Merger Agreement. The completion of the Merger is subject to various closing conditions, including
obtaining approval from the FCC. The Merger is intended to qualify as a reorganization for federal
income tax purposes.
At the effective time of the Merger (the Effective Time), by virtue of the Merger and
without any action on the part of any stockholder, each share of common stock of XM Radio (the XM
Common Stock) issued and outstanding immediately prior to the Effective Time will generally be
converted into the right to receive 4.6 shares of our common stock. Each share of Series A
Convertible Preferred Stock of XM Radio issued and outstanding immediately prior to the Effective
Time will be similarly converted at the Effective Time into the right to receive 4.6 shares of a
newly-designated series of our preferred stock having substantially the same powers, designations,
preferences, rights and qualifications, limitations and restrictions as the stock so converted.
Mel Karmazin, our chief executive officer, will become chief executive officer of the combined
company and Gary M. Parsons, chairman of the board of directors of XM Radio, will become chairman
of the board of directors of the combined company. The combined companys board of directors will
consist of 12 directors, including Messrs. Karmazin and Parsons, four independent members
designated by each of SIRIUS and XM Radio, as well as one representative of each of General Motors
and American Honda.
The Merger Agreement contains certain termination rights for both us and XM Radio. On April
30, 2008, we and XM Radio announced that the companies have agreed not to exercise their rights to
terminate the Merger Agreement prior to May 15, 2008. We and XM Radio have also announced that we
have agreed to further extend the Merger Agreement, as necessary, for rolling two week periods
unless either side notifies the other of its intention not to extend. If the Merger Agreement is
terminated under certain circumstances specified in the Merger Agreement, we or XM Radio, as the
case may be, will be required to pay the other a termination fee of $175,000.
This description of the Merger Agreement does not purport to be complete and is qualified in
its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 to our Current
Report on Form 8-K dated February 21, 2007.
Results of Operations
Our discussion of our results of operations, along with the selected financial information in
the tables that follow, includes the following non-GAAP financial measures: average monthly churn;
average monthly revenue per subscriber, or ARPU; SAC, as adjusted, per gross subscriber addition;
customer service and billing expenses, as adjusted, per average subscriber; free cash flow; and
adjusted loss from operations. We believe these non-GAAP financial measures provide meaningful
supplemental information regarding our operating performance and are used for internal management
purposes, when publicly providing the business outlook, and as a means to evaluate period-to-period
comparisons. Please refer to the footnotes following our discussion of results of operations for
the definitions and further discussion of the usefulness of such non-GAAP financial measures.
Certain amounts in the prior unaudited consolidated financial statements have been
reclassified to conform to the current period presentation. Specifically, during the first quarter
2008, we reclassified equipment related retention costs from cost of equipment to sales and
marketing expense. Equipment related retention costs are associated with efforts to retain
existing subscribers that we believe will result in higher revenue and lower churn.
23
Subscribers and Key Operating Metrics:
The following table contains a breakdown of our subscribers for the three months ended March
31, 2008 and 2007:
|
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|
|
|
|
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|
March 31, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Beginning subscribers |
|
|
8,321,785 |
|
|
|
6,024,555 |
|
Net additions |
|
|
322,534 |
|
|
|
556,490 |
|
|
|
|
|
|
|
|
Ending subscribers |
|
|
8,644,319 |
|
|
|
6,581,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
4,643,215 |
|
|
|
4,234,804 |
|
OEM |
|
|
3,986,818 |
|
|
|
2,323,683 |
|
Hertz |
|
|
14,286 |
|
|
|
22,558 |
|
|
|
|
|
|
|
|
Ending subscribers |
|
|
8,644,319 |
|
|
|
6,581,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
2,506 |
|
|
|
192,978 |
|
OEM |
|
|
321,186 |
|
|
|
364,674 |
|
Hertz |
|
|
(1,158 |
) |
|
|
(1,162 |
) |
|
|
|
|
|
|
|
Net addtions |
|
|
322,534 |
|
|
|
556,490 |
|
|
|
|
|
|
|
|
Subscribers. We ended the first quarter of 2008 with 8,644,319 subscribers, an increase of 4%
since December 31, 2007 and 31% from the 6,581,045 subscribers as of March 31, 2007. Since March
31, 2007, we added 408,411 net subscribers from our retail channel and 1,663,135 net subscribers
from our OEM channel, resulting in a 10% and 72% increase in our retail and OEM subscriber base,
respectively.
The following table presents our key operating metrics for the three months ended March 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
March 31, |
|
|
2008 |
|
2007 |
Gross subscriber additions |
|
|
1,003,422 |
|
|
|
988,458 |
|
Deactivated subscribers |
|
|
680,888 |
|
|
|
431,968 |
|
Average monthly churn (1)(6) |
|
|
2.7 |
% |
|
|
2.3 |
% |
ARPU (2)(6) |
|
$ |
10.42 |
|
|
$ |
10.46 |
|
SAC, as adjusted, per gross
subscriber addition (3)(6) |
|
$ |
91 |
|
|
$ |
101 |
|
Customer service and billing
expenses, as adjusted, per
average subscriber (4)(6) |
|
$ |
1.05 |
|
|
$ |
1.15 |
|
Total revenue |
|
$ |
270,350 |
|
|
$ |
204,037 |
|
Free cash flow (5)(6) |
|
$ |
(186,535 |
) |
|
$ |
(146,715 |
) |
Adjusted loss from operations (7) |
|
$ |
(39,457 |
) |
|
$ |
(83,999 |
) |
Net loss |
|
$ |
(104,118 |
) |
|
$ |
(144,745 |
) |
ARPU. Total ARPU for the three months ended March 31, 2008 was $10.42 compared to $10.46 for
the three months ended March 31, 2007. The decrease was driven by an increase in the mix of prepaid
subscriptions on vehicles that have not been sold to a consumer; a decline in net advertising
revenue per average subscriber as subscriber growth exceeded the growth in ad revenues; offset by
the effects of rebates.
We expect ARPU to fluctuate based on the growth of our subscriber base, promotions, rebates
offered to subscribers and corresponding take-rates, plan mix, subscription prices, advertising
sales and the identification of additional revenue streams from subscribers.
SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber
addition was $91 and $101 for the three months ended March 31, 2008 and 2007, respectively. The
decline was primarily attributable to lower per unit subsidies due to production efficiencies and a
higher average retail selling price, offset by a higher mix of OEM gross additions.
We expect SAC, as adjusted, per gross subscriber addition to decline as the costs of
subsidized components of SIRIUS radios decrease in the future. If competitive forces or changes in
retailer promotional strategies require us to increase hardware subsidies or promotions, SAC, as
adjusted, per gross subscriber addition may increase. Our SAC, as adjusted, per gross subscriber
addition will continue to be impacted by our increasing mix of OEM gross subscriber addition.
24
Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber Per Month. Customer
service and billing expenses, as adjusted, per average subscriber per month declined 9% to $1.05
for the first quarter of 2008 compared with $1.15 for the first quarter of 2007.
We expect customer service and billing expenses, as adjusted, per average subscriber to
decrease on an annual basis as our subscriber base grows due to scale efficiencies in call center
and other customer care and billing operations. Our customer service and billing expenses, as
adjusted, per average subscriber are generally lower in the first three quarters of our fiscal year
and increase in the fourth quarter due to the holiday selling season.
Adjusted Loss from Operations. For the three months ended March 31, 2008 and 2007, adjusted
loss from operations was $39,457 and $83,999, respectively, a decrease of $44,542. The decrease was
primarily driven by an increase in total revenue of $66,313 as a result of a 31% increase in our
subscriber base, which more than offset increases in non operating expenses of $21,771.
Net Loss. For the three months ended March 31, 2008 and 2007, net loss was $104,118 and
$144,745, respectively, a decrease of $40,627. The decrease was primarily driven by an increase in
total revenue of $66,313 as a result of a 31% increase in our subscriber base.
Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007
Total Revenue
Subscriber Revenue. Subscriber revenue includes subscription fees, activation fees and the
effects of rebates. For the three months ended March 31, 2008 and 2007, subscriber revenue was
$255,640 and $190,796, respectively, an increase of 34% or $64,844. The increase was attributable
to the growth of subscribers to our service.
The following table contains a breakdown of our subscriber revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Subscription fees |
|
$ |
250,467 |
|
|
$ |
189,969 |
|
Activation fees |
|
|
6,298 |
|
|
|
5,319 |
|
Effect of rebates |
|
|
(1,125 |
) |
|
|
(4,492 |
) |
|
|
|
|
|
|
|
Total subscriber revenue |
|
$ |
255,640 |
|
|
$ |
190,796 |
|
|
|
|
|
|
|
|
Future subscriber revenue will be dependent upon, among other things, the growth of our
subscriber base, promotions, rebates offered to subscribers and corresponding take-rates, plan mix,
subscription prices and the identification of additional revenue streams from subscribers.
25
Advertising Revenue. Advertising revenue includes the sale of advertising on our non-music
channels, net of agency fees. Agency fees are based on a stated percentage per the advertising
agreements applied to gross billing revenue. For the three months ended March 31, 2008 and 2007,
net advertising revenue was $8,408 and $6,721, respectively, an increase of $1,687. The increase
was a result of increased advertiser interest through sales efforts.
We expect advertising revenue to grow as our subscribers increase, as we continue to improve
brand awareness and content, and as we increase the size and effectiveness of our advertising sales
force. Advertising revenue is subject to fluctuation based on the overall advertising environment.
Equipment Revenue. Equipment revenue includes revenue from the direct sale of SIRIUS radios
and accessories through our direct to consumer distribution channel. For the three months ended
March 31, 2008 and 2007, equipment revenue was $6,063 and $4,671, respectively, an increase of
$1,392. The increase was the result of higher sales through our direct to consumer distribution
channel, offset by the effects of promotional discounts.
We expect equipment revenue to increase as we introduce new products and as sales grow through
our direct to consumer distribution channel.
Operating Expenses
Satellite and Transmission. Satellite and transmission expenses consist of costs associated
with the operation and maintenance of our satellites; satellite telemetry, tracking and control
system; terrestrial repeater network; satellite uplink facility; and broadcast studios. : For the
three months ended March 31, 2008 and 2007, satellite and transmission expenses were $7,822 and
$7,986, respectively, a decrease of $164. Excluding stock-based compensation of $797 and $656 for
the three months ended March 31, 2008 and 2007, respectively, satellite and transmission expenses
decreased $305 from $7,330 to $7,025. As of March 31, 2008 and 2007, we had 124 and 127 terrestrial
repeaters, respectively, in operation.
Future increases in satellite and transmission expenses will primarily be attributable to the
addition of new terrestrial repeaters and maintenance costs of existing terrestrial repeaters. We
expect to deploy additional terrestrial repeaters in 2008. Such expenses may also increase in
future periods if we decide to reinstate our in-orbit satellite insurance.
Programming and Content. Programming and content expenses include costs to acquire, create and
produce content and on-air talent costs. We have entered into various agreements with third parties
for music and non-music programming. These agreements require us to pay license fees, share
advertising revenue, purchase advertising on media properties owned or controlled by the licensor
and pay other guaranteed amounts. Purchased advertising is recorded as a sales and marketing
expense in the period the advertising is broadcast.
For the three months ended March 31, 2008 and 2007, programming and content expenses were $61,692
and $59,998, respectively, an increase of $1,694. Excluding stock-based compensation of $2,789 and
$2,935 for the three months ended March 31, 2008 and 2007, respectively, programming and content
expenses increased $1,840 from $57,063 to $58,903. This increase was primarily attributable to
higher compensation-related costs for additions to headcount.
Our programming and content expenses, excluding stock-based compensation expense, could
increase as we continue to develop and enhance our channels. We regularly evaluate programming
opportunities and may choose to acquire and develop new content or renew current programming
agreements in the future at higher costs.
Revenue Share and Royalties. Revenue share and royalties include distribution and content
provider revenue share, residuals and broadcast and webstreaming royalties. Residuals are monthly
fees paid based upon the number of subscribers using a SIRIUS radio purchased from a retailer.
Variable advertising revenue share is recorded to revenue share and royalties in the period the
advertising is broadcast. For the three months ended March 31, 2008 and 2007, revenue share and
royalties were $42,320 and $27,134, respectively, an increase of $15,186, or 56%. This increase was
attributable to the determination by the Copyright Royalty Board in
January 2008 of the royalty rate under the
statutory license covering the performance of sound recordings. The
33% growth in our revenues also
contributed to the increase in revenue share and royalties.
We expect revenue share to increase as our revenues grow and we expand our distribution of
SIRIUS radios through automakers. In addition, we expect broadcast and webstreaming royalties,
which are typically variable in nature, to increase as our subscriber base grows.
Customer Service and Billing. Customer service and billing expenses include costs associated
with the operation of our customer service centers and subscriber management system as well as bad
debt expense. For the three months ended March 31, 2008 and 2007, customer service and billing
expenses were $26,922 and $21,853, respectively, an increase of $5,069. Excluding stock-based
compensation
26
of $276 and $199 for the three months ended March 31, 2008 and 2007, respectively,
customer service and billing expenses increased $4,992 from $21,654 to $26,646. This increase was
primarily due to higher call center operating costs necessary to accommodate the increase in the
our subscriber base. Customer service and billing expenses, excluding stock-based
compensation, increased 23% compared with an increase in weighted average subscribers of 34% year
over year. We expect our customer service and billing expenses, excluding stock-based compensation
expense, to increase as our subscriber base grows due to increased call center operating costs,
transaction fees necessary to serve our subscriber base and bad debt expense.
Cost of Equipment. Cost of equipment includes costs for SIRIUS radios and accessories sold
through our direct to consumer distribution channel. For the three months ended March 31, 2008 and
2007, cost of equipment was $7,588 and $6,458, respectively, an increase of $1,130. The increase
was primarily attributable to higher sales volume, offset by a decline in per unit costs.
We expect cost of equipment to increase in the future as sales through our direct to consumer
distribution channel grow.
Sales and Marketing. Sales and marketing expenses include costs for advertising, media and
production, including promotional events and sponsorships; cooperative marketing; customer
retention efforts for existing subscribers; and compensation. Cooperative marketing costs include
fixed and variable payments to reimburse retailers and automakers for the cost of advertising and
other product awareness activities. For the three months ended March 31, 2008 and 2007, sales and
marketing expenses were $38,467 and $40,996, respectively, a decrease of $2,529. Excluding
stock-based compensation of $5,240 and $5,644 for the three months ended March 31, 2008 and 2007,
respectively, sales and marketing expenses decreased $2,125 from $35,352 to $33,227. The decrease
was primarily attributable to lower advertising and reduced cooperative marketing spend with
distributors compared to the year-ago first quarter.
We expect sales and marketing expenses, excluding stock-based compensation expense, to
increase as we continue to build brand awareness through national advertising and promotional
activities and expand our subscriber retention efforts.
Subscriber Acquisition Costs. Subscriber acquisition costs include hardware subsidies paid to
radio manufacturers, distributors and automakers, including subsidies paid to automakers who
include a SIRIUS radio and a prepaid subscription to our service in the sale or lease price of a
new vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios;
device royalties for certain SIRIUS radios; commissions paid to retailers and automakers as
incentives to purchase, install and activate SIRIUS radios; product warranty obligations;
provisions for inventory allowance; and compensation costs associated with stock-based awards
granted in connection with certain distribution agreements. The majority of subscriber acquisition
costs are incurred and expensed in advance of acquiring a subscriber. Subscriber acquisition costs
do not include advertising, loyalty payments to distributors and dealers of SIRIUS radios and
revenue share payments to automakers and retailers of SIRIUS radios. Subscriber acquisition costs
also do not include amounts capitalized in connection with our agreement with Hertz, as we retain
ownership of certain SIRIUS radios used by Hertz.
For the three months ended March 31, 2008 and 2007, subscriber acquisition costs were $89,824 and
$100,117, respectively, a decrease of 10% or $10,293. Excluding stock-based compensation of $14 and
$1,880 for the three months ended March 31, 2008 and 2007, respectively, subscriber acquisition
costs decreased 9%, or $8,427, from $98,237 to $89,810. This decrease was primarily attributable to
production efficiencies and a higher average retail selling price, offset by increased OEM unit
production.
We expect total subscriber acquisition costs, excluding stock-based compensation expense, to
fluctuate based on OEM gross subscriber additions and changes in the retail environment, offset by
product cost. We intend to continue to offer subsidies, commissions and other incentives to acquire
subscribers.
General and Administrative. General and administrative expenses include rent and occupancy,
executive, finance, legal, human resources, information technology and investor relations costs.
For the three months ended March 31, 2008 and 2007, general and administrative expenses were
$48,778 and $35,343, respectively, an increase of $13,435. Excluding stock-based compensation of
$11,998 and $11,940 for the three months ended March 31, 2008 and 2007, respectively, general and
administrative expenses increased $13,377 from $23,403 to $36,780. This increase was primarily the
result of higher litigation related costs and compensation-related costs to support the growth of
our business.
We expect our general and administrative expenses, excluding stock-based compensation expense,
to increase in future periods as a result of higher personnel, information technology, and
facilities costs to support the growth of our business.
Future expense associated with stock-based compensation is contingent upon a number of
factors, including the number of stock-based awards granted, the price of our common stock,
assumptions used in estimating the fair value of stock-based awards, estimates for forfeitures,
vesting provisions and the timing as to when certain performance criteria are met, and could
materially change.
27
Engineering, Design and Development. Engineering, design and development expenses include
costs to develop our future generation of chip sets and new products and costs associated with the
incorporation of SIRIUS radios into vehicles manufactured by automakers. For the three months
ended March 31, 2008 and 2007, engineering, design and development expenses were $8,656 and
$12,411, respectively, a decrease of $3,755. Excluding stock-based compensation of $1,148 and
$1,006 for the three months ended March 31, 2008 and 2007,
respectively, engineering, design and development expenses decreased $3,897 from $11,405 to $7,508.
This decrease was primarily attributable to reduced OEM and product development costs.
We expect engineering, design and development expenses, excluding stock-based compensation
expense, to continue to fluctuate based on the nature and timing of engineering, design and
development activities.
Other Income (Expense)
Interest and Investment Income. Interest and investment income includes realized gains and
losses, dividends and interest income, including amortization of the premium and discount arising
at purchase. For the three months ended March 31, 2008 and 2007, interest and investment income
was $2,802 and $6,042, respectively, a decrease of $3,240. The decrease was attributable to lower
interest rates in 2008.
Interest Expense. Interest expense includes interest on outstanding debt, reduced by interest
capitalized in connection with the construction of our new satellites and launch vehicle. For the
three months ended March 31, 2008 and 2007, interest expense was $17,675 and $15,192, respectively,
an increase of $2,483. Interest expense increased due to the incurrence of the $250,000 Senior
Secured Term Loan in June 2007. Interest expense was offset by the capitalized interest associated
with satellite construction and a related launch vehicle.
Income Taxes
Income Tax Expense. Income tax expense represents the recognition of a deferred tax liability
related to the difference in accounting for our FCC license, which is amortized over 15 years for
tax purposes but not amortized for book purposes in accordance with U.S. generally accepted
accounting principles. We recorded income tax expense of $543 and $555 for the three months ended
March 31, 2008 and 2007, respectively.
28
Footnotes to Results of Operations
|
|
|
(1) |
|
Average monthly churn represents the number of deactivated subscribers divided by average quarterly subscribers. |
|
(2) |
|
ARPU is derived from total earned subscriber revenue and net advertising revenue divided by the daily weighted average number
of subscribers for the period. ARPU is calculated as follows: |
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Subscriber revenue |
|
$ |
255,640 |
|
|
$ |
190,796 |
|
Net advertising revenue |
|
|
8,408 |
|
|
|
6,721 |
|
|
|
|
|
|
|
|
Total subscriber and net
advertising revenue |
|
$ |
264,048 |
|
|
$ |
197,517 |
|
|
|
|
|
|
|
|
Daily weighted average number of
subscribers |
|
|
8,446,343 |
|
|
|
6,295,282 |
|
ARPU |
|
$ |
10.42 |
|
|
$ |
10.46 |
|
|
|
|
(3) |
|
SAC, as adjusted, per gross subscriber addition is derived from
subscriber acquisition costs, excluding stock-based
compensation, and margins from the direct sale of SIRIUS radios
and accessories divided by the number of gross subscriber
additions for the period. SAC, as adjusted, per gross
subscriber addition is calculated as follows: |
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Subscriber acquisition cost |
|
$ |
89,824 |
|
|
$ |
100,117 |
|
Less: stock-based compensation
granted to third parties and employees |
|
|
(14 |
) |
|
|
(1,880 |
) |
Add: margin from direct sale of SIRIUS
radios and accessories |
|
|
1,525 |
|
|
|
1,787 |
|
|
|
|
|
|
|
|
SAC, as adjusted |
|
$ |
91,335 |
|
|
$ |
100,024 |
|
|
|
|
|
|
|
|
Gross subscriber additions |
|
|
1,003,422 |
|
|
|
988,458 |
|
SAC, as adjusted, per gross subscriber
addition |
|
$ |
91 |
|
|
$ |
101 |
|
|
|
|
(4) |
|
Customer service and billing expenses, as adjusted, per average subscriber is
derived from total customer service and billing expenses, excluding
stock-based compensation, divided by the daily weighted average number of
subscribers for the period. Customer service and billing expenses, as
adjusted, per average subscriber is calculated as follows: |
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Customer service and billing expenses |
|
$ |
26,922 |
|
|
$ |
21,853 |
|
Less: stock-based compensation |
|
|
(276 |
) |
|
|
(199 |
) |
|
|
|
|
|
|
|
Customer service and billing expenses,
as adjusted |
|
$ |
26,646 |
|
|
$ |
21,654 |
|
|
|
|
|
|
|
|
Daily weighted average number of
subscribers |
|
|
8,446,343 |
|
|
|
6,295,282 |
|
Customer service and billing expenses,
as adjusted, per average subscriber |
|
$ |
1.05 |
|
|
$ |
1.15 |
|
|
|
|
(5) |
|
Free cash flow is derived from cash flow used in
operating activities, capital expenditures, merger related costs, and restricted and other
investment activity. Free cash flow is calculated as follows: |
29
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net cash used in operating activities |
|
$ |
(139,292 |
) |
|
$ |
(131,046 |
) |
Additions to property and equipment |
|
|
(39,225 |
) |
|
|
(12,458 |
) |
Merger related costs |
|
|
(10,018 |
) |
|
|
(2,901 |
) |
Restricted and other investment activity |
|
|
2,000 |
|
|
|
(310 |
) |
|
|
|
|
|
|
|
Free cash flow |
|
$ |
(186,535 |
) |
|
$ |
(146,715 |
) |
|
|
|
|
|
|
|
|
|
|
(6) |
|
Average monthly churn; ARPU; SAC, as adjusted, per gross subscriber
addition; customer service and billing expenses, as adjusted, per
average subscriber; and free cash flow are not measures of financial
performance under U.S. generally accepted accounting principles
(GAAP). We believe these non-GAAP financial measures provide
meaningful supplemental information regarding our operating
performance and are used by us for budgetary and planning purposes;
when publicly providing our business outlook; as a means to evaluate
period-to-period comparisons; and to compare our performance to that
of our competitors. We also believe that investors also use our
current and projected metrics to monitor the performance of our
business and make investment decisions. |
|
|
|
We believe the exclusion of stock-based compensation expense in our
calculations of SAC, as adjusted, per gross subscriber addition and
customer service and billing expenses, as adjusted, per average
subscriber is useful given the significant variation in expense that
can result from changes in the fair market value of our common stock,
the effect of which is unrelated to the operational conditions that
give rise to variations in the components of our subscriber
acquisition costs and customer service and billing expenses.
Specifically, the exclusion of stock-based compensation expense in our
calculation of SAC, as adjusted, per gross subscriber addition is
critical in being able to understand the economic impact of the direct
costs incurred to acquire a subscriber and the effect over time as
economies of scale are reached. |
|
|
|
These non-GAAP financial measures are used in addition to and in
conjunction with results presented in accordance with GAAP. These
non-GAAP financial measures may be susceptible to varying
calculations; may not be comparable to other similarly titled measures
of other companies; and should not be considered in isolation, as a
substitute for, or superior to measures of financial performance
prepared in accordance with GAAP. |
|
(7) |
|
We refer to net loss before taxes; other income (expense)-including
interest and investment income, interest expense, equity in net loss
of affiliate; depreciation; and stock-based compensation expense as
adjusted loss from operations. Adjusted loss from operations is not a
measure of financial performance under U.S. GAAP. We believe adjusted
loss from operations is a useful measure of our operating performance.
We use adjusted loss from operations for budgetary and planning
purposes; to assess the relative profitability and on-going
performance of our consolidated operations; to compare our performance
from periodto-period; and to compare our performance to that of our
competitors. We also believe adjusted loss from operations is useful
to investors to compare our operating performance to the performance
of other communications, entertainment and media companies. We believe
that investors use current and projected adjusted loss from operations
to estimate our current or prospective enterprise value and make
investment decisions. |
|
|
|
Because we fund and build-out our satellite radio system through the
periodic raising and expenditure of large amounts of capital, our
results of operations reflect significant charges for interest and
depreciation expense. We believe adjusted loss from operations
provides useful information about the operating performance of our
business apart from the costs associated with our capital structure
and physical plant. The exclusion of interest and depreciation expense
is useful given fluctuations in interest rates and significant
variation in depreciation expense that can result from the amount and
timing of capital expenditures and potential variations in estimated
useful lives, all of which can vary widely across different industries
or among companies within the same industry. We believe the exclusion
of taxes is appropriate for comparability purposes as the tax
positions of companies can vary because of their differing abilities
to take advantage of tax benefits and because of the tax policies of
the various jurisdictions in which they operate. We also believe the
exclusion of stock-based compensation expense is useful given the
significant variation in expense that can result from changes in the
fair market value of our common stock. Finally, we believe that the
exclusion of our equity in net loss of affiliate (SIRIUS Canada Inc.)
is useful to assess the performance of our core consolidated
operations in the continental United States. To compensate for the
exclusion of taxes, other income (expense), depreciation, impairment
charges and stock-based compensation expense, we separately measure
and budget for these items. |
|
|
|
There are material limitations associated with the use of adjusted
loss from operations in evaluating our company compared with net loss,
which reflects overall financial performance, including the effects of
taxes, other income (expense), depreciation, impairment charges and
stock-based compensation expense. We use adjusted loss from operations
to supplement GAAP results to provide a more complete understanding of
the factors and trends affecting the business than GAAP results alone.
Investors that wish to compare and evaluate our operating results
after giving effect for these costs, should refer to net loss as
disclosed in our unaudited consolidated statements of operations.
Since adjusted loss from operations is a non-GAAP financial measure,
our calculation of adjusted loss from operations may be susceptible to
varying calculations; may not be comparable to other similarly titled
measures of other companies; and should not be considered in
isolation, as a substitute for, or superior to measures of financial
performance prepared in accordance with GAAP. |
Adjusted loss from operations is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(104,118 |
) |
|
$ |
(144,745 |
) |
Depreciation |
|
|
26,906 |
|
|
|
26,786 |
|
Stock-based compensation |
|
|
22,262 |
|
|
|
24,260 |
|
Other non operating expense |
|
|
14,950 |
|
|
|
9,145 |
|
Income tax expense |
|
|
543 |
|
|
|
555 |
|
|
|
|
|
|
|
|
Adjusted loss from operations |
|
$ |
(39,457 |
) |
|
$ |
(83,999 |
) |
|
|
|
|
|
|
|
30
Liquidity and Capital Resources
Cash Flows for the Three Months Ended March 31, 2008 Compared with the Three Months Ended March 31,
2007
As of March 31, 2008, we had $252,508 in cash and cash equivalents compared with $259,162 as
of March 31, 2007 and $438,820 as of December 31, 2007.
The following table presents a summary of our cash flow activity for the three months ended
March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
|
|
Ended March 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Variance |
|
Net cash used in operating activities |
|
$ |
(139,292 |
) |
|
$ |
(131,046 |
) |
|
$ |
(8,246 |
) |
Net cash used in investing activities |
|
|
(47,235 |
) |
|
|
(4,723 |
) |
|
|
(42,512 |
) |
Net cash provided by financing activities |
|
|
215 |
|
|
|
1,510 |
|
|
|
(1,295 |
) |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(186,312 |
) |
|
|
(134,259 |
) |
|
|
(52,053 |
) |
Cash and cash equivalents at beginning of period |
|
|
438,820 |
|
|
|
393,421 |
|
|
|
45,399 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
252,508 |
|
|
$ |
259,162 |
|
|
$ |
(6,654 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
Net cash used in operating activities increased $8,246 to $139,292 for the three months ended
March 31, 2008 from $131,046 for the three months ended March 31, 2007. Such increase in the net
outflows of cash was attributable to the increased pay down of accruals related to royalties and
litigation related costs, offset by the improvement in adjusted loss from operations.
Net Cash Used in Investing Activities
Net cash used in investing activities was $47,235 for the three months ended March 31, 2008
compared with $4,723 for the three months ended March 31, 2007. The $42,512 increase was primarily
a result of an increase in capital expenditures of $26,767 primarily as a result of costs
associated with our satellite construction and launch vehicle and an increase in merger related
costs of $7,117 in the three months ended March 31, 2008.
We will incur significant capital expenditures to construct and launch our new satellites and
to improve our terrestrial repeater network and broadcast and administrative infrastructure. These
capital expenditures will support our growth and the resiliency of our operations, and will also
support the delivery of future new revenue streams.
Net Cash Provided by Financing Activities
Net cash provided by financing activities decreased $1,295 to $215 for the three months ended
March 31, 2008 from $1,510 for the three months ended March 31, 2007 primarily due to the repayment
of long-term debt.
Financings and Capital Requirements
We have historically financed our operations through the sale of debt and equity securities.
Future Liquidity and Capital Resource Requirements
In 2004, we issued $300,000 in aggregate principal amount of our 21/2% Convertible Notes
due 2009. These notes are convertible, at the option of the holders, into shares of our common
stock at a conversion rate of 226.7574 shares of common stock for each $1,000.00 principal amount,
or $4.41 per share of common stock. These notes mature in February 2009. If our common stock does
not trade above $4.41 per share prior to the maturity of these notes it is not likely that the
holders will convert them prior to maturity, and we will have to refinance these notes when they
mature in February 2009.
Based upon our current plans, we believe that our cash, cash equivalents and marketable
securities will be 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, merger related costs, working capital requirements, interest payments and taxes. Our
first quarter of positive free cash flow was reached in the fourth quarter of 2006, and we achieved
positive free cash flow for the second half of 2007. Our financial projections are based on
assumptions, which we believe are reasonable but contain significant uncertainties.
31
We regularly evaluate our plans and strategy. These evaluations often result in changes to
our plans and strategy, some of which may be material and significantly change our cash
requirements or cause us to achieve cash flow breakeven at a later date. These changes in our plans
or strategy may include: the acquisition of unique or compelling programming; the introduction of
new features or services;
significant new or enhanced distribution arrangements; investments in infrastructure, such as
satellites, equipment or radio spectrum; and acquisitions of third parties that own programming,
distribution, infrastructure, assets, or any combination of the foregoing.
In July 2007, we amended and restated our Credit Agreement with Space Systems/Loral (the
Credit Agreement). Under the Amended and Restated Customer Credit Agreement, Space Systems/Loral
has agreed to make loans to us in an aggregate principal amount of up to $100,000 to finance the
purchase of our fifth and sixth satellites. Loans made under the Credit Agreement will be secured
by our rights under the Satellite Purchase Agreement with Space Systems/Loral, including our rights
to our new satellites. The loans are also entitled to the benefits of a subsidiary guarantee from
Satellite CD Radio, Inc., our subsidiary that holds our FCC license, and any future material
subsidiary that may be formed by us. The maturity date of the loans is the earliest to occur of (i)
June 10, 2010, (ii) 90 days after our sixth satellite becomes available for shipment, and (iii) 30
days prior to the scheduled launch of the sixth satellite. Any loans made under the Credit
Agreement generally will bear interest at a variable rate equal to three-month LIBOR plus 4.75%.
The Credit Agreement permits us to prepay all or a portion of the loans outstanding without
penalty. We have no current plans to draw under this Credit Agreement.
In June 2007, we entered into a Term Credit Agreement with a syndicate of financial
institutions. The Term Credit Agreement provides for a term loan of $250,000, which has been drawn.
Interest under the Term Credit Agreement is based, at our option, on (i) adjusted LIBOR plus 2.25%
or (ii) the higher of (a) the prime rate and (b) the Federal Funds Effective Rate plus 1/2 of
1.00%, plus 1.25%. LIBOR borrowings may be made for interest periods, at our option, of one, two,
three or six months (or, if agreed by all of the lenders, nine or twelve months). The loan
amortizes in equal quarterly installments of 0.25% of the initial aggregate principal amount for
the first four and a half years, with the balance of the loan thereafter being repaid in four equal
quarterly installments. The loan matures on December 20, 2012. The loan is guaranteed by our
material wholly owned subsidiaries, including Satellite CD Radio,
Inc. (the Guarantors). The Term
Credit Agreement is secured by a lien on substantially all of our and the Guarantors assets,
including our four satellites and the shares of the Guarantors. The Term Credit Agreement contains
customary affirmative covenants and event of default provisions. The negative covenants contained
in the Term Credit Agreement are substantially similar to those contained in the indenture
governing our 95/8% Senior Notes due 2013.
To fund incremental cash requirements, or as market opportunities arise, we may choose to
raise additional funds through the sale of additional debt securities, equity securities or a
combination of debt and equity securities. The incurrence of additional indebtedness would result
in increased fiscal obligations and could contain restrictive covenants. The sale of additional
equity or convertible debt securities may result in dilution to our stockholders. These additional
sources of funds may not be available or, if available, may not be available on terms favorable to
us. Our merger agreement with XM Radio restricts our ability to incur additional debt and limits the amount of new equity
we can issue, in each case without approval from XM Radio.
2003 Long-Term Stock 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.
On May 25, 2004, our stockholders approved an amendment to the 2003 Plan to include members of our
board of directors as eligible participants. Employees, consultants and members of our board of
directors 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 are generally
subject to a vesting requirement. Stock-based awards generally expire ten years from date of grant.
Each restricted stock unit entitles the holder to receive one share of our common stock upon
vesting.
As of March 31, 2008, approximately 100,431,000 stock options, shares of restricted stock and
restricted stock units were outstanding. As of March 31, 2008, approximately 53,750,000 shares of
our common stock were available for grant under the 2003 Plan. During the three months ended March
31, 2008, employees exercised 62,335 stock options at exercise prices ranging from $2.69 to $3.36
per share, resulting in proceeds to us of $840. The exercise of the remaining outstanding, vested
options could result in an inflow of cash in future periods.
Contractual Cash Commitments
For a discussion of our Contractual Cash Commitments refer to Note 11 to the unaudited
consolidated financial statements, Commitments and Contingencies, of this Form 10-Q.
32
Critical Accounting Policies
For a description of our Critical Accounting Policies refer to Managements Discussion and
Analysis of Financial Condition and Results of Operations within our Annual Report on Form 10-K
for the year ended December 31, 2007 and Note 3 to the unaudited consolidated financial statements,
Summary of Significant Accounting Policies, of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As of March 31, 2008, we did not have any derivative financial instruments and we do not
intend to use derivatives. We do not hold or issue any free-standing derivatives. We hold
investments in marketable securities, which consist of certificates of deposit. We classify our
marketable securities as available-for-sale. These securities are consistent with the investment
objectives contained within our investment policy. The basic objectives of our investment policy
are the preservation of capital, maintaining sufficient liquidity to meet operating requirements
and maximizing yield.
Our long-term debt includes fixed interest rate and variable interest rate debt. Under our
current policies, we do not use interest rate derivative instruments to manage our exposure to
interest rate fluctuations. The fair market value of our debt is sensitive to changes in interest
rates.
Item 4. Controls and Procedures
As of March 31, 2008, an evaluation was performed under the supervision and with the
participation of our management, including Mel Karmazin, our 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 controls and 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 March 31, 2008. There have been no changes
in our internal control over financial reporting or in other factors that could materially affect,
or is reasonably likely to materially affect, our internal control over financial reporting for the
three months ended March 31, 2008.
33
Part II
Other Information
Item 1. Legal Proceedings
FCC Matters. In April 2006, we learned that XM Radio and two manufacturers of SIRIUS radios
had received inquiries from the FCC as to whether the FM transmitters in their products complied
with the FCCs emissions and frequency rules. We promptly began an internal review of the
compliance of the FM transmitters in a number of our radios. In June 2006, we learned that a third
manufacturer of SIRIUS radios had received an inquiry from the FCC as to whether the FM
transmitters in its products complied with the FCCs emissions and frequency rules. In June 2006,
we received a letter from the FCC making similar inquiries. In July 2006, we responded to the
letter from the FCC in respect of the preliminary results of our review. In August 2006, we
received a follow-up letter of inquiry from the FCC and responded to the FCCs further inquiry. We
continue to cooperate with the FCCs inquiry.
During our internal review, we determined that certain of our radios with FM transmitters were
not compliant with FCC rules. We have taken a series of actions to correct the problem.
In connection with our internal review, we discovered that certain SIRIUS personnel requested
manufacturers to produce SIRIUS radios that were not consistent with the FCCs rules. As a result
of this review, we are taking significant steps to ensure that this situation does not happen
again, including the adoption of a compliance plan, approved by our board of directors, to ensure
that in the future our products comply with all applicable FCC rules.
The FCCs laboratory has tested a number of our products and found them to be compliant with
the FCCs rules. We believe SIRIUS radios that are currently in production comply with applicable
FCCs rules. No health or safety issues are involved with these SIRIUS radios and radios which are
factory-installed in new vehicles are not affected.
We have retained an engineering compliance officer to report to our Senior Vice President of
Internal Audit, who reports to our Audit Committee.
In October 2006, we ceased operating 11 of our terrestrial repeaters which we discovered had
been operating at variance to the specifications and applied to the FCC for new authority to resume
operating these repeaters.
Copyright Royalty Board Proceeding. In December 2007, the Copyright Royalty Board, or CRB, of
the Library of Congress issued its decision regarding the royalty rate payable by us under the
statutory license covering the performance of sound recordings over our satellite digital audio
radio service for the six-year period starting January 1, 2007 and ending December 31, 2012. Under
the terms of the CRBs decision, we will pay a royalty of 6.0% of gross revenues, subject to
certain exclusions, for 2007 and 2008, 6.5% for 2009, 7.0% for 2010, 7.5% for 2011 and 8.0% for
2012. SoundExchange has appealed the decision of the CRB to the United States Court of Appeals for
the District of Columbia Circuit.
U.S. Electronics Arbitration. In 2006, U.S. Electronics Inc., a former licensed distributor
manufacturer of SIRIUS radios, commenced an arbitration proceeding against us. U.S. Electronics
alleges that, among other things, we breached our contract; failed to pay monies owed under the
contract; tortiously interfered with U.S. Electronics relationships with retailers and
manufacturers; and otherwise acted in bad faith. U.S. Electronics is seeking between $75,000 and
$110,000 in damages. We believe that a substantial portion of these damages are barred by the
limitation of liability provisions contained in the contract between us and U.S. Electronics. U.S.
Electronics contends that these provisions do not bar its damages because of, among other reasons,
our alleged bad faith and tortious conduct.
We are vigorously defending this action. A hearing in this arbitration commenced in March 2008
and, absent a settlement, we expect the arbitrators to issue a decision in this matter in the third
quarter of 2008.
Other Matters. In the ordinary course of business, we are a defendant in various lawsuits and
arbitration proceedings, including actions filed by former employees, parties to contracts or
leases and owners of patents, trademarks, copyrights or other intellectual property. None of these
actions are, in our opinion, likely to have a material adverse effect on our business or financial
results.
34
Item 1A. Risk Factors
Reference is made to the Risk Factors set forth in Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2007. The Risk Factors remain applicable from our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
See Exhibit Index attached hereto.
35
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.
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Sirius Satellite Radio Inc.
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By: |
/s/ David J. Frear
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David J. Frear |
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Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) |
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May 12, 2008
36
EXHIBIT INDEX
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Exhibit |
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Description |
2.1
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Agreement and Plan of Merger, dated as of February 19,
2007, by and among the Company, Vernon Merger Corporation
and XM Satellite Radio Holdings Inc. (incorporated by
reference to Exhibit 2.1 to the Companys Current Report
on Form 8-K dated February 19, 2007). |
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3.1
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Amended and Restated Certificate of Incorporation dated
March 4, 2003 (incorporated by reference to Exhibit 3.1
to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002). |
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3.2
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Amended and Restated By-Laws (incorporated by reference
to Exhibit 3.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2001). |
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4.1
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Form of certificate for shares of Common Stock
(incorporated by reference to Exhibit 4.3 to the
Companys Registration Statement on Form S-1 (File No.
33-74782)). |
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4.2
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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 Companys Registration Statement on Form S-4 (File
No. 333-82303)). |
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4.3
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Indenture, dated as of September 29, 1999, between the
Company and United States Trust Company of Texas, N.A.,
as trustee, relating to the Companys 83/4% Convertible
Subordinated Notes due 2009 (incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K
filed on October 13, 1999). |
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4.4
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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 Companys 83/4%
Convertible Subordinated Notes due 2009 (incorporated by
reference to Exhibit 4.01 to the Companys Current Report
on Form 8-K filed on October 1, 1999). |
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4.5
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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 Companys 83/4% Convertible Subordinated
Notes due 2009 (incorporated by reference to Exhibit 4.16
to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002). |
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4.6
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Third Supplemental Indenture, dated as of March 7, 2003,
between the Company and HSBC Bank USA, as trustee,
relating to the Companys 83/4% Convertible Subordinated
Notes due 2009 (incorporated by reference to Exhibit 4.17
to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002). |
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4.7
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Form of 83/4% Convertible Subordinated Note due 2009
(incorporated by reference to Article VII of Exhibit 4.01
to the Companys Current Report on Form 8-K filed on
October 1, 1999). |
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4.8
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Indenture, dated as of May 23, 2003, between the Company
and The Bank of New York, as trustee (incorporated by
reference to Exhibit 99.2 to the Companys Current Report
on Form 8-K dated May 30, 2003). |
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4.9
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First Supplemental Indenture, dated as of May 23, 2003,
between the Company and The Bank of New York, as trustee,
relating to the Companys 31/2% Convertible Notes due 2008
(incorporated by reference to Exhibit 99.3 to the
Companys Current Report on Form 8-K dated May 30, 2003). |
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4.10
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Second Supplemental Indenture, dated as of February 20,
2004, between the Company and The Bank of New York, as
trustee, relating to the Companys 21/2% Convertible Notes
due 2009 (incorporated by reference to Exhibit 4.20 to
the Companys Annual Report on Form 10-K for the year
ended December 31, 2003). |
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Exhibit |
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Description |
4.11
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Third Supplemental Indenture, dated as of October 13,
2004, between the Company and The Bank of New York, as
trustee, relating to the Companys 31/4% Convertible Notes
due 2011 (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated October 13,
2004). |
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4.12
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Indenture, dated as of August 9, 2005, between the
Company and The Bank of New York, as trustee, relating to
the Companys 9?% Senior Notes due 2013 (incorporated by
reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K filed on August 12, 2005). |
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4.13
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Common Stock Purchase Warrant granted by the Company to
DaimlerChrysler AG dated October 1, 2007 (incorporated by
reference to Exhibit 4.13 to the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30,
2007). |
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4.14
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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 Companys Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002). |
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4.15
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Form of Media-Based Incentive Warrant dated February 3,
2004 issued by the Company to NFL Enterprises LLC
(incorporated by reference to Exhibit 4.25 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2003). |
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4.16
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Bounty-Based Incentive Warrant dated February 3, 2004
issued by the Company to NFL Enterprises LLC
(incorporated by reference to Exhibit 4.26 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2003). |
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4.17
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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
Companys Registration Statement on Form S-3 (File No.
333-65602)). |
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4.18
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Amended and Restated Customer Credit Agreement, dated as
of July 30, 2007, between the Company and Space
Systems/Loral, Inc. (incorporated by reference to Exhibit
4.19 to the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2007). |
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4.19
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Term Credit Agreement, dated as of June 20, 2007, among
the Company., the lenders party thereto, and Morgan
Stanley Senior Funding, Inc., as Administrative Agent and
Collateral Agent (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K dated
June 20, 2007). |
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10.1.1
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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 Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998). |
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10.1.2
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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 Companys Quarterly
Report on Form 10-Q for the quarter ended March 31,
2000). |
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* 10.2
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Employment Agreement dated November 18, 2004 between the
Company and Mel Karmazin (incorporated by reference to
Exhibit 10.2 to the Companys Annual Report on Form 10-K
for the year ended December 31, 2004). |
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* 10.3
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Employment Agreement, dated as of June 3, 2003, between
the Company and David J. Frear (incorporated by reference
to Exhibit 10.7 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003). |
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* 10.4
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First Amendment, dated as of August 10, 2005, to the
Employment Agreement, dated as of June 3, 2003, between
the Company and David Frear (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K
dated August 12, 2005). |
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* 10.5
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Second Amendment, dated as of February 12, 2008, to the
Employment Agreement, dated as of June 3, 2003, between
the Company and David J. Frear (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form
8-K dated February 13, 2008). |
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* 10.6
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Employment Agreement, dated as of May 5, 2004, between
the Company and Scott A. Greenstein (incorporated by
reference to Exhibit 10.4 to the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004). |
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Exhibit |
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Description |
* 10.7
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First Amendment, dated as of August 8, 2005, to the
Employment Agreement, dated as of May 5, 2004, between
the Company and Scott A. Greenstein (incorporated by
reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K dated August 12, 2005). |
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* 10.8
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Amended and Restated Employment Agreement, dated as of
June 6, 2007, between the Company and James E. Meyer
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated June 7,
2007). |
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* 10.9
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Restricted Stock Unit Agreement, dated as of August 9,
2005, between the Company and James E. Meyer
(incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K dated August 12,
2005). |
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* 10.10
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Employment Agreement, dated as of November 8, 2004,
between the Company and Patrick L. Donnelly
(incorporated by reference to Exhibit 10.6 to the
Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004). |
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* 10.11
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First Amendment, dated as of May 21, 2007, to the
Employment Agreement, dated as of November 8, 2004,
between Patrick L. Donnelly and the Company
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated May 22,
2007). |
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* 10.12
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CD Radio Inc. 401(k) Savings Plan (incorporated by
reference to Exhibit 4.4 to the Companys Registration
Statement on Form S-8 (File No. 333-65473)). |
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* 10.13
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Amended and Restated Sirius Satellite Radio 2003
Long-Term Stock Incentive Plan (incorporated by
reference to Exhibit 10.10 to the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30,
2004). |
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* 10.14
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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
Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998). |
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10.15
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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
Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000). |
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31.1
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Certificate of Mel Karmazin, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith). |
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31.2
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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). |
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32.1
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Certificate of Mel Karmazin, 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). |
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32.2
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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). |
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* |
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This document has been identified as a management contract or compensatory plan or arrangement. |
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Portions of this exhibit have been omitted pursuant to Applications for Confidential treatment
filed by the Company with the Securities and Exchange Commission. |
39