FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR FISCAL YEAR ENDED DECEMBER 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
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 Identification Number) |
incorporation of organization) |
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1221 Avenue of the Americas, 36th Floor |
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New York, New York
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10020 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (212) 584-5100
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange |
Title of each class:
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on which registered: |
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Common Stock, par value $0.001 per share
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Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ
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):
Large accelerated filer
þ Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the registrants common stock held by non-affiliates of the
registrant on June 30, 2007 was $4,084,707,962. All executive officers and directors of the
registrant have been deemed, solely for the purpose of the foregoing calculation, to be
affiliates of the registrant.
The
number of shares of the registrants common stock outstanding as
of February 27, 2008 was 1,476,584,321.
Documents Incorporated by Reference
Information included in our definitive proxy statement for our 2008 annual meeting of
stockholders scheduled to be held on Tuesday, May 20, 2008 is incorporated by reference in Items 10, 11, 12,
13 and 14 of Part III of this report.
SIRIUS SATELLITE RADIO INC.
2007 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
2
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 Annual
Report on Form 10-K 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 this Annual Report on 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 this Annual Report on 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:
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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; |
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the useful life of our satellites, which have experienced circuit failures on
their solar arrays and other component failures and are not insured; |
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our dependence upon third parties, including manufacturers and distributors of
SIRIUS radios, retailers, automakers and programming providers; and |
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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.
PART I
Item 1. Business
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 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.
The completion of the Merger is subject to various closing conditions, including approval from
the Federal Communications Commission and the Department of Justice. See Pending Merger with XM
Radio for a further description of the Merger. The information presented in this Annual Report on
Form 10-K does not give effect to the Merger.
We are a satellite radio provider in the United States. We offer over 130 channels to our
subscribers69 channels of 100% commercial-free music and 65 channels of sports, news, talk,
entertainment, traffic, weather and data. The core of our enterprise is programming; we are
committed to offering the best audio entertainment.
Our primary source of revenue is subscription fees, with most of our customers subscribing to
SIRIUS on an annual, semi-annual, quarterly or monthly basis. As of December 31, 2007, we had
8,321,785 subscribers. In addition, we derive revenue from activation fees, the sale of
advertising on some of our non-music channels, and the direct sale of SIRIUS radios and
accessories.
Most of our subscribers receive our service through SIRIUS radios, which are sold through our
website and by automakers, consumer electronics retailers and mobile audio dealers. SIRIUS radios
for the car, truck, home, RV and boat are available in approximately 20,000 retail locations,
including Best Buy, Circuit City, Costco, Crutchfield, Sams Club, Target and Wal-Mart and through
RadioShack on an exclusive basis.
As of December 31, 2007, SIRIUS radios were available as a factory and dealer-installed option
in 116 vehicle models and as a dealer only-installed option in 37 vehicle models. We have
agreements with Chrysler, Dodge, Jeep, Mercedes-Benz, Ford, Mitsubishi, BMW, Volkswagen, Kia,
Bentley, Audi, Lincoln, Mercury, Mazda, Land Rover, Jaguar, Volvo, Aston Martin, MINI, Maybach and
Rolls-Royce to offer SIRIUS radios as factory or dealer-installed equipment in their vehicles.
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.
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SIRIUS radios are also offered to renters of Hertz vehicles at airport
locations nationwide.
We offer our programming over multiple platforms in addition to our satellite and terrestrial
repeater network. SIRIUS Internet Radio, which we refer to as SIR, is an Internet-only version of
our service. SIR delivers a simulcast of more than 80 channels of our talk, entertainment, sports
and music programming. Our music channels are also available to certain DISH satellite television
subscribers, and a select number of our music channels are available to certain subscribers to the
Nationwide Sprint PCS Network.
We also offer certain ancillary services. In 2007, we introduced SIRIUS Backseat TV, a
television service offering content designed primarily for children from Nickelodeon, Disney
Channel and Cartoon Network in the backseat of vehicles. Chrysler offered SIRIUS Backseat TV
exclusively in select 2008 model-year vehicles. We also offer a service that provides graphic
information as to road closings, traffic flow and incident data to consumers with in-vehicle
navigation systems, and a marine weather service that provides a range of information, including
sea surface temperatures, wave heights and extended forecasts, to recreational boaters. In 2008,
we intend to launch SIRIUS Travel Link, a suite of data services that includes real-time traffic,
tabular and graphical weather, fuel prices, sports schedules and scores, and movie listings.
SIRIUS Travel Link is expected to be standard equipment on Fords next-generation navigation
system, and is anticipated to be offered on select Ford, Lincoln and Mercury vehicles in 2008.
In 2005, SIRIUS Canada Inc., a Canadian corporation owned by us, Canadian Broadcasting
Corporation and Standard Radio Inc., launched service in Canada. SIRIUS Canada currently offers
110 channels of commercial-free music and news, sports, talk and entertainment programming,
including 11 channels of Canadian content. As of October 11, 2007, SIRIUS Canada had over 500,000
subscribers.
Pending Merger with XM Radio
On February 19, 2007, we entered into an Agreement and Plan of Merger with XM Satellite 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.
Each of SIRIUS and XM Radio has made customary representations and warranties and covenants in
the Merger Agreement. The completion of the Merger is subject to various closing conditions,
including approval from the Federal Communications Commission and the Department of Justice. 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, currently our chief executive officer, will become chief executive officer of
the combined company and Gary M. Parsons, currently 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 February 29, 2008, we
and XM Radio announced that the companies have agreed not to exercise their rights to terminate
the Agreement and Plan of the Merger prior to May 1, 2008. 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 $175,000,000.
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 the Current
Report on Form 8-K dated February 21, 2007, and is incorporated herein by reference.
The Merger Agreement contains representations and warranties that SIRIUS and XM Radio made to
each other as of specific dates. The assertions embodied in those representations and warranties
were made solely for purposes of the Merger Agreement between SIRIUS and XM Radio and may be
subject to important qualifications and limitations agreed to by SIRIUS and XM Radio in connection
with negotiating its terms. Moreover, the representations and warranties may be subject to a
contractual standard of materiality that may be different from what may be viewed as material to
stockholders, or may have been used for the purpose of allocating risk between SIRIUS and XM Radio
rather than establishing matters as facts. For the foregoing reasons, no person should rely on the
representations and warranties as statements of factual information at the time they were made or
otherwise.
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Programming
We offer a dynamic programming lineup of over 130 channels to our subscribers69 channels of
100% commercial-free music and 54 channels of sports, news, talk, and entertainment; 11 channels of
traffic and weather; and informational data services. Our programming lineup changes from time to
time as we strive to attract new subscribers, to create content that appeals to a broad range of
audiences and to satisfy our existing subscribers.
Music Programming
Our music channels offer an extensive selection of music genresfrom rock, pop and hip-hop to
country, dance, jazz, Latin and classical. Within each genre we offer a range of formats, styles
and recordings.
All of our music channels are broadcast commercial-free. Our channels are produced,
programmed and hosted by a team of experts in their fields, including musical performers such as
Eminem, Jimmy Buffett, Little Steven Van Zandt, and other unique personalities such as Cousin
Brucie, Tony Hawk, and several of the original MTV veejays. Each channel is operated as an individual radio
station, with a distinct format and branding.
In 2007, we:
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launched the Siriusly Sinatra channel featuring music
from Frank Sinatra as well as artists such as Tony
Bennett, Nat King Cole, Bobby Darin, Ella Fitzgerald and Dean Martin; |
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debuted The Grateful Dead Channel featuring performances spanning the bands long and
celebrated history including rare, unreleased concerts; |
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returned the popular E Street Radio channel to our music lineup in conjunction with
Bruce Springsteen and the E Street Bands Magic album and tour; |
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broadcast live concerts from Jimmy Buffetts Bama Breeze tour on Radio Margaritaville,
our music channel dedicated to the tropical lifestyle, created in conjunction with Jimmy
Buffett; |
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renewed radio personality Bruce Morrow, known to his legion of fans as Cousin Brucie,
to an exclusive multi-year deal; |
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began the second season of live broadcasts from the Metropolitan Opera with seven new
productions, including Macbeth and a special family-targeted production of Hansel & Gretel; |
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worked closely with artists such as Duran Duran, Garth Brooks, Jay-Z, and Miley Cyrus to
create their own channels, available for a limited time; |
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created a new channel dedicated to 90s alternative rock and grunge music called
Lithium; and |
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celebrated the diversity and heritage of music with exclusive programming for Black
History Month and Hispanic Heritage Month. |
Sports Programming
Live play-by-play sports is an important part of our programming strategy. We are the Official
Satellite Radio Partner of the National Football League, with exclusive satellite radio rights to
use the NFL logo and collective NFL team trademarks. We carry all NFL regular season, pre-season
and post-season games. In most cases, we carry both the home and visiting team game broadcasts, as
well as Spanish language broadcasts of select games. We also carry the Super Bowl and in 2008 we
broadcast the game in eight languages. We also produce and broadcast SIRIUS NFL Radio, an
around-the-clock exclusive channel of NFL content for our subscribers. Our agreement with the NFL
expires at the end of the 2010-2011 NFL season.
In
2007, we began live broadcast coverage of all NASCAR Sprint Cup
Series, NASCAR Nationwide Series
and NASCAR Craftsman Truck Series races. We have created SIRIUS NASCAR Radio, an around-the-clock
channel of exclusive NASCAR-related programming, including Tony Stewart Live and race coverage. We
take fans into the cars and pits by devoting additional
Driver2Crew Chatter channels that carry
the driver-to-crew communications of multiple different race teams
during NASCAR Sprint Cup Series
races. We are the Official Satellite Radio Partner of NASCAR with exclusive trademark and
marketing rights and the right to sell advertising time on the NASCAR channel and during races.
We are the exclusive Official Satellite Radio Partner of the NBA and broadcast a daily 3-hour
SIRIUS produced NBA talk show. We transmit live play-by-play
broadcasts of every regular season NBA
game plus every game of the NBA playoffs and the NBA Finals. Our agreement with the
NBA expires at the end of the current NBA season.
We are the official satellite radio broadcaster of Barclays English Premier League soccer, and
have the right to air matches of the top 20 clubs in the United Kingdom, including Manchester
United. We are also the exclusive satellite radio provider of the
Chelsea football club's Premier League matches.
Every Chelsea match features an exclusive pre-game show co-hosted by
international soccer legend Giorgio Chinaglia. Our soccer coverage also includes live matches from the UEFA Champions League. We
also broadcast Celtic games from the Scottish Premier League.
We carry extensive live play-by-play coverage of college football, basketball and other sports
from schools from 18 NCAA Division I conferences. We also have the right to broadcast all
games of the NCAA Division I mens basketball tournament through 2009.
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also air Wimbledon Championships, Arena Football League, National
Lacrosse League and horse racing.
In 2007, we began broadcasting FIS Alpine Skiing of Mens and Womens World Cup events and
added Sporting News Radio to our talk show lineup. Our sports channels also include ESPN Radio,
ESPN News and ESPNs Spanish language programming, ESPN Deportes.
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launched a new all-sports channel, SIRIUS Sports Central, which
features exclusive talk programs as well as Sporting News
Radio programming. We collaborated with ESPN on a new ESPN-dedicated channel showcasing the ESPN The
Magazine talk show, and simulcasts of select ESPN television shows, including
SportsCenter.
Talk and Entertainment Programming
We offer over 25 talk and entertainment channels for a variety of audiences.
In January 2006, Howard Stern moved his radio show to SIRIUS from terrestrial radio as part of
two channels being programmed by Howard Stern and us. Our agreement with Stern expires on December
31, 2010. Our talk radio offerings also feature dozens of popular talk personalities, most creating
radio shows that air exclusively on SIRIUS, including Senator Bill Bradley, Deepak Chopra, Richard Simmons, Martha Stewart, Mark Thompson and Barbara Walters. Our diverse spectrum of talk
programming is a significant differentiator from terrestrial radio and other audio entertainment
providers.
Our comedy channels present a range of humor on the channels Laugh Break, Blue Collar Comedy
and Raw Dog Comedy, and our other entertainment channels include
Cosmo Radio, SIRIUS OutQ, MAXIM Radio, Road Dog
Trucking Radio, Playboy Radio and Radio Disney.
Our religious programming includes the Catholic Channel which is programmed with the
assistance of the Archdiocese of New York; EWTN, a Global Catholic Radio Network; and Family Net
Radio, programmed by Family Net, an affiliate of the Southern Baptist Convention.
In 2007, we:
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launched The Foxxhole, an urban comedy and entertainment channel
produced by Jamie Foxx, featuring live shows hosted by Foxx and other comics; |
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announced the creation of Doctor Radio, an exclusive medical channel
featuring doctors as hosts of live shows, with listener call-ins, to be produced with NYU Medical
Center and launched in the second quarter of 2008; |
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expanded Barbara Walters call-in talk show to a weekly format; |
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added a program featuring speeches by celebrity and public figures produced with the 92nd Street Y in
New York City; and |
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added a variety of exclusive daily and weekly shows to our Martha Stewart, Playboy Radio, Road
Dog Trucking, SIRIUS Left, SIRIUS OutQ and SIRIUS Stars channels. |
In February 2008, we launched Indie Talk, an exclusive forum for independent thought and opinion.
News and Information Programming
We offer 25 news and information channels. These channels present a range of national,
international and financial news, including news from BBC World Service News, Bloomberg Radio, CNBC, CNN,
FOX News, NPR and the World Radio Network.
We offer continuous, local traffic reports for 20 metropolitan markets throughout the United
States. We broadcast these reports, together with local weather reports from The Weather Channel,
on 11 of our channels.
We broadcast national weather reports produced by The Weather Channel on our weather and
emergency channel, which also alerts listeners to key information during civil and natural
emergencies. In addition, we insert appropriate emergency announcements and broadcasts into our
channels and participate in the national Emergency Alert System.
Distribution of SIRIUS Radios
Retail
We sell SIRIUS radios directly to consumers through our website. SIRIUS radios are also
marketed and distributed through major national and regional retailers, including Best Buy, Circuit
City, Costco, Crutchfield, Sams Club, Target and Wal-Mart. SIRIUS radios are distributed on an
exclusive basis by RadioShack. We develop in-store merchandising materials and provide sales force
training for several retailers. SIRIUS radios are also available nationwide at various truck
stops.
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Automakers
One of our primary means of distributing SIRIUS radios is through the sale of new vehicles.
Various automakers factory-install and dealer-install SIRIUS radios in their vehicles. As of
December 31, 2007, SIRIUS radios were available as a factory or dealer-installed option in 116
vehicle models and as a dealer only-installed option in 37 vehicle models. Many automakers include
a subscription to our radio service in the sale or lease price of their vehicles. In many cases, we
receive subscription payments from automakers in advance of the activation of our service. We
share with various automakers a portion of the revenues we derive from subscribers using vehicles
equipped to receive our service. We also reimburse various automakers for certain costs associated
with the SIRIUS radios installed in their vehicles, including in certain cases hardware costs,
tooling expenses and promotional and advertising expenses.
In 2007, we launched SIRIUS Backseat TV in select 2008
model year Chrysler, Dodge and Jeep vehicles.
In 2007, we also announced the SIRIUS Travel Link service, which is expected to be offered in 2008
on select Ford, Lincoln and Mercury vehicles.
Automakers continue to incorporate SIRIUS into their national and regional advertising. In
2007, Mercury and Mercedes-Benz each implemented a national advertising campaign with prominent
references to the SIRIUS radio service, and Chrysler implemented a national advertising campaign
with prominent references to SIRIUS Backseat TV.
Chrysler LLC. In February 2008, we extended our agreement with Chrysler to provide an
exclusive relationship until September 2017. This agreement covers all Chrysler LLC brands,
including Chrysler, Jeep and Dodge. Chrysler included SIRIUS radios as a factory-installed feature
in more than 70% of its 2008 model year vehicles. As of December 31, 2007, Chrysler included
SIRIUS Backseat TV as a factory-installed option in seven vehicle models.
Mercedes-Benz USA, Inc. and Freightliner LLC. We have an agreement with Mercedes-Benz USA,
Inc. and Freightliner LLC, which continues until September 2012. This agreement covers the
distribution of our radio service on an exclusive basis in all cars and light trucks manufactured
by Mercedes-Benz as well as Freightliner and Sterling heavy trucks. Mercedes-Benz included SIRIUS
radios as factory equipment in over 80% of its vehicles in 2007, including all 2008 model year
Mercedes S Class, SL Class, CL Class, CLS, AMG and V12 engine vehicles, and has announced plans to
increase penetration of SIRIUS radios to over 90% of its vehicles by 2009.
Ford Motor Company. In 2007, we extended our agreement with Ford and certain of its
affiliates to provide for an exclusive relationship until September 2016 or, at Fords option,
until September 2018. Beginning in January 2011, Ford may elect to become nonexclusive under the
agreement, in which case Ford would forfeit significant future economic benefits. This agreement
covers all Ford brands, including Ford, Lincoln, Mercury, Jaguar,
Volvo, Land Rover and Mazda. At the end of 2007, SIRIUS
radios were being offered as standard equipment in most Lincoln brand
vehicles; and in Range Rover and Range Rover Sport vehicles. At the end of 2007, SIRIUS radios were available as factory-installed equipment in 23 Ford, Lincoln
and Mercury vehicle lines. The Ford and Mercury brands are targeting approximately 70% factory
penetration of SIRIUS radios beginning with 2009 model year vehicles. Ford plans to offer SIRIUS
Travel Link on select Ford, Lincoln and Mercury vehicles in 2008.
We also have an agreement with Aston Martin which extends to September 2011. Aston Martin offers SIRIUS as a factory-installed option with a lifetime
subscription on its Vantage and DB9 vehicles.
BMW. We have an agreement with BMW of North America which provides for an exclusive
relationship until August 2008. This agreement covers all BMW and MINI vehicles. Commencing in
the 2008 model year, certain BMW and MINI vehicles are sold with a lifetime subscription included in the
price of the car.
Volkswagen and Audi. We have an agreement with Volkswagen of America, Inc. that provides for
an exclusive relationship through July 2012 or, at Volkswagens option, through July 2015. This
agreement covers all Volkswagen and Audi vehicles. Volkswagen announced its intention to offer
SIRIUS radios as standard equipment in all Touareg2, New Beetle, New Beetle Convertible, GTI and
GLI models beginning in the 2008 model year. Audi announced its intention to offer SIRIUS radios
as standard equipment in all 2008 S4, RS 4, A6, A8, and R8 models, and select Audi Q7 models.
Other Automakers. We have an exclusive agreement with Kia Motors America, Inc. Kia plans to
include SIRIUS radios as standard equipment in its vehicles commencing in the
2009 model year. Our agreement with Kia extends through 2014 or, at Kias option, through 2017.
We have an agreement with Mitsubishi Motors North America which provides for an exclusive
relationship through February 2010. Mitsubishi included SIRIUS radios as standard equipment in the
2008 model Eclipse Spyder vehicles, and as a factory-installed option on other 2008 models.
We have an agreement with Bentley Motors Inc. under which Bentley began including SIRIUS
radios as standard equipment in the majority of its 2008 model vehicles and will continue to do so through 2012. Each
Bentley vehicle is sold with a lifetime subscription included in the price of the car.
We also have an agreement with Rolls-Royce Motor Cars to include SIRIUS radios as standard
equipment in its vehicles through 2008. Each Rolls-Royce vehicle is sold
with a lifetime subscription included in the price of the car.
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.
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Special Markets
Trucks. Freightliner, Sterling, Peterbilt, Kenworth, Volvo and International offer SIRIUS
radios as a factory-installed option on the trucks they manufacture.
Boats. Various recreational boat builders, including Sea Ray, Four Winns, Chaparral, Larson,
Glastron, Ranger and Formula, offer SIRIUS radios and a prepaid subscription to our service as a
standard or optional feature on their boats.
Recreational Vehicles. Several leading manufacturers of recreational vehicles, including
Fleetwood, Monaco, Winnebago, Coachmen, Tiffin and Alfa Leisure, offer SIRIUS radios as a
factory-installed option.
The SIRIUS System
Our satellite radio system is designed to provide clear reception in most areas despite
variations in terrain, buildings and other obstructions. Subscribers can receive our transmissions
in all outdoor locations where the satellite radio receiver has an unobstructed line-of-sight with
one of our satellites or is within range of one of our terrestrial repeaters.
The FCC has allocated the portion of the S-band located between 2320 MHz and 2345 MHz
exclusively for satellite radio. We use 12.5 MHz of bandwidth in the 2320.0-2332.5 MHz frequency
to transmit our signals from our satellites to our subscribers. Uplink transmissions (from the
ground to our satellites) use 12.5 MHz of bandwidth in the 7060-7072.5 MHz band.
Our satellite radio system consists of three principal components:
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satellites, terrestrial repeaters and other satellite facilities; |
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our studios; and |
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SIRIUS radios. |
We continually monitor our infrastructure and regularly evaluate improvements in technology.
For example, we employ a technology known as hierarchical modulation to allow us to offer
additional audio channels, as well as advanced services such as data and video, without noticeably
affecting our broadcasts. This increase in network capacity is available through select new SIRIUS
radios and is not available to SIRIUS radios sold prior to the implementation of this technology.
Satellites, Terrestrial Repeaters and Other Satellite Facilities
Satellites. We operate and own three orbiting satellites, we own a spare satellite that is in
storage and we have two satellites presently under construction. Space Systems/Loral, the
manufacturer of our satellites, delivered our three operating satellites to us in 2000, following
the completion of in-orbit testing of each satellite. Our fourth, spare satellite was delivered to
ground storage in April 2002. Space Systems/Loral is also in the process of constructing a fifth
and sixth satellite for use in our system. We expect to launch our fifth satellite, which is
currently under construction, during the second quarter of 2009 and our sixth satellite in the
fourth quarter of 2010.
Our satellites are of the Loral FS-1300 model series. This family of satellites has a history
of reliability with a total of more than 350 years of in-orbit operation time.
Each of our three orbiting satellites travels in a figure eight pattern extending above and
below the equator, and spends approximately 16 hours per day north of the equator. At any time, two
of our three orbiting satellites operate north of the equator while the third satellite does not
transmit as it traverses the portion of the orbit south of the equator. This orbital configuration
yields high signal elevation angles, reducing service interruptions from signal blockage. Our fifth
satellite will complement our existing in-orbit satellites and will be launched into a
geostationary orbit. The redundancy of the resulting constellation configuration is expected to
provide enhanced coverage and performance.
We expect to further augment or replace our satellite constellation. We may elect to augment
our operating satellites with our spare satellite or with new satellites that we may purchase to
meet our business needs. In January 2008, we entered into an agreement with International Launch
Services to secure two satellite launches on Proton rockets. We will pay $95 million for the first
launch and $98 million for the second launch. 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. Decisions regarding our satellite constellation may affect the
estimated useful life of our existing satellites, and we may modify the depreciable life
accordingly. The cost of replacing our satellites will be substantial.
Our orbiting satellites have experienced circuit failures on their solar arrays. The circuit
failures our satellites have experienced to date do not limit the power of our broadcast signal or
affect our current operations. Additional circuit failures could reduce the estimated useful life
of our in-orbit satellites.
8
We do not maintain in-orbit insurance policies covering our satellites. We discontinued our
in-orbit insurance policies covering our satellites following a review of the health of our
satellite constellation, the exclusions from coverage contained in the available insurance, the
costs of the available insurance, and the practices of other satellite companies as to in-orbit
insurance.
If we are required to launch our spare satellite due to the failure of one of our
orbiting satellites, our operations would be impaired until such time as we successfully launch and
commission our spare satellite, which could take six months or more. If two or more of our
satellites fail in orbit in close proximity in time, our operations could be suspended until
replacement satellites are launched and placed into service. In such event, our business would be
materially impacted and we could default on our commitments.
Terrestrial Repeaters. In some areas with high concentrations of tall buildings, such as
urban centers, signals from our satellites may be blocked and reception of our satellite signal can
be adversely affected. In many of these areas, we have deployed terrestrial repeaters to supplement
our satellite coverage. We currently operate 124 terrestrial repeaters in 98 urban areas. We
plan to deploy a significant number of additional terrestrial repeaters in the future.
Other Satellite Facilities. We control and communicate with our satellites from our uplink
facility in New Jersey. These activities include routine satellite orbital maneuvers and
monitoring of the satellites. We also maintain earth stations in Panama and Ecuador to control and
communicate with our satellites.
Studios
Our programming originates principally from our national broadcast studio in New York City.
The national broadcast studio houses our corporate headquarters, facilities for programming
origination, programming personnel and facilities to transmit programming to our orbiting
satellites.
SIRIUS Radios
We design, establish specifications for, source parts and components for, and manage various
aspects of the logistics and production of SIRIUS radios. We do not manufacture, import or
distribute SIRIUS radios, except for the distribution of our products through our website. We have
authorized select manufacturers to produce SIRIUS radios. These radios are distributed under
various consumer brands, including the SIRIUS brand.
To facilitate the sale of SIRIUS radios, we subsidize chip sets and a portion of radio
manufacturing costs to effectively reduce the price of SIRIUS radios to our subscribers. We expect
these subsidies to decrease over time.
In-dash Radios. In-dash radios are integrated into vehicles and allow the user to listen to
AM, FM or SIRIUS with the push of a button. The SIRIUS receiver can be built into the radio or
connected as a hidden external unit.
In the auto sound aftermarket, in-dash radios are available at retailers nationally. In-dash
radios are also available to automakers for factory or dealer installation. When
factory-installed, the cost of the SIRIUS radio is generally included in the sticker price of the
vehicle and may include a prepaid SIRIUS subscription.
Dock & Play Radios. Dock & Play radios enable subscribers to transport their SIRIUS radios
easily to and from their cars, trucks, homes, offices, boats or other locations with available
adapter kits. Dock & Play radios adapt to existing audio systems through FM modulation or direct
connection and can be easily installed by a retailer or the purchaser. In addition, SIRIUS Dock &
Play systems designed for commercial truckers are available through participating truck
manufacturers, truck dealers and truck stops.
A boom box, which enables our subscribers to use their SIRIUS radios virtually anywhere, is
available for various models of Dock & Play radios.
Portable Units. In 2006, we introduced the Stiletto 100, our first satellite radio to provide
live reception in portable mode and the first portable satellite radio with WiFi capabilities. In
2007, we introduced an updated model, the Stiletto 2. The Stiletto 2 allows users to capture,
store and replay live SIRIUS content or a mix of SIRIUS content and MP3/WMA files, and permits
users to increase that storage capability through a slot for a removeable flash memory card. The
Stiletto products also allow the user to bookmark and purchase songs through compatible music
download and subscription services, providing easy access to SIRIUS music and other content.
FM Modulated Radios. FM modulated radios enable our service to be received in vehicles
with FM radios.
Home and Commercial Units. SIRIUS home units that provide our satellite service to most home
stereo systems are available nationally. In addition, various multi-tuner and multi-zone units are
available through commercial dealers and custom installation dealers. These units allow the user
to listen to SIRIUS radio from multiple locations within a home or business.
9
We have also specially-designed SIRIUS home units to interface with multiple audio and video
components. The SIRIUS Conductor home system operates with a wireless controller that displays
SIRIUS programming information and controls 12 components in addition to the included receiver from
up to 150 feet away. Similarly, the SIRIUSConnect Home tuner provides a one-cable connection to
easily add our service to SIRIUS-Ready home systems manufactured by companies such as Pioneer,
Sony, Onkyo, Xantech, Netstreams, Accurian and Rotel.
In 2007, Sonos introduced a product that promotes internet access to SIR in the home without
the need for a personal computer.
Many SIRIUS radios include a replay feature, allowing listeners to pause, rewind and fast
forward music, sports or talk programs. A number of SIRIUS radios also include SIRIUS-Seek, which
alerts listeners when selected artists or songs are playing on
another SIRIUS channel; Game Alert, which prompts listeners
when their favorite teams begin a game or when scores change; Game Zone, which lists a listeners
favorite team scores on one screen; and one-touch access to traffic and weather reports for select
cities.
We signed an agreement with XM Radio to develop a unified standard for satellite radios to
enable consumers to purchase one radio capable of receiving both our and XM Radios services. The
technology relating to this unified standard is being developed, funded and will be owned jointly
by the two companies. This unified standard is intended to meet FCC rules that require
interoperability of both licensed satellite radio systems.
International
Canada. In 2005, SIRIUS Canada launched its service in Canada and currently offers 110
channels of commercial-free music and news, sports, talk and entertainment programming, including
11 channels of Canadian content and the Howard Stern 100 channel, for Cdn. $14.99 per month.
As of October 11, 2007, SIRIUS Canada had over 500,000 subscribers. Subscribers to the SIRIUS
Canada service are not included in our subscriber counts.
SIRIUS Canada is a Canadian corporation owned by us, Canadian Broadcasting Corporation and
Standard Radio Inc. SIRIUS Canadas license to operate a satellite radio service in
Canada is subject to a number of conditions, including the requirement that SIRIUS Canada offer a
number of qualifying Canadian music and talk channels.
Other regions. We are in discussions with various parties regarding joint ventures in other
countries.
Other Opportunities
Internet Radio. We offer SIRIUS subscribers the ability to listen to our music channels and
select non-music channels over the Internet as part of our base subscription price. SIRIUS
Internet Radio, which we refer to as SIR, delivers a simulcast of more than 80 channels of our
talk, entertainment, sports and music programming for a monthly fee. Subscribers to SIR are included in our
subscriber counts.
Commercial Accounts. SIRIUS Music for Business, our music service for commercial
establishments, is available through Applied Media Corporation, Dynamic Media, Turn Key Media and
Info Hold Inc. Subscribers to commercial accounts are included in our subscriber counts.
SIRIUS Backseat TV. In 2007, we introduced SIRIUS Backseat TV, a television service offering
content designed primarily for children from Nickelodeon, Disney Channel and Cartoon Network in the
backseat of vehicles. Chrysler was the only automaker to offer SIRIUS Backseat TV in its 2008
model-year vehicle lineup. Subscribers to SIRIUS Backseat TV are not included in our subscriber
counts.
Travel Link. In 2008, we plan to launch SIRIUS Travel Link, a suite of data services that
includes real-time traffic, tabular and graphical weather, fuel prices, sports schedules and
scores, and movie listings. SIRIUS Travel Link is expected to be standard on Fords
next-generation navigation system and is anticipated to be offered on select Ford, Lincoln and
Mercury vehicles in 2008. Subscribers to SIRIUS Travel Link are not included in our subscriber
counts.
Traffic and Weather. We offer a service that provides graphic information as to road
closings, traffic flow and incident data to consumers with in-vehicle navigation systems. The
service reports incident information for 80 cities and traffic flow information for 26 cities. Traffic flow information is expected to expand to 77 cities in 2008. We
source these reports from a provider of mapping and traffic data. Subscribers to this service are
not included in our subscriber counts.
We also offer a marine weather service, featuring detailed information
ranging from weather and wave heights to sea surface temperatures, for recreational boaters. The
service integrates data information directly into certain marine electronics products. This marine
weather service covers the 48 contiguous states and waters extending hundreds of miles into the
Atlantic and Pacific Oceans, Gulf of Mexico and Caribbean.
10
In 2007, we began offering a commercial aviation weather service through WSI. WSI InFlight®
transmits aviation weather information using our system and is offered to commercial fleets,
business aircraft and private pilots.
SIRIUS via Mobile Phones. Sprint offers a SIRIUS music service to its subscribers through a
built-in media player on Sprint PCS VisionSM Multimedia Phones for $6.95 per month, a
portion of which we receive. This service includes access to 20 commercial-free SIRIUS music
channels, plus a channel devoted to artist interviews and performances. Subscribers to the Sprint
service are not included in our subscriber counts.
DISH Network. We offer our music channels as part of certain programming packages of the DISH
Network satellite television service. Subscribers to DISH Network are not included in our
subscriber counts.
Competition
We face competition for listeners, consumer electronics and audio spending, and advertising
dollars. In addition to pre-recorded entertainment purchased or playing in cars, homes and using
portable players, we compete most directly with the following services:
Terrestrial AM/FM Radio. Terrestrial AM/FM radio has had a well established market for its
services for many years and offers free broadcast reception paid for by commercial advertising
rather than by a subscription fee. Many radio stations offer information programming of a local
nature, such as local news and sports, which we do not offer as effectively as local radio. The
AM/FM radio broadcasting industry is highly competitive with respect to listeners and advertising
revenues. Some radio stations also have begun reducing the number of commercials per hour,
expanding the range of music played on the air and experimenting with new formats in order to
compete with us and other competitors. Several major radio companies have launched advertising
campaigns designed to assert the benefits of traditional local AM/FM radio. On average every U.S.
household has five AM/FM radios, and radio comes as a standard feature in every vehicle
manufactured without an additional cost to the consumer.
XM Radio. XM Radio is the other FCC licensee for satellite radio service in the United States.
XM Radio has announced that it had 9,027,000 subscribers as of December 31, 2007. XM Radio
broadcasts certain programming that we do not offer and is offered on various car model brands
which do not offer SIRIUS radios.
HD Radio. While most traditional AM/FM radio stations broadcast by means of analog signals,
the radio industry has made significant strides in rolling out advanced digital transmission
technology. Digital broadcasting offers higher sound quality than traditional analog signals and
the multicast of as many as five stations per frequency, significantly increasing the quality and
quantity of content available to consumers. Digital radio broadcast services have been expanding,
and an increasing number of radio stations in the U.S. have begun digital broadcasting or are in
the process of converting to digital broadcasting. Over 1,500 radio stations in the United States
currently broadcast digitally. Digital radio is generally offered to subscribers without a service
charge. BMW offers factory-installed HD radio receivers as an option
across all of its 2008 model
year vehicles, Ford currently offers HD Radio as a dealer installed option for the Ford, Mercury
and Lincoln brands and recently announced the availability of factory installed HD Radio technology
as a standard or optional feature on Ford, Mercury and Lincoln vehicles beginning in calendar year
2009, and retail HD radios are available nationwide at many large retailers. A number of
leading radio broadcasters have joined together to form the HD Digital Radio Alliance to accelerate
the successful rollout of digital radio.
Digital Music Devices such as iPods and MP3 Players. We face vigorous competition from various
digital music devices and their associated services. The Apple iPod®, a portable
digital music player, allows users to convert music on compact discs to digital files and to
download and purchase music and video through Apples iTunes® Music Store. iPods® are compatible with many car stereos and home
speaker systems. Apple has reached agreement with automobile manufacturers to preinstall equipment
in vehicles which will allow users to play music from their iPod through the automobile sound
system. Many MP3 players can be connected to online music subscription services, such as Real
Networks Rhapsody and Napster 2.0. Slacker, a recently launched private company, has introduced a
device and music service that continually updates the device based on a users preferences, serving
algorithmically determined playlists that are direct substitutes for radio programming.
Internet Radio. Consumers are increasingly turning to Internet radio. Internet radio
broadcasts have no geographic limitations and can provide listeners with radio programming from
around the country and the world. Improvements from higher bandwidths, faster modems, wider
programming selections, and industry consolidation have made Internet radio a more significant
competitor for listening in the home and office. Technologies like WiMax will also make Internet
radio more pervasive. In addition to the many free Internet streams offered by radio companies
like Clear Channel, CBS Radio or other smaller companies, subscription Internet music services,
such as Rhapsody and Pandora, offer unlimited and fully-customizable play lists for a small fixed
fee per month. These services may be used for listening at PCs or home media centers.
Wireless Phones. Several of the largest wireless providers currently offer
music to mobile phones. Additionally, many phones now contain FM radios. Sprint Nextel currently
offers streaming music from a variety of providers plus a music store for purchase. Verizon
Wireless offers the VCast music service that can be played directly on a phone. AT&T offers a
variety of streaming content and has also partnered with Apple to offer the iPhone. Several
subscription music services, including Rhapsody and Pandora, are offered over mobile phones.
11
Next Generation Wireless. Next generation wireless protocols will offer unprecedented
broadband coverage with enhanced data rates, reliability, and broadcast capabilities.
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Sprint Nextel announced in August 2006 its plans to develop a fourth generation
nationwide mobile broadband network using the WiMAX standard. Branded XOHM, the
network was activated on a limited basis in December 2007 and is scheduled for
commercial launch in several markets in 2008. |
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During 2007, Verizon Wireless launched VCast TV, a multichannel mobile video and
audio subscription service run over Qualcomms MediaFLO USA network. AT&T has
announced that it would also offer MediaFLO-based media services to its users. The
service offers 8 channels of broadcast video, including ESPN, CBS,
NBC and Nickelodeon. |
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In early 2008, the United States government began an auction of highly coveted
700 MHz spectrum, which offers cost-efficient network buildout
possibilities and high signal propagation characteristics. Major media,
communication and investment companies are participating in the auction with plans
to use the spectrum to offer next-generation wireless media and communications
services to consumers. |
When these and other services achieve ubiquitous mobile broadband capability, the relative
competitiveness of our product offering may suffer.
Direct Broadcast Satellite and Cable Audio. A number of companies provide specialized audio
services through either direct broadcast satellite or cable audio systems. These services are
targeted to fixed locations, mostly in-home. The radio service offered by direct broadcast
satellite and cable audio is often included as part of a package of digital services with video
service, and video customers therefore generally do not pay an additional monthly charge for the
audio service.
Government Regulation
As an operator of a privately owned satellite system, we are regulated by the FCC under the
Communications Act of 1934. The FCC is the government agency with primary authority in the United
States over satellite radio communications. We currently must comply with regulation by the FCC
principally with respect to:
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the licensing of our satellite system; |
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preventing interference with or to other users of radio frequencies; and |
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compliance with FCC rules established specifically for U.S. satellites and satellite radio
services. |
Any assignment or transfer of control of our FCC license must be approved by the FCC.
Similarly, our pending merger with XM Radio is conditioned upon approval of the transaction by the
FCC.
In 1997, we were one of two winning bidders for an FCC license to operate a satellite digital
audio radio service and provide other ancillary services. Our FCC license expires in 2010. Prior to
the expiration, we will be required to apply for a renewal of our FCC license. We anticipate that,
absent significant misconduct on our part, the FCC will renew our license to permit operation of
our satellites for their useful lives, and grant a license for any replacement satellites.
In some areas with high concentrations of tall buildings, such as urban centers, signals from
our satellites may be blocked and reception can be adversely affected. In many of these areas, we
have installed terrestrial repeaters to supplement our satellite signal coverage. The FCC has not
yet established rules governing terrestrial repeaters. A rulemaking on the subject was originally
initiated by the FCC in March 1997. A further rulemaking on the subject was commenced by the FCC
in December 2007. These rulemakings are still pending. Many comments have been filed as part of
these rulemakings. The comments cover many topics relating to the operation of our terrestrial
repeaters, but principally seek to protect adjoining wireless services from interference. We cannot
predict the outcome or timing of these FCC proceedings and the final rules adopted by the FCC may
limit our ability to deploy additional terrestrial repeaters, require us to reduce the power of our
existing terrestrial repeaters or fail to protect us from interference by adjoining spectrum
holders. In the interim, the FCC has granted us special temporary authority to operate over 200
terrestrial repeaters and offer our service on a non-harmful interference basis to other wireless
services. In October 2006, we ceased operating 11 of our terrestrial repeaters that we discovered
had been operating at variance to the specifications and applied to the FCC for new authority to
resume operating these repeaters.
We design, establish specifications for, source parts and components for, and manage various
aspects of the logistics and production of SIRIUS radios, including SIRIUS radios that include FM
modulators. Part 15 of the FCCs rules establish a number of requirements relating to FM
modulators, including emissions and frequency rules. The FCC is reviewing whether the FM
transmitters in certain SIRIUS radios comply with the Commissions emissions and frequency rules.
We are cooperating with the FCC in its on-going inquiry, and have discovered that certain SIRIUS personnel requested manufacturers to
produce SIRIUS radios that were not consistent with these rules. 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 our products comply with all applicable FCC
rules. We believe our radios that are currently in production comply with applicable FCC rules. The
FCCs inquiry may result in fines, additional license conditions or other FCC actions that are
detrimental to our business.
12
In 2006, we entered into an agreement with Space Systems/Loral to design and construct a fifth
satellite. In April 2007, the FCC granted our application to amend our license to add this
satellite to our existing satellite constellation. We have also entered into an agreement with
Space Systems/Loral to design and construct a sixth satellite. We have not yet filed an
application with the FCC to amend our license to add this satellite to our existing satellite
constellation.
Our FCC license is conditioned on us certifying that our system includes a receiver design
that will permit end users to access XM Radios system. We have signed an agreement with XM Radio
to develop jointly a unified standard for satellite radios to facilitate the ability of consumers
to purchase one radio capable of receiving both our and XM Radios services. We believe that this
agreement, and our efforts with XM Radio to develop this unified standard for satellite radios,
satisfies the interoperability condition contained in our FCC license.
Changes in law or regulations relating to communications policy or to matters affecting our
service could adversely affect our ability to retain our FCC license or the manner in which we
operate.
The SIRIUS Trademark
We have several registrations and approved applications in the U.S. Patent and Trademark
Office for the SIRIUS trademark and the Dog Design logo used in connection with our products
and service. We intend to maintain our trademarks and the applications and registrations therefor.
We are not aware of any material claims of infringement or other challenges to our right to use the
SIRIUS trademark or the Dog Design logo in the United States in connection with our products or
service.
Copyrights in Programming
In connection with our music programming, we must negotiate and enter into royalty
arrangements with two sets of rights holders: holders of copyrights in musical works, or songs, and
holders of copyrights in sound recordingsrecords, cassettes, compact discs and audio files.
Musical works rights holders, generally songwriters and music publishers, are represented by
performing rights organizations such as the American Society of Composers, Authors and Publishers,
or ASCAP, Broadcast Music, Inc., or BMI, and SESAC, Inc. These organizations negotiate fees with
copyright users, collect royalties and distribute them to the rights holders. Our public
performance license agreements with ASCAP expired at the end of 2006. We have entered into an
interim license agreement with ASCAP and BMI to pay royalties for our public performances of
musical works by our satellite radio service, and are in discussions regarding final licenses. If
we are unable to reach final agreements with ASCAP and BMI, a royalty rate may ultimately be
established through litigation.
Sound recording rights holders, typically large record companies, are primarily represented by
SoundExchange, an organization which negotiates licenses and collects and distributes royalties on
behalf of record companies and performing artists. 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.
Personnel
As of December 31, 2007, we had 973 full-time employees. In addition, we rely upon a number of
part-time employees, consultants, other advisors and outsourced relationships. None of our employees is represented by a
labor union, and we believe that our relationship with our employees is good.
Corporate Information
Sirius Satellite Radio Inc. was incorporated in the State of Delaware as Satellite CD Radio,
Inc. on May 17, 1990. On December 7, 1992, we changed our name to CD Radio Inc., and we formed a
wholly owned subsidiary, Satellite CD Radio, Inc., that is the holder of our FCC license. On
November 18, 1999, we changed our name to Sirius Satellite Radio Inc. Our executive offices are
located at 1221 Avenue of the Americas, 36th floor, New York, New York 10020 and our telephone
number is (212) 584-5100. Our internet address is SIRIUS.com. Our annual, quarterly and current
reports, and amendments to those reports, filed or furnished pursuant to Section 14(a) or 15(d) of
the Securities Exchange Act of 1934 may be accessed free of charge through our website after we
have electronically filed such material with, or furnished it to, the SEC. SIRIUS.com is an
inactive textual reference only, meaning that the information contained on the website is not part of this Annual Report on Form 10-K
and is not incorporated in this report by reference.
13
Executive Officers of the Registrant
Certain information regarding our executive officers is provided below:
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Name |
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Age |
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Position |
Mel Karmazin |
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64 |
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Chief Executive Officer |
Scott A. Greenstein |
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48 |
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President, Entertainment and Sports |
James E. Meyer |
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53 |
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President, Sales and Operations |
Patrick L. Donnelly |
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46 |
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Executive Vice President, General Counsel and Secretary |
David J. Frear |
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51 |
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Executive Vice President and Chief Financial Officer |
Mel Karmazin has served as our Chief Executive Officer and a member of our board of directors
since November 2004. Prior to joining us, Mr. Karmazin was President and Chief Operating Officer
and a member of the board of directors of Viacom Inc. from May 2000 until June 2004. Prior to
joining Viacom, Mr. Karmazin was President and Chief Executive Officer of CBS Corporation from
January 1999 and a director of CBS Corporation from 1997 until its merger with Viacom in May 2000.
He was President and Chief Operating Officer of CBS Corporation from April 1998 through December
1998. Mr. Karmazin joined CBS Corporation in December 1996 as Chairman and Chief Executive Officer
of CBS Radio and served as Chairman and Chief Executive Officer of the CBS Station Group (Radio and
Television) from May 1997 to April 1998. Prior to joining CBS Corporation, Mr. Karmazin served as
President and Chief Executive Officer of Infinity Broadcasting Corporation from 1981 until its
acquisition by CBS Corporation in December 1996. Mr. Karmazin served as Chairman, President and
Chief Executive Officer of Infinity from December 1998 until the merger of Infinity Broadcasting
Corporation with Viacom in February 2001.
Scott A. Greenstein has served as our President, Entertainment and Sports, since May 2004.
Prior to May 2004, Mr. Greenstein was Chief Executive Officer of The Greenstein Group, a media and
entertainment consulting firm. From 1999 until 2002, he was Chairman of USA Films, a motion picture
production, marketing and distribution company. From 1997 until 1999, Mr. Greenstein was
Co-President of October Films, a motion picture production, marketing and distribution company.
Prior to joining October Films, Mr. Greenstein was Senior Vice President of Motion Pictures, Music,
New Media and Publishing at Miramax Films, and held senior positions at Viacom Inc., a diversified
media and entertainment company.
James E. Meyer has served as our President, Sales and Operations, since May 2004. Prior to May
2004, Mr. Meyer was President of Aegis Ventures Incorporated, a consulting firm that provides
general management services. From December 2001 until 2002, Mr. Meyer served as special advisor to
the Chairman of Thomson S.A., a leading consumer electronics company. From January 1997 until
December 2001, Mr. Meyer served as the Senior Executive Vice President for Thomson as well as the
Chief Operating Officer for Thomson Consumer Electronics. From 1992 until 1996, Mr. Meyer served as
Thomsons Senior Vice President of Product Management. Mr. Meyer is a director of Gemstar-TV Guide
International, Inc.
Patrick L. Donnelly has served as our Executive Vice President, General Counsel and Secretary
since May 1998. From June 1997 to May 1998, he was Vice President and deputy general counsel of ITT
Corporation, a hotel, gaming and entertainment company that was acquired by Starwood Hotels &
Resorts Worldwide, Inc. in February 1998. From October 1995 to June 1997, he was assistant general
counsel of ITT Corporation. Prior to October 1995, Mr. Donnelly was an associate at the law firm of
Simpson Thacher & Bartlett LLP.
David J. Frear has served as our Executive Vice President and Chief Financial Officer since
June 2003. From July 1999 through February 2003, Mr. Frear was Executive Vice President and Chief
Financial Officer of Savvis Communications Corporation, a global managed service provider,
delivering internet protocol applications for business customers. From October 1999 through
February 2003, Mr. Frear also served as a director of Savvis. Mr. Frear was an independent
consultant in the telecommunications industry from August 1998 until June 1999. From October 1993
to July 1998, Mr. Frear was Senior Vice President and Chief Financial Officer of Orion Network
Systems Inc., an international satellite communications company that was acquired by Loral Space &
Communications Ltd. in March 1998. From 1990 to 1993, Mr. Frear was Chief Financial Officer of
Millicom Incorporated, a cellular, paging and cable television company. Prior to joining Millicom,
he was an investment banker at Bear, Stearns & Co., Inc. and Credit Suisse.
Employment Agreements
We have entered into an employment agreement with each of our executive officers, and these
agreements are described below.
Mel Karmazin. In November 2004, we entered into a five-year agreement with Mel Karmazin to
serve as our Chief Executive Officer. We pay Mr. Karmazin a base salary of $1,250,000 per year, and
annual bonuses in an amount determined each year by the Compensation Committee of our board of
directors.
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Pursuant to our agreement with Mr. Karmazin, his stock options and shares of restricted stock
will vest upon his termination of employment for good reason, upon his death or disability and in
the event of a change in control. In the event Mr. Karmazins employment is terminated by us
without cause, his unvested stock options and shares of restricted stock will vest and become
exercisable, and he will receive his current base salary for the remainder of the term and any
earned but unpaid annual bonus.
In the event that any payment we make, or benefit we provide, to Mr. Karmazin would require
him to pay an excise tax under Section 280G of the United States Internal Revenue Code, we have
agreed to pay Mr. Karmazin the amount of such tax and such additional amount as may be necessary to
place him in the exact same financial position that he would have been in if the excise tax was not
imposed.
Scott A. Greenstein. Mr. Greenstein has agreed to serve as our President, Entertainment and
Sports, through July 2009, and we pay Mr. Greenstein an annual salary of $850,000.
If Mr. Greensteins employment is terminated without cause or he terminates his employment for
good reason, he is entitled to receive a lump sum payment equal to (1) his base salary in effect
from the termination date through July 2009 and (2) any annual bonuses, at a level equal to 60% of
his base salary, that would have been customarily paid during the period from the termination date
through July 2009. In the event Mr. Greensteins employment is terminated without cause or he
terminates his employment for good reason, we are also obligated to continue his medical,
disability and life insurance benefits for eighteen months following his termination.
If, following the occurrence of a change in control, Mr. Greenstein is terminated without
cause or he terminates his employment for good reason, we are obligated to pay Mr. Greenstein the
lesser of (1) four times his base salary and (2) 80% of the multiple of base salary, if any, that
our chief executive officer would be entitled to receive under his or her employment agreement if
he or she was terminated without cause or terminated for good reason following such change in
control. We are also obligated to continue Mr. Greensteins medical, disability and life insurance
benefits, or pay him an amount sufficient to replace these benefits, until the third anniversary of
his termination date.
In the event that any payment we make, or benefit we provide, to Mr. Greenstein would require
him to pay an excise tax under Section 280G of the United States Internal Revenue Code, we have
agreed to pay Mr. Greenstein the amount of such tax and such additional amount as may be necessary
to place him in the exact same financial position that he would have been in if the excise tax was
not imposed.
James E. Meyer. Mr. Meyer has agreed to serve as our President, Sales and Operations, until
April 2010 and we pay Mr. Meyer an annual salary of $950,000.
If Mr. Meyers employment is terminated without cause or he terminates his employment for good
reason, we will pay him a lump sum payment equal to (1) his annual base salary in effect on the
termination date plus, (2) the greater of (x) a bonus equal to 60% of his annual base salary or (y)
the prior years bonus actually paid to him (the Designated Amount). Pursuant to his employment
agreement, Mr. Meyer may elect to retire in April 2008, April 2009 or April 2010. In the event he
elects to retire, we have agreed to pay him a lump sum payment equal to the Designated Amount.
If, following the consummation of the pending merger with XM Radio, Mr. Meyer elects to retire
(which he may do shortly following the merger or the next April following the merger), or Mr. Meyer
is terminated without cause or he terminates his employment for good reason during the 12 month
period following the merger, we will pay him a lump sum payment equal to two times the Designated
Amount.
Upon the expiration of Mr. Meyers employment agreement in April 2010 or following his
retirement, if earlier, we have agreed to offer Mr. Meyer a one-year consulting agreement. We
expect to reimburse Mr. Meyer for all of his reasonable out-of-pocket expenses associated with the
performance of his obligations under this consulting agreement, but do not expect to pay him any
cash compensation. Mr. Meyers stock options will continue to vest and will be exercisable during
the term of this consulting agreement.
In the event that any payment we make, or benefit we provide, to Mr. Meyer would be deemed to
be an excess parachute payment under Section 280G of the Internal Revenue Code such that he would
be subject to an excise tax, we have agreed to pay Mr. Meyer the amount of such tax and such
additional amount as may be necessary to place him in the exact same financial position that he
would have been in if the excise tax were not imposed.
Patrick L. Donnelly. Mr. Donnelly has agreed to serve as our Executive Vice President, General
Counsel and Secretary, through April 2010, and we pay Mr. Donnelly an annual base salary of
$525,000.
If Mr. Donnellys employment is terminated without cause or he terminates his employment for
good reason, we are obligated to pay him a lump sum payment equal to his annual salary and the
annual bonus last paid to him and to continue his medical, disability and life insurance benefits
for one year.
In the event that any payment we make, or benefit we provide, to Mr. Donnelly would require
him to pay an excise tax under Section 280G of the United States Internal Revenue Code, we have
agreed to pay Mr. Donnelly the amount of such tax and such
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additional amount as may be necessary to place him in the exact same financial position that
he would have been in if the excise tax was not imposed.
David J. Frear. Mr. Frear has agreed to serve as our Executive Vice President and Chief
Financial Officer through July 2010, and we pay Mr. Frear an annual salary of $550,000. Mr.
Frears annual salary will increase to $750,000 on August 1, 2008.
If Mr. Frears employment is terminated without cause or he terminates his employment for good
reason, we are obligated to pay him a lump sum payment equal to his annual salary and the annual
bonus last paid to him.
In the event that any payment we make, or benefit we provide, to Mr. Frear would require him
to pay an excise tax under Section 280G of the United States Internal Revenue Code, we have agreed
to pay Mr. Frear the amount of such tax and such additional amount as may be necessary to place him
in the exact same financial position that he would have been in if the excise tax was not imposed.
Additional information regarding the compensation for Messrs. Karmazin, Greenstein, Meyer,
Donnelly and Frear will be included in our definitive proxy statement for our 2008 annual meeting
of stockholders scheduled to be held on Tuesday, May 20, 2008.
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Item 1A. Risk Factors
In addition to the other information in this Annual Report on Form 10-K, including the
information under the caption Competition, the following risk factors should be considered
carefully in evaluating us and our business. This Annual Report on Form 10-K contains
forward-looking statements within the meaning of the federal securities laws. Actual results and
the timing of events could differ materially from those projected in forward-looking statements due
to a number of factors, including those set forth below and elsewhere in this Annual Report on Form
10-K. See Special Note Regarding Forward-Looking Statements.
Failure of our satellites would significantly damage our business.
Our three orbiting satellites were launched in 2000. We do not maintain in-orbit insurance
policies covering our satellites. We estimate that two of our in-orbit satellites will have a 13
year useful life and our third in-orbit satellite will have a 15 year useful life from the time of
launch. Our operating results would be materially adversely affected if the useful life of our
satellites is significantly shorter than we expect, whether as a result of a satellite failure or
technical obsolescence, and we fail to launch replacement satellites in a timely manner.
The useful lives of our satellites will vary and depend on a number of factors, including:
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degradation and durability of solar panels; |
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quality of construction; |
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random failure of satellite components, which could result in significant damage
to or loss of a satellite; |
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amount of fuel our satellites consume; and |
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damage or destruction by electrostatic storms or collisions with other objects in
space, which occur only in rare cases. |
Our in-orbit satellites have experienced circuit failures on their solar arrays. The circuit
failures our satellites have experienced do not affect our current operations. Additional circuit
failures could reduce the estimated useful life of our existing in-orbit satellites.
In the ordinary course of operation, satellites experience failures of component parts and
operational and performance anomalies. Components on our in-orbit satellites have failed, and from
time to time we have experienced anomalies in the operation and performance of our satellites.
These failures and anomalies are expected to continue in the ordinary course, and it is impossible
to predict if any of these future events will have a material adverse effect on our operations or
the useful life of our existing in-orbit satellites.
If one of our three satellites fails in orbit, our service would be impaired until such time
as we successfully launch and commission our spare satellite, which would take six months or more.
If two or more of our satellites fail in orbit in close proximity in time, our service could be
suspended until replacement satellites are launched and placed into service. In such event, our
business would be materially impacted and we could default on our commitments.
We have entered into an agreement with Space Systems/Loral to design and construct two new
satellites. The first of these new satellites is expected to be launched in the second quarter of
2009. The second of these new satellites is expected to be launched in the fourth quarter of 2010.
Satellite launches have significant risks, including launch failure, damage or destruction of the
satellite during launch and failure to achieve a proper orbit or operate as planned. Our agreement
with Space Systems/Loral does not protect us against the risks inherent in a satellite launch or
in-orbit operations.
Failure to comply with FCC requirements could damage our business.
As the holder of an FCC license to operate a satellite radio service in the United States, we
are subject to FCC rules and regulations. The terms of our license require us to meet certain
conditions, including designing a receiver that will permit end users to access XM Radios system;
coordination of our satellite radio service with radio systems operating in the same range of
frequencies in neighboring countries; and coordination of our communications links to our
satellites with other systems that operate in the same frequency band. Non-compliance by us with
these conditions could result in fines, additional license conditions, license revocation or other
detrimental FCC actions.
The FCC is reviewing whether the FM transmitters in certain SIRIUS radios comply with the
Commissions emissions and frequency rules. We are cooperating with the FCC in its inquiry, and
have discovered that certain SIRIUS personnel requested manufacturers to produce SIRIUS radios that
were not consistent with these rules. We have taken steps to ensure that this situation does not
happen again, including the adoption of a compliance plan to ensure that in the future our products
comply with all applicable FCC rules. We believe our radios that are currently in production
comply with applicable FCC rules. SIRIUS radios that include compliant FM transmitters may be
subject to some transmission noise, which may result in us encouraging professional installation in
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some cases. The FCCs inquiry may result in fines, additional license conditions or other FCC
actions that are detrimental to our business.
The FCC has not yet issued final rules permitting us to operate and deploy terrestrial
repeaters to fill gaps in our satellite coverage. We are operating our terrestrial repeaters on a
non-interference basis pursuant to a grant of special temporary authority from the FCC. The
FCCs final terrestrial repeater rules may require us to reduce the power of our terrestrial
repeaters and limit our ability to deploy additional repeaters. If the FCC requires us to reduce
significantly the power of our terrestrial repeaters, this would have an adverse effect on the
quality of our service in certain markets and/or cause us to alter our terrestrial repeater
infrastructure at a substantial cost. If the FCC limits our ability to deploy additional
terrestrial repeaters, our ability to improve any deficiencies in our service quality that may be
identified in the future would be adversely affected.
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. Our failure to comply with the initial special temporary authority
could result in disciplinary action by the FCC, although we do not believe such action would have a
material adverse effect on our business or operations.
We may
need to refinance a portion of our debt, which refinancing may not be available.
In 2004, we
issued $300 million 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.
Our substantial indebtedness could adversely affect our financial health.
As of December 31, 2007, we had approximately $1.3 billion of indebtedness, of which $250
million was secured by our assets. We may incur more debt if we believe we can raise money on
favorable terms. A significant portion of our indebtedness contains restrictive covenants. Our
indebtedness could:
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limit our ability to borrow additional funds; |
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limit our flexibility in planning for, or reacting to, changes in our business
and industry; |
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increase our vulnerability to general adverse economic and industry conditions; |
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require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, possibly reducing the availability of our cash flow to
fund working capital, capital expenditures, and other general corporate purposes;
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place us at a competitive disadvantage compared to competitors that have less
debt. |
Failure to comply with the covenants contained in the indentures and agreements governing our
debt could result in an event of default, which, if not cured or waived, could cause us to
discontinue operations or seek a purchaser for our business or assets.
We may from time to time modify our business plan, and these changes could adversely affect us and
our financial condition.
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. 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.
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 indebtedness would result in
increased fiscal obligations and could contain additional restrictive covenants. The sale of
additional equity or convertible debt securities would 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 business might never become profitable.
As of December 31, 2007, we had an accumulated deficit of approximately $4.4 billion. We
expect our cumulative net losses to grow as we make payments under various contracts, incur
marketing and subscriber acquisition costs and make interest payments on our existing debt. If we
are unable ultimately to generate sufficient revenues to become profitable, we could default on our
commitments and may have to discontinue operations or seek a purchaser for our business or assets.
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Programming is an important part of our service, and the costs to renew our programming
arrangements may be more than anticipated.
Third-party content is an important part of our service, and we compete with many entities for
content. We have entered into a number of important content arrangements, including agreements
with the NFL, Howard Stern and NASCAR, which require us to pay substantial sums. Our agreement
with the NFL expires at the end of the 2010-2011 NFL season; our agreement with Howard Stern
expires in December 2010; and our agreement with NASCAR expires in 2011. As these agreements
expire, we may not be able to negotiate renewals of one or more of these agreements, or renew such
agreements at costs we believe are attractive.
In addition, we may not be able to obtain additional third-party content within the costs
contemplated by our business plan.
Higher than expected costs of attracting new subscribers could adversely affect our financial
performance and operating results.
We are spending substantial funds on advertising and marketing and in transactions with
automakers, radio manufacturers, retailers and others to obtain and attract subscribers. If the
costs of attracting new subscribers are greater than expected, our financial performance and
operating results could be adversely affected.
Higher subscriber turnover could adversely affect our financial performance and operating results.
We are experiencing, and expect to continue to experience in the future, subscriber turnover,
or churn. If we are unable to retain our current subscribers, or the costs of retaining
subscribers is higher than we expect, our financial performance and operating results could be
adversely affected.
Weaker than expected market acceptance of our service could adversely affect our advertising
revenue and operating results.
Our ability to generate advertising revenues is directly affected by the number of subscribers
to our service and the amount of time subscribers spend listening to our talk and entertainment
channels or our traffic and weather service. Our ability to generate advertising revenues also
depends on several factors, including the level and type of market penetration of our service,
competition for advertising dollars from other media, and changes in the advertising industry and
the economy generally. We directly compete for audiences and advertising revenues with traditional
AM/FM radio stations and other media, some of which maintain longstanding relationships with
advertisers and possess greater resources than we do.
Failure of third parties to perform could adversely affect our business.
Our business depends in part on the efforts of third parties, especially the efforts of:
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automakers that manufacture, market and sell vehicles capable of receiving our
service, but in many cases have no obligations to do so; |
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consumer electronics manufacturers that manufacture and distribute SIRIUS radios; |
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companies that manufacture and sell integrated circuits for SIRIUS radios; |
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programming providers and on-air talent, including Howard Stern; |
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retailers that market and sell SIRIUS radios and promote subscriptions to our
service; and |
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third party vendors that have designed, built, support or operate important
elements of our system, such as our customer service facilities. |
If one or more of these third parties does not perform in a sufficient or timely manner, our
business will be adversely affected and we could be placed at a long-term disadvantage.
The sale and lease of vehicles with SIRIUS radios and the retail aftermarket are important
sources of subscribers for us. To the extent sales of vehicles by automakers slow or retailers
elect to promote other competing products, our subscriber growth could be adversely impacted. We
do not manufacture satellite radios or accessories, and we depend on manufacturers and others for
the production of SIRIUS radios and their component parts. If one or more manufacturers does not
produce radios in a sufficient quantity to meet demand, or if such radios were not to perform as
advertised or were to be defective, sales of our service and our reputation could be adversely
affected.
We may be exposed to liabilities associated with the design, manufacture and distribution of SIRIUS
radios.
We do not manufacture, import, or distribute SIRIUS radios. We do design, establish
specifications for, source parts and components for, and manage various aspects of the logistics
and production of SIRIUS radios. As a result of these activities, we may be exposed to liabilities
associated with the design, manufacture and distribution of SIRIUS radios that the providers of an
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entertainment service would not customarily be subject to, such as liabilities for design defects,
patent infringement and compliance with applicable laws, as well as the costs of returned product.
Rapid technological and industry changes could make our service obsolete.
The audio entertainment industry is characterized by rapid technological change, frequent new
product innovations, changes in customer requirements and expectations, and evolving standards. If
we are unable to keep pace with these changes, our business may be unsuccessful. Products using
new technologies, or emerging industry standards, could make our technologies obsolete or less
competitive in the marketplace.
Our national broadcast studio, terrestrial repeater network, satellite uplink facility or other
ground facilities could be damaged by natural catastrophes or terrorist activities.
An earthquake, tornado, flood, terrorist attack or other catastrophic event could damage our
national broadcast studio, terrestrial repeater network or satellite uplink facility, interrupt our
service and harm our business. We do not have replacement or redundant facilities that can be used
to assume the fuel functions of our terrestrial repeater network, national broadcast studio or satellite
uplink facility in the event of a catastrophic event.
Any damage to the satellite that transmits to our terrestrial repeater network would likely
result in degradation of our service for some subscribers and could result in complete loss of
service in certain areas. Damage to our national broadcast studio would restrict our programming
production and require us to obtain programming from third parties to continue our service. Damage
to our satellite uplink facility could result in a complete loss of
service until we transfer our operations to a suitable replacement
facility.
Consumers could pirate our service.
Individuals who engage in piracy may be able to obtain or rebroadcast our satellite radio
service or access the internet transmission of our service without paying the subscription fee.
Although we use encryption technology to mitigate the risk of signal theft, such technology may not
be adequate to prevent theft of our signal. If signal theft becomes widespread, it could harm our
business.
Risks Relating to the Pending Merger with XM Radio
In connection with closing the merger, a substantial amount of XM Radios indebtedness will need to be refinanced or amended.
In connection with closing the merger, XM Radio must offer to repurchase a significant portion
of its outstanding debt at 101% of the principal amount thereof or obtain the consent of the
holders of the debt to eliminate such repurchase obligation. Any required repurchase would likely
be financed with other debt and, due to prevailing conditions in the debt markets, debt financing
to fund such repurchase may not be available on terms favorable to the combined company or at all.
Similarly, soliciting the consent of holders to amend XM Radios debt to eliminate the repurchase
obligation may not be successful or, if successful, may require XM Radio to pay a significant
amount to the holders. At December 31, 2007, the aggregate principal amount of XM Radios
outstanding debt was approximately $1.5 billion, and no outstanding debt was trading above 101%
of the outstanding principal amount. If the XM Radio debt is trading above 101% at the time of any
required repurchase offer, a large majority of holders would be unlikely to sell their notes in the
repurchase offer.
The combined companys indebtedness following the completion of the merger will be substantial.
This indebtedness could adversely affect the combined company in many ways, including by reducing
funds available for other business purposes.
The pro forma indebtedness of the combined company as of December 31, 2007, after giving
effect to the merger, would have been approximately $2.8 billion. This indebtedness could reduce
funds available for investment in research and development and capital expenditures or create
competitive disadvantages compared to competitors with lower debt levels. In addition, existing
covenants in our debt instruments and XM Radios debt instruments woud limit the transfer of cash
between the two companies after a combination and require that inter-company dealings be effected
on an arms-length basis, which may affect the timing or amount of synergies realized from the
integration of the two companies.
The ability to complete the merger is subject to the receipt of consents and approvals from
government entities, which may impose conditions that could have an adverse effect on us or could
cause either party to abandon the merger.
In deciding whether to grant regulatory approvals, the relevant governmental entities will
consider the effect of the merger on competition and whether the merger is in the public interest.
The terms and conditions of the approvals that are granted may impose requirements, limitations or
costs or place restrictions on the conduct of the combined companys business.
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The merger agreement requires us to accept significant conditions from regulatory bodies
before we may refuse to close the merger on the basis of those regulatory conditions. We cannot
provide any assurance that either company will obtain the necessary approvals or that any other
conditions, terms, obligations or restrictions will not have a material adverse effect on the
combined company following the merger. In addition, we can provide no assurance that these
conditions, terms, obligations or restrictions will not result in the delay or abandonment of the
merger.
Any delay in completion of the merger may significantly reduce the benefits expected to be obtained
from the merger.
In addition to the required regulatory clearances and approvals, the merger is subject to a
number of other conditions beyond our control that may prevent, delay or otherwise materially
adversely affect its completion. We cannot predict whether and when these other conditions will be
satisfied. Further, the requirements for obtaining the required clearances and approvals could
delay the completion of the merger for a significant period of time or prevent it from occurring.
Any delay in completing the merger may significantly reduce the synergies and other benefits that
we expect to achieve if we successfully complete the merger within the expected timeframe and
integrate our business with XM Radios business.
The anticipated benefits of the merger may not be realized fully or at all or may take longer to
realize than expected.
The merger involves the integration of two companies that have previously operated
independently with principal offices in two distinct locations. Due to legal restrictions, we have
conducted only limited planning regarding the integration of the two companies. The combined
company will be required to devote significant management attention and resources to integrating
the two companies. Delays in this process could adversely affect the combined companys business,
financial results, financial condition and stock price. Even if we are able to integrate our
business operations successfully, there can be no assurance that this integration will result in
the realization of the full benefits of synergies, cost savings, innovation and operational
efficiencies that may be possible from this integration or that these benefits will be achieved
within a reasonable period of time.
Additionally, as a condition to their approval of the merger, regulatory agencies may impose
requirements, limitations or costs or require divestitures or place restrictions on the conduct of
the combined companys business. If we agree to these requirements, limitations, costs,
divestitures or restrictions, our ability to realize the anticipated benefits of the merger may be
impaired.
The issuance of shares of our common stock to XM Radio stockholders in the merger will
substantially reduce the percentage interests of our stockholders.
If the merger is completed, we will issue up to approximately 1.7 billion shares of our common
stock in the merger. Based on the number of shares of our common stock and XM Radio common stock
outstanding on December 31, 2007, XM Radio stockholders before the merger will own, in the
aggregate, approximately 50% of the shares of common stock outstanding immediately after the
merger. The issuance of shares of our common stock to XM Radio stockholders in the merger and to
holders of assumed options and restricted stock units to acquire shares of XM Radio common stock
and warrants will cause a significant reduction in the relative percentage interest of our current
stockholders in earnings, voting, liquidation value and book and market value.
Failure to complete the merger for regulatory or other reasons could adversely affect our stock
price and our future business and financial results.
Completion of the merger is conditioned upon, among other things, the receipt of approval,
including from the Federal Communications Commission and the Department of Justice. There is no
assurance that we will receive the necessary approvals or satisfy the other conditions to the
merger. Failure to complete the pending merger would prevent us from realizing the anticipated
benefits of the merger. We will also remain liable for significant transaction costs, including
legal and accounting fees, whether or not the merger is completed. In addition, the current market
price of our common stock may reflect a market assumption as to whether the merger will occur.
Consequently, the completion of, or a failure to complete, the merger could result in a significant
change in the market price of our common stock.
Resales of shares of our common stock following the merger and additional obligations to issue
shares of our common stock may cause the market price of our common stock to fall.
As of December 31, 2007, we had approximately 1.47 billion shares of common stock outstanding
and approximately 165 million shares of common stock subject to outstanding options and other
rights to purchase or acquire shares. We currently expect that we may
issue up to 1.7
billion shares of our common stock in connection with the merger. The issuance of these new shares
of our common stock and the sale of additional shares of our common stock that may become eligible
for sale in the public market from time to time upon exercise of options (including a substantial
number of our options that will replace existing XM Radio options) could have the effect of
depressing the market price for shares of our common stock.
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The trading price of shares of our common stock after the merger may be affected by factors
different from those affecting the price of shares of XM Radio common stock or shares of our common
stock before the merger.
If we complete the merger, holders of XM Radio common stock will become holders of our common
stock. The results of our operations, as well as the trading price of our common stock, after the
merger may be affected by factors different from those currently affecting our results of
operations, XM Radios results of operations and the trading price of XM Radio common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease space in office buildings in New York, New York, to house our headquarters and
national broadcast studios. We also lease office or studio space in Lawrenceville, New Jersey;
Farmington Hills, Michigan; Nashville, Tennessee; Memphis, Tennessee; Los Angeles, California; and
Houston, Texas.
We own property that we use for technical and engineering facilities in Vernon, New Jersey. We
also lease properties in Panama and Ecuador that we use as earth stations to command and control
our satellites.
Item 3. 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.
The revenue subject to the royalty includes subscription revenue from our U.S. satellite
digital audio radio subscribers and advertising revenues from channels, other than those channels
that make only incidental performances of sound recordings. Exclusions from revenue subject to the
statutory license fee include, among other things, revenue from channels, programming and products
or other services offered for a separate charge where such channels make only incidental
performances of sound recordings; revenue from channels, programming and products or other services
for which the sound recording performances are exempt from any license requirement or directly
licensed; revenue from equipment sales; revenue from current and future data services (including
video services); intellectual property royalties received by us; credit card, invoice and
fulfillment service fees; and bad debt expense.
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U.S. Electronics Arbitration. In May 2006, U.S. Electronics Inc., a licensed distributor and a
former licensed manufacturer of SIRIUS radios, commenced an arbitration proceeding against us. U.S.
Electronics alleges that we breached our contract; failed to pay monies owed under the contract;
tortiously interfered with U.S. Electronics relationships with retailers and manufacturers;
withheld information relating to the FCCs inquiring into SIRIUS radios that include FM modulators;
and otherwise acted in bad faith. U.S. Electronics is seeking between $75 million and $110 million
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, and will be permitted to try to prove in the arbitration, 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 is scheduled to commence in March
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.
23
Item 4. Submission of Matters to a Vote of Security Holders
On November 13, 2007, at a special meeting of stockholders, our stockholders voted to approve
the three proposals described below relating to our pending merger with XM Radio:
|
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|
|
|
|
|
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|
|
|
|
For |
|
Against |
|
Abstain |
An amendment to our certificate
of incorporation to increase
the number of authorized shares
of common stock to 4,500,000,000 |
|
|
737,519,923 |
|
|
|
26,975,203 |
|
|
|
4,257,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The issuance of our common
stock, par value $0.001 per
share, and our Series A
convertible preferred stock,
par value $0.001 per share, a
new series of our preferred
stock, pursuant to the Merger
Agreement, dated as of
February 19, 2007, by and among
Sirius Satellite Radio Inc.,
Vernon Merger Corporation and
XM Satellite Radio Holdings
Inc., as the same may be
amended from time to time |
|
|
747,910,147 |
|
|
|
17,229,345 |
|
|
|
3,612,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Any motion to adjourn or
postpone the special meeting to
a later date or dates, if
necessary, to solicit
additional proxies if there are
insufficient votes at the time
of the special meeting
|
|
|
737,013,648 |
|
|
|
26,186,874 |
|
|
|
5,551,765 |
|
PART II
Item 5. Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is traded on the Nasdaq Global Select Market under the symbol SIRI. The
following table sets forth the high and low sales price for our common stock, as reported by
Nasdaq, for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
6.82 |
|
|
$ |
4.36 |
|
Second Quarter |
|
|
5.57 |
|
|
|
3.60 |
|
Third Quarter |
|
|
4.77 |
|
|
|
3.62 |
|
Fourth Quarter |
|
|
4.37 |
|
|
|
3.50 |
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
4.26 |
|
|
$ |
3.18 |
|
Second Quarter |
|
|
3.25 |
|
|
|
2.66 |
|
Third Quarter |
|
|
3.59 |
|
|
|
2.71 |
|
Fourth Quarter |
|
|
3.94 |
|
|
|
2.76 |
|
On February 27, 2008,
the closing sales price of our common stock on the Nasdaq Global Select Market
was $2.94 per share. On February 27, 2008, there were approximately 850,000 beneficial holders of
our common stock. We have never paid cash dividends
on our common stock. We currently intend to retain earnings, if any, for use in our business
and do not anticipate paying any cash dividends in the foreseeable future.
Item 6. Selected Financial Data
Our selected financial data set forth below with respect to the consolidated statements of
operations for the years ended December 31, 2007, 2006 and 2005, and with respect to the
consolidated balance sheets at December 31, 2007 and 2006, are derived from our consolidated
financial statements audited by Ernst & Young LLP, independent registered public accounting firm,
included in Item 8 of this Annual Report on Form 10-K. Our selected financial data set forth below
with respect to the consolidated statements of operations for the years ended December 31, 2004 and
2003, and with respect to the consolidated balance sheets at December 31, 2005, 2004 and 2003 are
derived from our consolidated financial statements audited by Ernst & Young LLP, which are not
included in this Annual Report. This selected financial data should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included in Item 8 of this Annual
Report and Managements Discussion and Analysis of Financial Condition and Results of Operations.
24
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
(In thousands, except per share amounts) |
|
|
|
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
922,066 |
|
|
$ |
637,235 |
|
|
$ |
242,245 |
|
|
$ |
66,854 |
|
|
$ |
12,872 |
|
Loss from operations |
|
|
(513,090 |
) |
|
|
(1,067,724 |
) |
|
|
(829,140 |
) |
|
|
(678,304 |
) |
|
|
(437,530 |
) |
Net loss (1) |
|
|
(565,252 |
) |
|
|
(1,104,867 |
) |
|
|
(862,997 |
) |
|
|
(712,162 |
) |
|
|
(226,215 |
) |
Net loss applicable to common stockholders (1) |
|
|
(565,252 |
) |
|
|
(1,104,867 |
) |
|
|
(862,997 |
) |
|
|
(712,162 |
) |
|
|
(314,423 |
) |
Net loss per share applicable to common
stockholders (basic and diluted) |
|
$ |
(0.39 |
) |
|
$ |
(0.79 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.38 |
) |
Weighted average common shares outstanding
(basic and diluted) |
|
|
1,462,967 |
|
|
|
1,402,619 |
|
|
|
1,325,739 |
|
|
|
1,238,585 |
|
|
|
827,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
438,820 |
|
|
$ |
393,421 |
|
|
$ |
762,007 |
|
|
$ |
753,891 |
|
|
$ |
520,979 |
|
Marketable securities |
|
|
469 |
|
|
|
15,500 |
|
|
|
117,250 |
|
|
|
5,277 |
|
|
|
28,904 |
|
Restricted investments |
|
|
53,000 |
|
|
|
77,850 |
|
|
|
107,615 |
|
|
|
97,321 |
|
|
|
8,747 |
|
Total assets |
|
|
1,694,149 |
|
|
|
1,658,528 |
|
|
|
2,085,362 |
|
|
|
1,957,613 |
|
|
|
1,617,317 |
|
Long-term debt, net of current portion |
|
|
1,278,617 |
|
|
|
1,068,249 |
|
|
|
1,084,437 |
|
|
|
656,274 |
|
|
|
194,803 |
|
Accumulated deficit |
|
|
(4,398,972 |
) |
|
|
(3,833,720 |
) |
|
|
(2,728,853 |
) |
|
|
(1,865,856 |
) |
|
|
(1,153,694 |
) |
Stockholders (deficit) equity (2) |
|
|
(792,737 |
) |
|
|
(389,071 |
) |
|
|
324,968 |
|
|
|
1,000,633 |
|
|
|
1,325,194 |
|
|
|
|
(1) |
|
Net loss and net loss applicable to common stockholders for the year ended December 31, 2003
included other income of $256,538 related to our debt restructuring. |
|
(2) |
|
No cash dividends were declared or paid in any of the periods presented. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the
federal securities laws. Actual results and the timing of events could differ materially from those
projected in forward-looking statements due to a number of factors, including those described under
Item 1ARisk Factors and elsewhere in this Annual Report. See Special Note Regarding
Forward-Looking Statements.
(All dollar amounts referenced in this Item 7 are in thousands, unless otherwise stated)
Executive Summary
Overview:
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 65 channels of sports, news, talk, entertainment, traffic 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 through our website and by automakers, consumer electronics retailers, and mobile audio
dealers. Subscribers can also receive our music channels and certain other channels over the
Internet.
Our music channels are available to DISH satellite television subscribers and certain of our
music channels are offered to Sprint subscribers over multi-media
handsets. We also offer video, traffic
and weather data services for a separate fee. Subscribers to DISH satellite television, Sprint and
our video, traffic and weather data services are not included in our subscriber count.
25
In 2005, SIRIUS Canada Inc., a Canadian corporation owned by us, Canadian Broadcasting
Corporation and Standard Radio Inc., received a license from the Canadian Radio-television and
Telecommunications Commission to offer 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 December
31, 2007, 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 December 31, 2007, SIRIUS radios were available as a factory-installed option in 116 vehicle
models and as a dealer-installed option in 37 vehicle models. SIRIUS radios are also offered to
renters of Hertz vehicles at airport locations nationwide.
As of December 31, 2007, we had 8,321,785 subscribers compared with 6,024,555 subscribers as
of December 31, 2006. 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 vary, 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.
Costs associated with acquiring subscribers are generally incurred and expensed in advance of
acquiring a subscriber and are recognized as subscriber acquisition costs.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles, which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods. We have disclosed all significant accounting
policies in Note 2 to the consolidated financial statements included in this report. We have
identified the following policies, which were discussed with the audit committee of our board of
directors, as critical to our business and understanding our results of operations.
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 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 obligated 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.
26
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 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
rebates based on actual take-rates for rebate incentives offered in prior periods, adjusted as
deemed necessary based on current take-rate data available at the time. In subsequent periods,
estimates are adjusted when necessary. For certain instant rebate promotions, we have recorded the consideration paid by us 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 have adopted EITF No. 06-01 for the year
ended December 31, 2007. The adoption of EITF No. 06-01 did not have a material impact on our
consolidated results of operations or financial position.
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 payments are recorded to programming and content expense during the
period in which the advertising is broadcast.
Equipment revenue from the direct sale of SIRIUS radios and accessories is recognized upon
shipment, net of discounts and rebates. 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 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, 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 fee 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. Effective January 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standard (SFAS) No. 123 (revised 2004), Share-Based Payment, using the
modified prospective transition method. Our 2005 consolidated results
of operations and financial position were not restated under this transition method.
The stock-based compensation cost recognized beginning January 1, 2006 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. 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.
Effective January 1, 2006, we account for such awards 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.
Upon adoption of SFAS No. 123R, we continued to 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
27
subjective assumptions can materially affect the fair market value estimate, the 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. For the year ended December 31,
2005, we used historical volatility of our stock over a period equal to the expected life of
stock-based awards to estimate fair value. We estimated the fair value of awards granted during the
years ended December 31, 2007 and 2006 using the implied volatility of actively traded options on
our stock. We believe that implied volatility is more representative of future stock price trends
than historical volatility. 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.
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; price protection paid to distributors;
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 generally 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.
Long-Lived Assets. We carry our long-lived assets at cost less accumulated depreciation. In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
review our long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset is not recoverable. At the time an impairment in value of a
long-lived asset is identified, the impairment is measured as the amount by which the carrying
amount of a long-lived asset exceeds its fair value. To determine fair value, we employ an expected
present value technique, which utilizes multiple cash flow scenarios that reflect the range of
possible outcomes and an appropriate discount rate.
In June 2006 we wrote-off $10,917 for the net book value of certain satellite long-lead time
parts purchased in 1999 that we will no longer need.
Useful Life of Satellite System. Our satellite system includes the costs of our satellite
construction, launch vehicles, launch insurance, capitalized interest, spare satellite, terrestrial
repeater network and satellite uplink facility. In accordance with SFAS No. 144, we monitor our
satellites for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset is not recoverable. The expected useful lives of our three in-orbit satellites
were originally 15 years from the date they were placed into
orbit. In June 2006, we adjusted the useful lives of two of our in-orbit satellites to 13 years to
reflect the way we intend to operate the constellation. We continue to expect our spare satellite
to operate effectively for 15 years from the date of launch.
Our in-orbit satellites have experienced circuit failures on their solar arrays. We continue
to monitor the operating condition of our in-orbit satellites. If events or circumstances indicate
that the useful lives of our in-orbit satellites have changed, we will modify the depreciable life
accordingly.
FCC License. In 1997, the FCC granted us a license to operate a commercial satellite radio
service in the United States. While our FCC license has a renewable eight-year term, we expect to
renew our license as there are no legal, regulatory, contractual, competitive, economic or other
factors that limit its useful life. As a result, we treat our FCC license as an indefinite-lived
intangible asset under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. We
re-evaluate the useful life determination for our FCC license each reporting period to determine
whether events and circumstances continue to support an indefinite useful life. To date, we have
not recorded any amortization expense related to our FCC license.
We test our FCC license for impairment at least annually or more frequently if indicators of
impairment exist. We used the Greenfield Method utilizing a discounted cash flow model to evaluate
the fair value of our FCC license. The key assumptions in building the model included projected
revenues and estimated start up costs, which were based primarily on historical operations. If
these estimates or projections change in the future, we may be required to record an impairment
charge related to this asset.
28
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.
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;
SAC, as adjusted, per gross subscriber addition; customer service and billing expenses, as
adjusted, per average subscriber per month; average monthly revenue per subscriber, or ARPU; 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, and as a means to evaluate period-to-period
comparisons. Refer to the footnotes following our discussion of results of operations for the
definitions and usefulness of such non-GAAP financial measures.
Subscribers and Key Operating Metrics:
The following table contains a breakdown of our subscribers for the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
Beginning subscribers |
|
|
6,024,555 |
|
|
|
3,316,560 |
|
|
|
1,143,258 |
|
Net additions |
|
|
2,297,230 |
|
|
|
2,707,995 |
|
|
|
2,173,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending subscribers |
|
|
8,321,785 |
|
|
|
6,024,555 |
|
|
|
3,316,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
4,640,709 |
|
|
|
4,041,826 |
|
|
|
2,465,363 |
|
OEM |
|
|
3,665,632 |
|
|
|
1,959,009 |
|
|
|
823,693 |
|
Hertz |
|
|
15,444 |
|
|
|
23,720 |
|
|
|
27,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending subscribers |
|
|
8,321,785 |
|
|
|
6,024,555 |
|
|
|
3,316,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net additions |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
598,883 |
|
|
|
1,576,463 |
|
|
|
1,554,108 |
|
OEM |
|
|
1,706,623 |
|
|
|
1,135,316 |
|
|
|
620,224 |
|
Hertz |
|
|
(8,276 |
) |
|
|
(3,784 |
) |
|
|
(1,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net additions |
|
|
2,297,230 |
|
|
|
2,707,995 |
|
|
|
2,173,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscribers. We ended 2007 with 8,321,785 subscribers, an increase of 38% from the 6,024,555
subscribers as of December 31, 2006. Since December 31, 2006, we added 598,883 net subscribers from
our retail channel and 1,706,623 net subscribers from our OEM channel, resulting in a 15% and 87%
increase in our retail and OEM subscriber base, respectively.
The following table presents our key operating metrics for the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
Gross subscriber additions |
|
|
4,183,901 |
|
|
|
3,758,163 |
|
|
|
2,519,301 |
|
Deactivated subscribers |
|
|
1,886,671 |
|
|
|
1,050,168 |
|
|
|
345,999 |
|
Average monthly churn (1)(6) |
|
|
2.2 |
% |
|
|
1.9 |
% |
|
|
1.5 |
% |
ARPU (2)(6) |
|
$ |
10.46 |
|
|
$ |
11.01 |
|
|
$ |
10.34 |
|
SAC, as adjusted, per gross
subscriber addition (3)(6) |
|
$ |
101 |
|
|
$ |
114 |
|
|
$ |
139 |
|
Customer service and billing
expenses, as adjusted, per
average subscriber per month (4)(6) |
|
$ |
1.10 |
|
|
$ |
1.37 |
|
|
$ |
2.29 |
|
Total revenue |
|
$ |
922,066 |
|
|
$ |
637,235 |
|
|
$ |
242,245 |
|
Free cash flow (5)(6) |
|
$ |
(218,624 |
) |
|
$ |
(500,715 |
) |
|
$ |
(333,922 |
) |
Adjusted loss from operations (7) |
|
$ |
(327,410 |
) |
|
$ |
(513,140 |
) |
|
$ |
(567,507 |
) |
Net loss |
|
$ |
(565,252 |
) |
|
$ |
(1,104,867 |
) |
|
$ |
(862,997 |
) |
29
ARPU. ARPU for the year ended December 31, 2007 was $10.46 down from $11.01 for the year
ended December 31, 2006. This decrease in ARPU was driven by an increase in the mix of prepaid
subscriptions for vehicles that have not yet 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 and the
identification of additional revenue streams from subscribers.
SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber
addition was $101 and $114 for the years ended December 31, 2007 and 2006, respectively. The
decline was primarily driven by lower product costs, offset by a higher mix of OEM gross additions
and FM transmitter costs in 2006.
We expect SAC, as adjusted, per gross subscriber addition to decline as the costs of
subsidized components of SIRIUS radios decrease in the future. Competitive forces and changes in
retailer promotional strategies, including a change in channel mix of gross additions from retail
to OEM, may result in increases in SAC, as adjusted, per gross subscriber addition.
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 20% to $1.10
for the year ended December 31, 2007 compared with $1.37 for the year ended December 31, 2006. We
expect our costs per subscriber to continue 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.
Adjusted Loss from Operations. For the years ended December 31, 2007 and 2006, adjusted loss
from operations was $327,410 and $513,140, respectively, a decrease of $185,730. The decrease was
primarily driven by a 45% increase in total revenue of $284,831, which more than offset the 9%
increase in operating expenses of $99,101.
Net Loss. For the years ended December 31, 2007 and 2006, net loss was $565,252 and
$1,104,867, respectively, a decrease of $539,615. The decrease was driven by a decrease in our
stock-based compensation expense of $359,018 as well as an increase in total revenue of $284,831,
offset by a $99,101 increase in our operating expenses to support the growth of our business.
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006 and Year Ended December 31,
2006 Compared with Year Ended December 31, 2005
Revenue
Subscriber Revenue. Subscriber revenue includes subscription fees, activation fees and the
effects of rebates.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, subscriber revenue
was $854,933 and $575,404, respectively, an increase of 49% or $279,529. The increase
was attributable to the 38% growth of subscribers to our service. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, subscriber revenue
was $575,404 and $223,615, respectively, an increase of 157% or $351,789. The increase
was attributable to the growth of subscribers to our service. |
The following table contains a breakdown of our subscriber revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Subscription fees |
|
$ |
853,832 |
|
|
$ |
572,386 |
|
|
$ |
233,635 |
|
Activation fees |
|
|
20,878 |
|
|
|
15,612 |
|
|
|
6,790 |
|
Effect of rebates |
|
|
(19,777 |
) |
|
|
(12,594 |
) |
|
|
(16,810 |
) |
|
|
|
|
|
|
|
|
|
|
Total subscriber
revenue |
|
$ |
854,933 |
|
|
$ |
575,404 |
|
|
$ |
223,615 |
|
|
|
|
|
|
|
|
|
|
|
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, churn,
plan mix, subscription prices and the identification of additional revenue streams from
subscribers.
Advertising Revenue. Advertising revenue includes the sale of advertising on some of 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.
30
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, net advertising
revenue was $34,192 and $31,044, respectively, an increase of $3,148. The increase was
primarily attributable to more attractive programming such as NASCAR. |
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, net advertising
revenue was $31,044 and $6,131, respectively, an increase of $24,913. More attractive
programming and increased advertiser interest resulted in an increase in spots sold. |
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.
Equipment Revenue. Equipment revenue includes revenue from the direct sale of SIRIUS radios
and accessories through our website, net of discounts and rebates.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, equipment revenue
was $29,281 and $26,798, respectively, an increase of $2,483. The increase was the
result of higher sales through our direct to consumer distribution channel, offset by
the effects of promotional discounts and rebates. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, equipment revenue
was $26,798 and $12,271, respectively, an increase of $14,527. 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 continue to introduce new
products and promotions and as
sales through our direct to consumer distribution channel grow.
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.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, satellite and
transmission expenses were $27,907 and $41,797, respectively, a decrease of $13,890.
Excluding stock-based compensation expense of $2,198 and $2,568 for the years ended
December 31, 2007 and 2006, respectively, satellite and transmission expenses decreased
$13,520 from $39,229 to $25,709. This decrease of $13,520 was a result of sales of
certain satellite parts and lower maintenance and utility expense in 2007; and 2006
included an impairment charge associated with certain satellite long-lead time parts we
purchased in 1999 that we no longer need. As of December 31, 2007 and 2006, we had 124
and 127 terrestrial repeaters, respectively, in operation. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, satellite and
transmission expenses were $41,797 and $29,798, respectively, an increase of $11,999.
Excluding stock-based compensation expense of $2,568 and $1,942 for the years ended
December 31, 2006 and 2005, respectively, satellite and transmission expenses increased
$11,373 from $27,856 to $39,229. This increase of $11,373 was primarily attributable to
an impairment charge associated with certain satellite long-lead time parts we purchased
in 1999 that we no longer need. As of December 31, 2006 and 2005, we had 127 and 140
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.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, programming and
content expenses were $236,059 and $520,424, respectively, a decrease of $284,365.
Excluding stock-based compensation expense of $9,643 and $321,774 for the years ended
December 31, 2007 and 2006, respectively, programming and content expenses increased
$27,766 from $198,650 to $226,416. This increase of $27,766 was primarily attributable
to talent and license fees associated with new programming agreements, including NASCAR,
and compensation related costs for additions to headcount. Stock-based compensation
expense decreased $312,131 primarily due to expense associated with shares of our common
stock delivered to Howard Stern and his agent in 2006 upon the satisfaction of
performance targets. |
31
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, programming and
content expenses were $520,424 and $100,784, respectively, an increase of $419,640.
Excluding stock-based compensation expense of $321,774 and $19,469 for the years ended
December 31, 2006 and 2005, respectively, programming and content expenses increased
$117,335 from $81,315 to $198,650. This increase of $117,335 was primarily attributable
to talent and
license fees associated with new programming; broadcast and webstreaming royalties as
a result of the increase in subscribers; and compensation related costs for additions
to headcount. Stock-based compensation expense increased $302,305 primarily due to
$224,813 associated with 34,375,000 shares of our common stock delivered to Howard
Stern and his agent in January 2006. In addition, in 2006 we recorded expense
associated with common stock earned upon the satisfaction of performance targets for
which shares of our common stock were delivered in the first quarter of 2007. |
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.
Future expense associated with stock-based compensation is contingent upon a variety 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.
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.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, revenue share and
royalties were $146,715 and $69,918, respectively, an increase of $76,797, or 110%. This
increase was primarily attributable to the determination by the Copyright Royalty Board of the royalty rate under the
statutory license covering the performance of sound recordings. The 2007 royalty rate
of 6% of gross revenue resulted in royalty expense of approximately $48,100, of which
approximately $25,900 was recorded in the fourth quarter. The growth in revenues and
increase in the our OEM subscriber base also contributed to the increase in revenue
share and royalties. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, revenue share and
royalties were $69,918 and $32,358, respectively, an increase of
$37,560, or 11.6%. This
increase was primarily attributable to the growth in our revenue, increased broadcast
royalties, and an increase in our OEM subscribers. |
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 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.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, customer service
and billing expenses were $93,817 and $76,462, respectively, an increase of $17,355.
Excluding stock-based compensation expense of $708 and $812 for the years ended December
31, 2007 and 2006, respectively, customer service and billing expenses increased $17,459
from $75,650 to $93,109. This increase of $17,459 was primarily due to call center
operating costs necessary to accommodate our subscriber base, transaction fees due to
the addition of new subscribers, and an increase in bad debt expense. Customer service
and billing expenses, excluding stock-based compensation expense, increased 23% compared
with an increase in our subscribers of 38% year over year. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, customer service
and billing expenses were $76,462 and $51,513, respectively, an increase of $24,949.
Excluding stock-based compensation expense of $812 and $549 for the years ended December
31, 2006 and 2005, respectively, customer service and billing expenses increased $24,686
from $50,964 to $75,650. This increase of $24,686 was primarily due to call center
operating costs necessary to accommodate our subscriber base and transaction fees due to
the addition of new subscribers. Customer service and billing expenses, excluding
stock-based compensation expense, increased 48% compared with an increase in our
subscribers of 82% year over year. |
We expect our customer care and billing expenses, excluding stock-based compensation expense,
to increase as our subscriber base grows due to increased call center operating costs and
transaction fees necessary to serve a larger subscriber base and bad debt expense.
32
Cost of Equipment. Cost of equipment includes costs for SIRIUS radios and accessories sold
through our direct to consumer distribution channel.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, cost of equipment
was $45,458 and $35,233, respectively, an increase of $10,225. The increase was
primarily attributable to higher sales volume; offset by a decline in per unit costs. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, cost of equipment
was $35,233 and $11,827, respectively, an increase of $23,406. The increase was
primarily attributable to higher sales volume and per unit costs as we continued to
introduce new products through our direct to consumer distribution channel. |
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 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.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, sales and marketing
expenses were $173,572 and $203,682, respectively, a decrease of $30,110. Excluding
stock-based compensation expense of $15,607 and $19,543 for the years ended December 31,
2007 and 2006, respectively, sales and marketing expenses decreased $26,174 from
$184,139 to $157,965. This decrease of $26,174 was primarily due to lower consumer
marketing and advertising and reduced cooperative marketing spend with our distributors
offset by higher compensation related costs. Sales and marketing expenses, excluding
stock-based compensation expense, decreased 14% compared with a 46% increase in total
revenue from $637,235 for the year ended December 31, 2006 to
$922,066 for the year
ended December 31, 2007. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, sales and marketing
expenses were $203,682 and $197,675, respectively, an increase of $6,007. Excluding
stock-based compensation expense of $19,543 and $42,149 for the years ended December 31,
2006 and 2005, respectively, sales and marketing expenses increased $28,613 from
$155,526 to $184,139. This increase of $28,613 was primarily due to increased
cooperative marketing and advertising costs and compensation related costs. This 18%
increase in sales and marketing expenses, excluding stock-based compensation expense,
compared with a 163% increase in total revenue from $242,245 for the year ended December
31, 2005 to $637,235 for the year ended December 31, 2006. Stock-based compensation
expense decreased $22,606 primarily due to the timing of third parties achieving
milestones and changes in the fair market value of such awards. |
We expect sales and marketing expenses, excluding stock-based compensation expense, to
increase as we expand our subscriber retention efforts and continue to build brand awareness
through national advertising and promotional activities.
Future expense associated with stock-based compensation is contingent upon a variety 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.
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.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, subscriber
acquisition costs were $407,642 and $451,614, respectively, a decrease of 10% or
$43,972. Excluding stock-based compensation expense of $2,843 and $31,898 for the years
ended December 31, 2007 and 2006, respectively, subscriber acquisition costs decreased
$14,917, from $419,716 to $404,799. This decrease was primarily attributable to lower
chipset subsidies and commission costs offset by higher OEM hardware subsidies.
Stock-based compensation expense decreased $29,055 primarily due to the timing of third
parties achieving milestones and changes in the fair market value of such awards.
|
33
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, subscriber
acquisition costs were $451,614 and $399,350, respectively, an increase of 13% or
$52,264. Excluding stock-based compensation expense of $31,898 and $49,709 for the years
ended December 31, 2006 and 2005, respectively, subscriber acquisition costs increased
20%, or $70,075, from $349,641 to $419,716. This increase was primarily attributable
to increased OEM hardware subsidies due to higher production volume and costs related to
FM transmitter compliance with FCC rules, offset by decreased aftermarket hardware
subsidies as we continued to reduce manufacturing and chip set costs.
Stock-based compensation expense decreased $17,811 primarily due to the timing of
third parties achieving milestones and changes in the fair market value of such
awards. |
We expect total subscriber acquisition costs,
excluding stock-based compensation expense, to
be consistent with 2007 in 2008 as increases in our gross subscriber additions are offset by
continuing declines in the costs of subsidized components of SIRIUS radios. We intend to continue
to offer subsidies, commissions and other incentives to acquire subscribers.
Future expense associated with stock-based compensation is contingent upon a variety 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.
General and Administrative. General and administrative expenses include rent and occupancy,
finance, legal, human resources, information technology and investor relations costs.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, general and
administrative expenses were $155,863 and $129,953, respectively, an increase of
$25,910. Excluding stock-based compensation expense of $44,317 and $49,928 for the years
ended December 31, 2007 and 2006, respectively, general and administrative expenses
increased $31,521 from $80,025 to $111,546. This increase of $31,521 was primarily a
result of legal fees associated with increased litigation, including the CRB proceeding,
and employment-related costs to support the growth of our business. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, general and
administrative expenses were $129,953 and $83,244, respectively, an increase of $46,709.
Excluding stock-based compensation expense of $49,928 and $27,724 for the years ended
December 31, 2006 and 2005, respectively, general and administrative expenses increased
$24,505 from $55,520 to $80,025. This increase of $24,505 was primarily a result of
legal fees and employment-related costs. Stock-based compensation expense increased
$22,204 primarily as a result of the adoption of SFAS No. 123R, offset by a decrease in
expense for restricted stock units that vested in the first quarter of 2006. |
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 variety 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.
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.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, engineering, design
and development expenses were $41,343 and $70,127, respectively, a decrease of $28,784.
Excluding stock-based compensation expense of $3,584 and $11,395 for the years ended
December 31, 2007 and 2006, respectively, engineering, design and development expenses
decreased $20,973 from $58,732 to $37,759. This decrease of $20,973 was primarily
attributable to reduced OEM tooling and manufacturing upgrades associated with the
factory installation of SIRIUS radios in additional vehicle models offset by higher
employment related costs. Stock-based compensation expense decreased $7,811 primarily
due to third parties achieving certain production milestones. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, engineering, design
and development expenses were $70,127 and $66,281, respectively, an increase of $3,846.
Excluding stock-based compensation expense of $11,395 and $21,536 for the years ended
December 31, 2006 and 2005, respectively, engineering, design and development expenses
increased $13,987 from $44,745 to $58,732. This increase of $13,987 was primarily
attributable to OEM tooling and manufacturing upgrades and receiver integration for
factory installations of SIRIUS radios, development costs associated with the
manufacturing of SIRIUS radios and additional personnel-related costs to support
research and development efforts. Stock-based compensation expense decreased $10,141
primarily due to third parties achieving certain production milestones. |
34
We expect engineering, design and development expenses, excluding stock-based compensation
expense, to remain relatively constant.
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.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, interest and
investment income was $20,570 and $33,320, respectively, a decrease of $12,750. The
decrease was primarily attributable to a lower annual average cash balance in 2007 than
2006 and higher interest rates in 2006 as a result of our investments
in auction rate securities. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, interest and
investment income was $33,320 and $26,878, respectively, an increase of $6,442. The
increase was attributable to a combination of higher overall interest rates and our
decision to invest in financial instruments bearing higher interest rates. |
Interest Expense. Interest expense includes interest on outstanding debt, offset by interest
capitalized in connection with the construction of our fifth and sixth satellites and a launch
vehicle.
|
|
|
2007 vs 2006: For the years ended December 31, 2007 and 2006, interest expense
was $70,328 and $64,032, respectively, an increase of $6,296. The increase was primarily
the result of the interest expense associated with our new term loan, offset by interest capitalized in 2007 associated with satellite construction and a related launch
vehicle. |
|
|
|
|
2006 vs 2005: For the years ended December 31, 2006 and 2005, interest expense
was $64,032 and $45,361, respectively, an increase of $18,671. The increase was
primarily the result of a full year of interest expense for our 95/8% Senior Notes due
2013 issued in August 2005, offset by a decrease in interest expense both as a result of
the 2005 redemption of our 15% Senior Secured Discount Notes due 2007 and our 141/2%
Senior Secured Notes due 2009 and $4,205 of interest capitalized for the construction
and launch of our fifth satellite. |
Loss from Redemption of Debt. For the year ended December 31, 2005, a loss from redemption of
debt of $6,214 was recognized in connection with the redemption of our 15% Senior Secured Discount
Notes due 2007 and our 141/2% Senior Secured Notes due 2009, including a redemption premium of $5,502
and the write-off of unamortized debt issuance costs of $712.
Equity in Net Loss of Affiliate. Equity in net loss of affiliate includes our share of SIRIUS
Canadas net loss. We recorded $0 and $4,445 for the years ended December 31, 2007 and 2006,
respectively, for our share of SIRIUS Canadas net loss. We recorded $4,445 and $6,938 for the
years ended December 31, 2006 and 2005, respectively, for our share of SIRIUS Canadas net loss.
As of December 31, 2007, our investment in SIRIUS Canada was $0 as we have 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 provide additional funding.
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.
|
|
|
2007 vs 2006: We recorded income tax expense of $2,435 and $2,065 for the years
ended December 31, 2007 and 2006, respectively. |
|
|
|
|
2006 vs 2005: We recorded income tax expense of $2,065 and $2,311 for the years
ended December 31, 2006 and 2005, respectively. |
35
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 Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Subscriber revenue |
|
$ |
854,933 |
|
|
$ |
575,404 |
|
|
$ |
223,615 |
|
Net advertising revenue |
|
|
34,192 |
|
|
|
31,044 |
|
|
|
6,131 |
|
|
|
|
|
|
|
|
|
|
|
Total subscriber and net
advertising revenue |
|
$ |
889,125 |
|
|
$ |
606,448 |
|
|
$ |
229,746 |
|
|
|
|
|
|
|
|
|
|
|
Daily weighted average number of
subscribers |
|
|
7,082,927 |
|
|
|
4,591,693 |
|
|
|
1,851,149 |
|
ARPU |
|
$ |
10.46 |
|
|
$ |
11.01 |
|
|
$ |
10.34 |
|
|
|
|
(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 Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Subscriber acquisition cost |
|
$ |
407,642 |
|
|
$ |
451,614 |
|
|
$ |
399,350 |
|
Less: stock-based compensation |
|
|
(2,843 |
) |
|
|
(31,898 |
) |
|
|
(49,709 |
) |
Add: margin from direct sale of SIRIUS
radios and accessories |
|
|
16,177 |
|
|
|
8,435 |
|
|
|
(444 |
) |
|
|
|
|
|
|
|
|
|
|
SAC, as adjusted |
|
$ |
420,976 |
|
|
$ |
428,151 |
|
|
$ |
349,197 |
|
|
|
|
|
|
|
|
|
|
|
Gross subscriber additions |
|
|
4,183,901 |
|
|
|
3,758,163 |
|
|
|
2,519,301 |
|
SAC, as adjusted, per gross subscriber
addition |
|
$ |
101 |
|
|
$ |
114 |
|
|
$ |
139 |
|
|
|
|
(4) |
|
Customer service and billing expenses, as adjusted, per
average subscriber per month 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 per month is calculated as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Customer service and billing expenses |
|
$ |
93,817 |
|
|
$ |
76,462 |
|
|
$ |
51,513 |
|
Less: stock-based compensation |
|
|
(708 |
) |
|
|
(812 |
) |
|
|
(549 |
) |
|
|
|
|
|
|
|
|
|
|
Customer service and billing expenses,
as adjusted |
|
$ |
93,109 |
|
|
$ |
75,650 |
|
|
$ |
50,964 |
|
|
|
|
|
|
|
|
|
|
|
Daily weighted average number of
subscribers |
|
|
7,082,927 |
|
|
|
4,591,693 |
|
|
|
1,851,149 |
|
Customer service and billing expenses,
as adjusted, per average subscriber per month |
|
$ |
1.10 |
|
|
$ |
1.37 |
|
|
$ |
2.29 |
|
|
|
|
(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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net cash used in operating activities |
|
$ |
(148,766 |
) |
|
$ |
(421,702 |
) |
|
$ |
(269,994 |
) |
Additions to property and equipment |
|
|
(65,264 |
) |
|
|
(92,674 |
) |
|
|
(49,888 |
) |
Merger related costs |
|
|
(29,444 |
) |
|
|
|
|
|
|
|
|
Restricted and other investment activity |
|
|
24,850 |
|
|
|
13,661 |
|
|
|
(14,040 |
) |
|
|
|
|
|
|
|
|
|
|
Free cash flow |
|
$ |
(218,624 |
) |
|
$ |
(500,715 |
) |
|
$ |
(333,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
Average monthly churn; ARPU; SAC, as adjusted, per gross subscriber addition; customer
service and billing expenses, as adjusted, per average subscriber per month; 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; 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 |
36
|
|
|
|
|
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, loss from redemption of debt and equity in net loss of affiliate;
depreciation; impairment charges; and stock-based compensation expense as adjusted loss from
operations. Adjusted loss from operations is not a measure of financial performance under
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 period to 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
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 Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net loss |
|
$ |
(565,252 |
) |
|
$ |
(1,104,867 |
) |
|
$ |
(862,997 |
) |
Impairment |
|
|
|
|
|
|
10,917 |
|
|
|
|
|
Depreciation |
|
|
106,780 |
|
|
|
105,749 |
|
|
|
98,555 |
|
Stock-based compensation |
|
|
78,900 |
|
|
|
437,918 |
|
|
|
163,078 |
|
Other expense |
|
|
49,727 |
|
|
|
35,078 |
|
|
|
31,546 |
|
Income tax expense |
|
|
2,435 |
|
|
|
2,065 |
|
|
|
2,311 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted loss from operations |
|
$ |
(327,410 |
) |
|
$ |
(513,140 |
) |
|
$ |
(567,507 |
) |
|
|
|
|
|
|
|
|
|
|
37
Liquidity and Capital Resources
Cash Flows for the Year Ended December 31, 2007 Compared with Year Ended December 31, 2006 and for
the Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
As of December 31, 2007 and 2006, we had $438,820 and $393,421, respectively, in cash and cash
equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
Variances |
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 vs 2006 |
|
|
2006 vs 2005 |
|
Net cash used in operating activities |
|
$ |
(148,766 |
) |
|
$ |
(421,702 |
) |
|
$ |
(269,994 |
) |
|
$ |
272,936 |
|
|
$ |
(151,708 |
) |
Net cash (used in) provided by investing activities |
|
|
(54,186 |
) |
|
|
27,329 |
|
|
|
(175,821 |
) |
|
|
(81,515 |
) |
|
|
203,150 |
|
Net cash provided by financing activities |
|
|
248,351 |
|
|
|
25,787 |
|
|
|
453,931 |
|
|
|
222,564 |
|
|
|
(428,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
45,399 |
|
|
|
(368,586 |
) |
|
|
8,116 |
|
|
|
413,985 |
|
|
|
(376,702 |
) |
Cash and cash equivalents at beginning of period |
|
|
393,421 |
|
|
|
762,007 |
|
|
|
753,891 |
|
|
|
(368,586 |
) |
|
|
8,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
438,820 |
|
|
$ |
393,421 |
|
|
$ |
762,007 |
|
|
$ |
45,399 |
|
|
$ |
(368,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities.
|
|
|
2007 vs 2006: Net cash used in operating activities decreased $272,936 to
$148,766 for the year ended December 31, 2007 from $421,702 for the year ended December
31, 2006. Such decrease in the net outflows of cash was attributable
to the improvement in adjusted net loss of $185,730; higher purchase of
inventory in 2006 and timing of programming and distribution arrangements in 2006. |
|
|
|
|
2006 vs 2005: Net cash used in operating activities increased $151,708 to
$421,702 for the year ended December 31, 2006 from $269,994 for the year ended December
31, 2005. Such increase in the net outflows of cash was attributable to payments for
increased operating expenses to support the growth of our subscriber base from 3,316,560
subscribers at December 31, 2005 to 6,024,555 subscribers at December 31, 2006; higher
purchases of inventory to support production of SIRIUS radios and higher sales volumes
through our direct to consumer distribution channel; and prepayments for new programming
and distribution arrangements entered into in 2006; offset by an increase in cash collected for
subscribers electing annual and other prepaid subscription programs compared with the
prior year. |
Net Cash (Used in) Provided by Investing Activities.
|
|
|
2007 vs 2006: Net cash used in investing activities was $54,186 for the year
ended December 31, 2007 compared with net cash provided by investing activities of
$27,329 for the year ended December 31, 2006. The $81,515
decrease in cash provided was primarily a result of sales of auction rate
securities in 2006; $29,444 of merger related costs incurred in 2007;
offset by a decrease in capital expenditures in 2007 of $27,410
associated with our satellite construction and launch vehicle. |
|
|
|
|
2006 vs 2005: Net cash provided by investing activities was $27,329 for the year
ended December 31, 2006 compared with net cash used in investing activities of $175,821
for the year ended December 31, 2005. The $203,150 increase was primarily a result of
sales of auction rate securities in 2006, offset by an increase in capital expenditures
from $49,888 for the year ended December 31, 2005 to $92,674 for the year ended December
31, 2006 primarily as a result of costs associated with our satellite construction and
launch vehicle. |
We will incur significant capital expenditures to construct and launch our fifth and sixth
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.
Net Cash Provided by Financing Activities
|
|
|
2007 vs 2006: Net cash provided by financing activities increased $222,564 to
$248,351 for the year ended December 31, 2007 from $25,787 for the year ended December
31, 2006. The increase was a result of additional proceeds, net of related costs and
principal repayments, from the new term loan entered into in June 2007. |
|
|
|
|
2006 vs 2005: Net cash provided by financing activities decreased $428,144 to
$25,787 for the year ended December 31, 2006 from $453,931 for the year ended December
31, 2005. The decrease was primarily a result of the offering of $500,000 in aggregate
principal amount of our 95/8% Senior Notes due 2013 in August 2005 resulting in net
proceeds to us of $493,005. |
Financings and Capital Requirements
|
|
We have historically financed our operations through the sale of debt and equity
securities. |
38
Future Liquidity and Capital Resource Requirements
In 2004, we issued $300 million 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 theses 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.
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 June 2007, we amended and restated our Credit Agreement with Space Systems/Loral (the
Loral Credit Agreement). Under the 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 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 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 no current plans to draw under this
Credit Agreement.
In June 2007, we also 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
wholly owned subsidiaries, Satellite CD Radio, Inc. and Sirius Asset Management Company LLC (the
Guarantors). The Term Credit Agreement is secured by a lien on substantially all of our and the
Guarantors assets, including our 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 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.
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 that includes one or all of the following: (1) over time,
generally three to five years from the date of grant; (2) on a specific date in future periods with
acceleration
39
to earlier periods if performance criteria are satisfied; or (3) as certain
performance targets set at the time of grant are achieved. 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 December 31, 2007, approximately 83,223,000 stock options, shares of restricted stock
and restricted stock units were outstanding. As of December 31,
2007, approximately 58,810,000 shares of our common stock were available for grant under the 2003 Plan. During the year ended
December 31, 2007, employees exercised 2,859,232 stock options at exercise prices ranging from
$2.79 to $4.16 per share, resulting in proceeds to us of $3,532. The exercise of the remaining
outstanding, vested options could result in an inflow of cash in future periods.
Contractual Cash Commitments
We have entered into various contracts that contain significant cash obligations. These cash
obligations could vary in future periods if we change our business plan or strategy, which could
include significant additions to our programming, infrastructure or distribution. The following
table summarizes our expected contractual cash commitments as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Thereafter |
|
|
Total |
|
Debt obligations |
|
$ |
35,801 |
|
|
$ |
304,242 |
|
|
$ |
2,500 |
|
|
$ |
232,500 |
|
|
$ |
239,375 |
|
|
$ |
500,000 |
|
|
$ |
1,314,418 |
|
Cash interest payments |
|
|
82,331 |
|
|
|
77,871 |
|
|
|
73,435 |
|
|
|
72,963 |
|
|
|
58,526 |
|
|
|
49,195 |
|
|
|
414,321 |
|
Lease obligations |
|
|
12,261 |
|
|
|
12,577 |
|
|
|
12,189 |
|
|
|
11,401 |
|
|
|
11,302 |
|
|
|
22,133 |
|
|
|
81,863 |
|
Satellite and transmission |
|
|
159,824 |
|
|
|
64,312 |
|
|
|
28,776 |
|
|
|
7,459 |
|
|
|
7,678 |
|
|
|
41,048 |
|
|
|
309,097 |
|
Programming and content |
|
|
150,224 |
|
|
|
168,197 |
|
|
|
160,395 |
|
|
|
42,072 |
|
|
|
19,423 |
|
|
|
9,667 |
|
|
|
549,978 |
|
Marketing and distribution |
|
|
69,770 |
|
|
|
22,903 |
|
|
|
26,153 |
|
|
|
18,173 |
|
|
|
5,500 |
|
|
|
|
|
|
|
142,499 |
|
Chip set development and production |
|
|
3,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,681 |
|
Other |
|
|
12,629 |
|
|
|
650 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash commitments |
|
$ |
526,521 |
|
|
$ |
650,752 |
|
|
$ |
303,450 |
|
|
$ |
384,568 |
|
|
$ |
341,804 |
|
|
$ |
622,043 |
|
|
$ |
2,829,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations. Debt obligations include principal payments on our outstanding debt. The
amounts presented assume that the debt will not be converted to common stock since conversion is
outside of our control.
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. We have also entered into an agreement with Space
Systems/Loral to design and construct our fifth and sixth satellites. Construction of the fifth
satellite is expected to be completed in the second quarter of 2009. We plan to launch our fifth
satellite on a Proton rocket under a contract we executed in 2006 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.
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. In addition, certain
programming and content agreements 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.
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 and to provide billing and subscriber management services. Amounts associated with these
agreements are included in the commitments table.
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.
40
Under the terms of a joint development agreement with XM Radio, 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 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 December 31,
2007 and 2006, $53,000 and $77,850, respectively, were classified as restricted investments as a
result of our reimbursement obligations under these letters of credit and escrow deposits.
As of December 31, 2007, we have not entered into any off-balance sheet arrangements or
transactions.
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. We are currently evaluating the impact of the adoption, if any,
that SFAS No. 157 will have 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. We are currently
evaluating the effects that SFAS No. 159 will have 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.
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. We are
currently evaluating the impact that the adoption of EITF 07-03 will have on
our consolidated results of operations and financial position.
Item 7A. Quantitative and Qualitative Disclosure About Market Risks
As of December 31, 2007, 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 United States government notes and
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 debt includes fixed interest rates and the fair market value of the debt is sensitive to
changes in interest rates. Under our current policies, we do not use interest rate derivative
instruments to manage our exposure to interest rate fluctuations.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements contained in Item 15 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
41
Item 9A. Controls and Procedures
Controls and Procedures
As of December 31, 2007, 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 December 31, 2007. There has been no change
in our internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting during the quarter ended
December 31, 2007.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Exchange Act. We have performed an
evaluation under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of our internal control
over financial reporting. Our management used the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations to perform this evaluation. Based on
that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer,
concluded that our internal control over financial reporting was effective as of December 31, 2007.
Ernst & Young, LLP, our independent registered public accounting firm, who audited the
consolidated financial statements included in this Annual Report on Form 10-K, has issued an
attestation report on the effectiveness of our internal control over financial reporting as of
December 31, 2007, a copy of which is included in this Annual Report on Form 10-K.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item for executive officers is set forth under the heading
Executive Officers of the Registrant in Part I, Item 1, of this report.
Item 11. Executive Compensation
The information required by this item is included in our definitive proxy statement for our
2008 annual meeting of stockholders scheduled to be held on Tuesday, May 20, 2008, and is incorporated herein
by reference.
42
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is included in our definitive proxy statement for our
2008 annual meeting of stockholders scheduled to be held on Tuesday, May 20, 2008, and is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is included in our definitive proxy statement for our
2008 annual meeting of stockholders scheduled to be held on Tuesday, May 20, 2008, and is incorporated herein
by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item is included in our definitive proxy statement for our
2008 annual meeting of stockholders scheduled to be held on Tuesday, May 20, 2008, and is incorporated herein
by reference.
We have scheduled our 2008 annual meeting of stockholders
for Tuesday, May 20, 2008. In the event that our pending merger with XM Radio is not consummated in the coming weeks, we may decide to
reschedule our annual meeting of stockholders to later this year to allow stockholders to vote on our new board of directors. In the event we reschedule our
annual meeting, we will file an amendment to this Annual Report on Form 10-K to include the information required by
Items 10, 11, 12, 13 and 14 of Part III of this report.
PART IV
Item 15. Exhibits, Financial Statement Schedules
|
(a) |
|
Financial Statements, Financial Statement Schedules and Exhibits |
|
(1) |
|
Financial Statements |
|
|
|
|
See Index to Consolidated Financial Statements appearing on page F-1. |
|
|
(2) |
|
Financial Statement Schedules |
|
|
|
|
See Index to Consolidated Financial Statements appearing on page F-1. |
|
|
(3) |
|
Exhibits |
See Exhibit Index appearing on pages E-1 through E-3 for a list of exhibits filed or
incorporated by reference as part of this Annual Report on Form 10-K.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on this 28th day of February 2008.
|
|
|
|
|
|
Sirius Satellite Radio Inc.
|
|
|
By: |
/s/ David J. Frear
|
|
|
|
David J. Frear |
|
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
/s/ Joseph P. Clayton
(Joseph P. Clayton) |
|
Chairman of the Board of
Directors and Director
|
|
February 28, 2008 |
/s/ Mel Karmazin
(Mel Karmazin) |
|
Chief Executive Officer
and Director
(Principal Executive
Officer)
|
|
February 28, 2008 |
/s/ David J. Frear
(David J. Frear) |
|
Executive Vice President
and Chief Financial
Officer (Principal
Financial Officer)
|
|
February 28, 2008 |
/s/ Adrienne E. Calderone
(Adrienne E. Calderone) |
|
Senior Vice President and
Corporate Controller
(Principal Accounting
Officer)
|
|
February 28, 2008 |
/s/ Leon D. Black
(Leon D. Black) |
|
Director
|
|
February 28, 2008 |
/s/ Lawrence F. Gilberti
(Lawrence F. Gilberti) |
|
Director
|
|
February 28, 2008 |
/s/ James P. Holden
(James P. Holden) |
|
Director
|
|
February 28, 2008 |
/s/ Warren N. Lieberfarb
(Warren N. Lieberfarb) |
|
Director
|
|
February 28, 2008 |
/s/ Michael J. McGuiness
(Michael J. McGuiness) |
|
Director
|
|
February 28, 2008 |
/s/ James F. Mooney
(James F. Mooney) |
|
Director
|
|
February 28, 2008 |
44
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Sirius Satellite Radio Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Sirius Satellite
Radio Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders equity, and cash flows
for each of the three years in the period ended December 31, 2007. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sirius Satellite Radio Inc.
and Subsidiaries at December 31, 2007 and 2006, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Notes 2 and 11 to the consolidated financial statements, Sirius Satellite Radio Inc. adopted Statement of Financial Accounting Standard
No. 123 (revised 2004), Share-Based Payment, effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Sirius Satellite Radio Inc.s internal control
over financial reporting as of December 31, 2007, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 29, 2008
expressed an unqualified opinion thereon.
/s/ Ernst
& Young, LLP
New York, NY
February 29, 2008
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Sirius Satellite Radio Inc.:
We have audited Sirius Satellite Radio Inc.s internal control over financial reporting
as of December 31, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Sirius Satellite Radio Inc.s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included in the
accompanying Item 9A. Our responsibility is to express an opinion on the companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Sirius Satellite Radio Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Sirius Satellite Radio
Inc. as of December 31, 2007 and 2006, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three years in
the period ended December 31, 2007 of Sirius Satellite Radio Inc. and our report dated
February 29, 2008 expressed an unqualified opinion thereon.
/s/ Ernst
& Young, LLP
New York, NY
February 29, 2008
F-3
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber revenue, including effects of rebates |
|
$ |
854,933 |
|
|
$ |
575,404 |
|
|
$ |
223,615 |
|
Advertising revenue, net of agency fees |
|
|
34,192 |
|
|
|
31,044 |
|
|
|
6,131 |
|
Equipment revenue, net of discounts and rebates |
|
|
29,281 |
|
|
|
26,798 |
|
|
|
12,271 |
|
Other revenue |
|
|
3,660 |
|
|
|
3,989 |
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
922,066 |
|
|
|
637,235 |
|
|
|
242,245 |
|
Operating expenses (excludes depreciation shown separately below) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services: |
|
|
|
|
|
|
|
|
|
|
|
|
Satellite and transmission |
|
|
27,907 |
|
|
|
41,797 |
|
|
|
29,798 |
|
Programming and content |
|
|
236,059 |
|
|
|
520,424 |
|
|
|
100,784 |
|
Revenue share and royalties |
|
|
146,715 |
|
|
|
69,918 |
|
|
|
32,358 |
|
Customer service and billing |
|
|
93,817 |
|
|
|
76,462 |
|
|
|
51,513 |
|
Cost of equipment |
|
|
45,458 |
|
|
|
35,233 |
|
|
|
11,827 |
|
Sales and marketing |
|
|
173,572 |
|
|
|
203,682 |
|
|
|
197,675 |
|
Subscriber acquisition costs |
|
|
407,642 |
|
|
|
451,614 |
|
|
|
399,350 |
|
General and administrative |
|
|
155,863 |
|
|
|
129,953 |
|
|
|
83,244 |
|
Engineering, design and development |
|
|
41,343 |
|
|
|
70,127 |
|
|
|
66,281 |
|
Depreciation |
|
|
106,780 |
|
|
|
105,749 |
|
|
|
98,555 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,435,156 |
|
|
|
1,704,959 |
|
|
|
1,071,385 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(513,090 |
) |
|
|
(1,067,724 |
) |
|
|
(829,140 |
) |
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and investment income |
|
|
20,570 |
|
|
|
33,320 |
|
|
|
26,878 |
|
Interest expense, net of amounts capitalized |
|
|
(70,328 |
) |
|
|
(64,032 |
) |
|
|
(45,361 |
) |
Loss from redemption of debt |
|
|
|
|
|
|
|
|
|
|
(6,214 |
) |
Equity in net loss of affiliate |
|
|
|
|
|
|
(4,445 |
) |
|
|
(6,938 |
) |
Other income |
|
|
31 |
|
|
|
79 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(49,727 |
) |
|
|
(35,078 |
) |
|
|
(31,546 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(562,817 |
) |
|
|
(1,102,802 |
) |
|
|
(860,686 |
) |
Income tax expense |
|
|
(2,435 |
) |
|
|
(2,065 |
) |
|
|
(2,311 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(565,252 |
) |
|
$ |
(1,104,867 |
) |
|
$ |
(862,997 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share (basic and diluted) |
|
$ |
(0.39 |
) |
|
$ |
(0.79 |
) |
|
$ |
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic and diluted) |
|
|
1,462,967 |
|
|
|
1,402,619 |
|
|
|
1,325,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts related to stock-based compensation included in operating expenses were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite and transmission |
|
$ |
2,198 |
|
|
$ |
2,568 |
|
|
$ |
1,942 |
|
Programming and content |
|
|
9,643 |
|
|
|
321,774 |
|
|
|
19,469 |
|
Customer service and billing |
|
|
708 |
|
|
|
812 |
|
|
|
549 |
|
Sales and marketing |
|
|
15,607 |
|
|
|
19,543 |
|
|
|
42,149 |
|
Subscriber acquisition costs |
|
|
2,843 |
|
|
|
31,898 |
|
|
|
49,709 |
|
General and administrative |
|
|
44,317 |
|
|
|
49,928 |
|
|
|
27,724 |
|
Engineering, design and development |
|
|
3,584 |
|
|
|
11,395 |
|
|
|
21,536 |
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
78,900 |
|
|
$ |
437,918 |
|
|
$ |
163,078 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
438,820 |
|
|
$ |
393,421 |
|
Marketable securities |
|
|
469 |
|
|
|
15,500 |
|
Accounts receivable, net of allowance for doubtful accounts of $4,608 and
$5,011 at December 31, 2007 and December 31, 2006, respectively |
|
|
44,068 |
|
|
|
24,189 |
|
Receivables from distributors |
|
|
60,004 |
|
|
|
46,825 |
|
Inventory, net |
|
|
29,537 |
|
|
|
34,502 |
|
Prepaid expenses |
|
|
31,392 |
|
|
|
52,588 |
|
Restricted investments |
|
|
35,000 |
|
|
|
25,000 |
|
Other current assets |
|
|
39,567 |
|
|
|
25,241 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
678,857 |
|
|
|
617,266 |
|
Property and equipment, net |
|
|
806,263 |
|
|
|
810,389 |
|
FCC license |
|
|
83,654 |
|
|
|
83,654 |
|
Restricted investments, net of current portion |
|
|
18,000 |
|
|
|
52,850 |
|
Deferred financing fees |
|
|
13,864 |
|
|
|
13,166 |
|
Other long-term assets |
|
|
93,511 |
|
|
|
81,203 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,694,149 |
|
|
$ |
1,658,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
464,943 |
|
|
$ |
437,913 |
|
Accrued interest |
|
|
24,772 |
|
|
|
24,782 |
|
Deferred revenue |
|
|
548,330 |
|
|
|
412,370 |
|
Current maturities of long-term debt |
|
|
35,801 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,073,846 |
|
|
|
875,065 |
|
Long-term debt |
|
|
1,278,617 |
|
|
|
1,068,249 |
|
Deferred revenue, net of current portion |
|
|
110,525 |
|
|
|
76,580 |
|
Other long-term liabilities |
|
|
23,898 |
|
|
|
27,705 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,486,886 |
|
|
|
2,047,599 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value: 2,500,000,000 shares authorized,
1,471,143,570
and 1,434,635,501 shares issued and outstanding at
December 31, 2007 and
December 31, 2006, respectively |
|
|
1,471 |
|
|
|
1,435 |
|
Additional paid-in capital |
|
|
3,604,764 |
|
|
|
3,443,214 |
|
Accumulated deficit |
|
|
(4,398,972 |
) |
|
|
(3,833,720 |
) |
|
|
|
|
|
|
|
Total stockholders (deficit) equity |
|
|
(792,737 |
) |
|
|
(389,071 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,694,149 |
|
|
$ |
1,658,528 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In Thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Deferred |
|
|
Comprehensive |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Loss |
|
|
Deficit |
|
|
Total |
|
Balances, December 31, 2004 |
|
|
1,276,922,634 |
|
|
$ |
1,277 |
|
|
$ |
2,916,199 |
|
|
$ |
(50,963 |
) |
|
$ |
(24 |
) |
|
$ |
(1,865,856 |
) |
|
$ |
1,000,633 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(862,997 |
) |
|
|
(862,997 |
) |
Change in unrealized gain on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(862,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to
employees and employee benefit
plans |
|
|
2,773,776 |
|
|
|
3 |
|
|
|
3,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,369 |
|
Issuance of common stock to
third parties |
|
|
38,580 |
|
|
|
|
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480 |
|
Compensation in connection with the
issuance of stock-based awards |
|
|
|
|
|
|
|
|
|
|
109,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,112 |
|
Issuance of stock-based awards |
|
|
|
|
|
|
|
|
|
|
18,300 |
|
|
|
(18,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of stock-based awards |
|
|
|
|
|
|
|
|
|
|
(1,333 |
) |
|
|
1,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,236 |
|
|
|
|
|
|
|
|
|
|
|
41,236 |
|
Exercise of
options, $5.00 to $7.98 per share |
|
|
14,460,738 |
|
|
|
14 |
|
|
|
18,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,817 |
|
Exchange of 31/2% Convertible Notes due
2008, including accrued interest |
|
|
10,548,545 |
|
|
|
11 |
|
|
|
14,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,294 |
|
Exercise of warrants, $0.92 and
$2.39 per share |
|
|
41,482,578 |
|
|
|
41 |
|
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005 |
|
|
1,346,226,851 |
|
|
$ |
1,346 |
|
|
$ |
3,079,169 |
|
|
$ |
(26,694 |
) |
|
$ |
|
|
|
$ |
(2,728,853 |
) |
|
$ |
324,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,104,867 |
) |
|
|
(1,104,867 |
) |
Issuance of common stock to
employees and employee benefit
plans |
|
|
20063,322 |
|
|
|
20 |
|
|
|
22,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,273 |
|
Issuance of common stock to
third parties |
|
|
34,467,869 |
|
|
|
35 |
|
|
|
224,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,952 |
|
Compensation in connection with the
issuance of stock-based awards |
|
|
|
|
|
|
|
|
|
|
100,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,923 |
|
Reversal of deferred compensation
related to the adoption of
Statement of Financial
Accounting Standards (SFAS)
No. 123R |
|
|
|
|
|
|
|
|
|
|
(26,694 |
) |
|
|
26,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of
options, $3.52 to $6.81 per share |
|
|
19,284,495 |
|
|
|
19 |
|
|
|
26,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,679 |
|
Exercise of warrants, $2.39 per share |
|
|
2,862,533 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of 31/2% Convertible Notes due
2008, including accrued interest |
|
|
11,730,431 |
|
|
|
12 |
|
|
|
15,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006 |
|
|
1,434,635,501 |
|
|
$ |
1,435 |
|
|
$ |
3,443,214 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,833,720 |
) |
|
$ |
(389,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-6
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Continued)
(In Thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Total |
|
Net loss |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(565,252 |
) |
|
$ |
(565,252 |
) |
Issuance of common stock to
employees and employee benefit plans |
|
|
4,279,097 |
|
|
|
4 |
|
|
|
19,242 |
|
|
|
|
|
|
|
19,246 |
|
Issuance of common stock to
third parties |
|
|
22,058,824 |
|
|
|
22 |
|
|
|
82,919 |
|
|
|
|
|
|
|
82,941 |
|
Compensation in connection with the
issuance of stock-based awards |
|
|
|
|
|
|
|
|
|
|
52,683 |
|
|
|
|
|
|
|
52,683 |
|
Exercise of options, $2.79 to $4.16 per share |
|
|
2,859,232 |
|
|
|
3 |
|
|
|
3,529 |
|
|
|
|
|
|
|
3,532 |
|
Exercise of
warrants, $1.04 to $2.39 per share |
|
|
4,988,726 |
|
|
|
5 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
Exchange of 31/2% Convertible Notes due
2008, including accrued interest |
|
|
2,321,737 |
|
|
|
2 |
|
|
|
3,180 |
|
|
|
|
|
|
|
3,182 |
|
Exchange of 21/2% Convertible Notes due
2009, including accrued interest |
|
|
453 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007 |
|
|
1,471,143,570 |
|
|
$ |
1,471 |
|
|
$ |
3,604,764 |
|
|
$ |
(4,398,972 |
) |
|
$ |
(792,737 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
F-7
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(565,252 |
) |
|
$ |
(1,104,867 |
) |
|
$ |
(862,997 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
106,780 |
|
|
|
105,749 |
|
|
|
98,555 |
|
Non-cash interest expense |
|
|
4,269 |
|
|
|
3,107 |
|
|
|
3,169 |
|
Provision for doubtful accounts |
|
|
9,002 |
|
|
|
9,370 |
|
|
|
4,311 |
|
Non-cash equity in loss of affiliate |
|
|
|
|
|
|
4,445 |
|
|
|
6,938 |
|
Non-cash loss from redemption of debt |
|
|
|
|
|
|
|
|
|
|
712 |
|
(Gain)/Loss on disposal of assets |
|
|
(428 |
) |
|
|
1,661 |
|
|
|
1,028 |
|
Impairment loss |
|
|
|
|
|
|
10,917 |
|
|
|
|
|
Stock-based compensation |
|
|
78,900 |
|
|
|
437,918 |
|
|
|
163,078 |
|
Deferred income taxes |
|
|
2,435 |
|
|
|
2,065 |
|
|
|
2,311 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
16 |
|
Accounts receivable |
|
|
(28,881 |
) |
|
|
(1,871 |
) |
|
|
(28,440 |
) |
Inventory |
|
|
4,965 |
|
|
|
(20,246 |
) |
|
|
(6,329 |
) |
Receivables from distributors |
|
|
(13,179 |
) |
|
|
(20,312 |
) |
|
|
(17,265 |
) |
Prepaid expenses and other current assets |
|
|
11,459 |
|
|
|
(42,367 |
) |
|
|
(11,864 |
) |
Other long-term assets |
|
|
12,109 |
|
|
|
(19,331 |
) |
|
|
6,476 |
|
Accounts payable and accrued expenses |
|
|
66,169 |
|
|
|
26,366 |
|
|
|
145,052 |
|
Accrued interest |
|
|
(8,920 |
) |
|
|
1,239 |
|
|
|
17,813 |
|
Deferred revenue |
|
|
169,905 |
|
|
|
181,003 |
|
|
|
210,947 |
|
Other long-term liabilities |
|
|
1,901 |
|
|
|
3,452 |
|
|
|
(3,505 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(148,766 |
) |
|
|
(421,702 |
) |
|
|
(269,994 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(65,264 |
) |
|
|
(92,674 |
) |
|
|
(49,888 |
) |
Sales of property and equipment |
|
|
641 |
|
|
|
127 |
|
|
|
72 |
|
Merger related costs |
|
|
(29,444 |
) |
|
|
|
|
|
|
|
|
Purchases of restricted and other investments |
|
|
(310 |
) |
|
|
(12,339 |
) |
|
|
(25,037 |
) |
Release of restricted investments |
|
|
25,160 |
|
|
|
26,000 |
|
|
|
10,997 |
|
Purchases of available-for-sale securities |
|
|
|
|
|
|
(123,500 |
) |
|
|
(148,900 |
) |
Sales of available-for-sale securities |
|
|
15,031 |
|
|
|
229,715 |
|
|
|
36,935 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by investing activities |
|
|
(54,186 |
) |
|
|
27,329 |
|
|
|
(175,821 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of debt |
|
|
|
|
|
|
|
|
|
|
(57,609 |
) |
Long-term borrowings, net of related costs |
|
|
244,879 |
|
|
|
|
|
|
|
493,005 |
|
Repayment of
long-term borrowings |
|
|
(625 |
) |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
4,097 |
|
|
|
25,787 |
|
|
|
18,543 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
248,351 |
|
|
|
25,787 |
|
|
|
453,931 |
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents |
|
|
45,399 |
|
|
|
(368,586 |
) |
|
|
8,116 |
|
Cash and cash equivalents at the beginning of period |
|
|
393,421 |
|
|
|
762,007 |
|
|
|
753,891 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period |
|
$ |
438,820 |
|
|
$ |
393,421 |
|
|
$ |
762,007 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-8
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
Supplemental Disclosure of Cash and Non-Cash Flow Information
Interest, net of amounts capitalized |
|
$ |
66,266 |
|
|
$ |
59,929 |
|
|
$ |
24,387 |
|
Income taxes |
|
|
162 |
|
|
|
583 |
|
|
|
158 |
|
Non-cash operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in satisfaction of accrued compensation |
|
|
7,949 |
|
|
|
7,243 |
|
|
|
4,824 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Release of restriction on marketable securities |
|
|
|
|
|
|
4,750 |
|
|
|
|
|
Common stock issued in exchange of 31/2% Convertible Notes due
2008, including accrued interest |
|
|
3,182 |
|
|
|
16,001 |
|
|
|
14,294 |
|
Common stock issued in exchange of 21/2% Convertible Notes due
2009, including accrued interest |
|
|
2 |
|
|
|
|
|
|
|
|
|
Common stock issued to third parties |
|
|
82,941 |
|
|
|
224,952 |
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-9
SIRIUS
SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO 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
subscribers69 channels of 100% commercial-free music and 65 channels of sports, news, talk,
entertainment, traffic, video and weather. The core of our enterprise is programming; we are
committed to offering the best audio entertainment.
Our primary source of revenue is subscription fees, with most of our customers subscribing to
SIRIUS on an annual, semi-annual, quarterly or monthly basis. As of December 31, 2007, we had
8,321,785 subscribers. In addition, we derive revenue from activation fees, the sale of
advertising on our non-music channels, and the direct sale of SIRIUS radios and accessories.
Most of our subscribers receive our service through SIRIUS radios, which are sold through our
website and by automakers, consumer electronics retailers and mobile audio dealers. SIRIUS radios
for the car, truck, home, RV and boat are available in approximately 20,000 retail locations,
including Best Buy, Circuit City, Costco, Crutchfield, Sams Club, Target and Wal-Mart and through
RadioShack on an exclusive basis.
As of December 31, 2007, SIRIUS radios were available as a factory and dealer-installed option
in 116 vehicle models and as a dealer only-installed option in 37 vehicle models. We have
agreements with Chrysler, Mercedes-Benz, Ford, Mitsubishi, BMW, Volkswagen, Kia, Bentley and
Rolls-Royce to offer SIRIUS radios as factory or dealer-installed equipment in their vehicles.
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.
SIRIUS radios are also offered to renters of Hertz vehicles at airport
locations nationwide.
We offer our programming over multiple platforms in addition to our satellite and terrestrial
repeater network. SIRIUS Internet Radio, which we refer to as SIR, is an Internet-only version of
our service. SIR delivers a simulcast of more than 80 channels of our talk, entertainment, sports
and music programming. Our music channels are also available to certain DISH satellite television
subscribers, and a select number of our music channels are available to certain subscribers to the
Nationwide Sprint PCS Network.
We also offer certain ancillary services. In 2007, we introduced SIRIUS Backseat TV, a
television service offering content designed primarily for children from Nickelodeon, Disney
Channel and Cartoon Network in the backseat of vehicles. Chrysler offered SIRIUS Backseat TV
exclusively in select 2008 model-year vehicles. We also offer a service that provides graphic
information as to road closings, traffic flow and incident data to consumers with in-vehicle
navigation systems, and a marine weather service that provides a range of information, including
sea surface temperatures, wave heights and extended forecasts, to recreational boaters. In 2008,
we intend to launch SIRIUS Travel Link, a suite of data services that includes real-time traffic,
tabular and graphical weather, fuel prices, sports schedules and scores, and movie listings.
SIRIUS Travel Link is expected to be standard equipment on Fords next-generation navigation
system, and is anticipated to be offered on select Ford, Lincoln and Mercury vehicles in 2008.
In 2005, SIRIUS Canada Inc., a Canadian corporation owned by us, Canadian Broadcasting
Corporation and Standard Radio Inc., launched service in Canada. SIRIUS Canada currently offers
110 channels of commercial-free music and news, sports, talk and entertainment programming,
including 11 channels of Canadian content. As of October 11, 2007, SIRIUS Canada had over 500,000
subscribers.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements of Sirius Satellite Radio Inc. and its
subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles.
All intercompany transactions and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make 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.
Significant estimates inherent in the preparation of the accompanying consolidated financial
statements include allowances for doubtful accounts; depreciable
lives of our assets; valuation of our FCC license; useful lives
of our satellites;
valuation allowance against deferred tax assets; stock-based
compensation; rebates; certain subscriber acquisition costs, including product warranty
obligations; and impairments.
F-10
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
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 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 obligated 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 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 rebate incentives offered in prior periods, adjusted as
deemed necessary based on current 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 a 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 have adopted EITF No. 06-01 for the year ended December
31, 2007. The adoption of EITF No. 06-01 did not have a material impact on our consolidated
results of operations or financial position.
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 payments are recorded to revenue share and royalties during the period in
which the advertising is broadcast.
Equipment revenue from the direct sale of SIRIUS radios and accessories is recognized upon
shipment, net of discounts and rebates. 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.
F-11
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
We 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, 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 fee 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
Effective January 1, 2006, we adopted the provisions of SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), using the modified prospective transition method.
Our 2005 consolidated results of operations and financial position were
not restated under this transition method.
The stock-based compensation cost recognized
beginning January 1, 2006 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.
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. For pro forma disclosure purposes in accordance with
SFAS No. 123, we estimated forfeitures. As of January 1, 2006, the cumulative effect of adopting
the estimated forfeiture method was not significant.
In 2005, we used the intrinsic value method to measure the compensation cost of stock-based
awards granted to employees and members of our board of directors in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Accordingly,
we recorded compensation expense for stock-based awards granted to employees and members of our
board of directors over the vesting period equal to the excess of the market price of the
underlying common stock at the date of grant over the exercise price of the stock-based award. The
intrinsic value of restricted stock units as of the date of grant was amortized to expense over the
vesting period.
The following table reflects net loss and net loss per share had stock-based compensation to
employees and members of our board of directors been recorded based on the fair value method under
SFAS No. 123 for the period ended December 31, 2005:
|
|
|
|
|
Net loss as reported |
|
$ |
(862,997 |
) |
Stock-based compensation to employees and members of our board of directors |
|
|
47,915 |
|
Stock-based compensation to employees and members of our board of directors pro
forma |
|
|
(94,677 |
) |
|
|
|
|
Net loss pro forma |
|
$ |
(909,759 |
) |
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
Basic and diluted as reported |
|
$ |
(0.65 |
) |
Basic and diluted pro forma |
|
$ |
(0.69 |
) |
F-12
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
Pursuant to SFAS 123R, we recognized $61,205 and $70,392 of compensation cost for stock-based
awards granted to employees and members of our board of directors for the years ended December 31,
2007 and 2006, respectively. This compared to $47,915 of compensation cost for stock-based awards
granted to employees and members of our board of directors recognized pursuant to APB No. 25 for
the year ended December 31, 2005. Total unrecognized compensation related to unvested stock-based
awards granted to employees and members of our board of directors at December 31, 2007, net of
estimated forfeitures, is $80,635 and is expected to be recognized over a weighted-average period
of three years.
Prior to January 1, 2006, we accounted 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. 123.
Effective January 1, 2006, we account for such awards 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. Charges
associated with such stock-based awards are referred to by us as stock-based compensation.
Upon adoption of SFAS No. 123R, we continued to 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, the 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. For the year ended December 31,
2005, we used historical volatility of our stock over a period equal to the expected life of
stock-based awards to estimate fair value. We estimated the fair value of awards granted during the
years ended December 31, 2007 and 2006 using the implied volatility of actively traded options on
our stock. We believe that implied volatility is more representative of future stock price trends
than historical volatility. 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.
F-13
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
The following table summarizes the weighted-average assumptions used to compute reported and
pro forma stock-based compensation to employees and members of our board of directors for the
periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
(pro forma) |
Risk-free interest rate |
|
|
4.8 |
% |
|
|
4.2 |
% |
|
|
3.9 |
% |
Expected life of options years |
|
|
4.45 |
|
|
|
4.45 |
|
|
|
6.23 |
|
Expected stock price volatility |
|
|
60 |
% |
|
|
60 |
% |
|
|
110 |
% |
Expected dividend yield |
|
|
N/A |
|
|
|
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 Years Ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
Risk-free interest rate |
|
|
3.1-5.0 |
% |
|
|
4.3-5.2 |
% |
|
|
2.8-4.6 |
% |
Expected life of options years |
|
|
2.25-6.33 |
|
|
|
1.67-10.00 |
|
|
|
1.00-9.93 |
|
Expected stock price volatility |
|
|
60 |
% |
|
|
60 |
% |
|
|
56-116 |
% |
Expected dividend yield |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
SFAS No. 123R changes the presentation of realized excess tax benefits associated with the
exercise of stock options in the statements of cash flows. Excess tax benefits are realized tax
benefits from tax deductions for the exercise of stock options in excess of the deferred tax asset
attributable to stock compensation expense for such options. Prior to the adoption of SFAS No. 123R
such realized tax benefits were required to be presented as operating cash flows. 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 years
ended December 31, 2007, 2006 and 2005 because a valuation allowance was recorded 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.
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.
F-14
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
We record product warranty obligations in accordance with 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 standard published specifications in
effect at the time of the purchase of the products by the customer. During the year ended December
31, 2007, we provided 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.
The following table reconciles the beginning and ending aggregate product warranty liability:
|
|
|
|
|
Balance, December 31, 2006 |
|
$ |
5,041 |
|
Accrual for warranties issued during the period |
|
|
3,703 |
|
Settlements during the period |
|
|
(6,208 |
) |
|
|
|
|
Balance, December 31, 2007 |
|
$ |
2,536 |
|
|
|
|
|
Sports Programming Costs
We record the costs associated with our sports programming agreements in accordance with SFAS
No. 63, Financial Reporting by Broadcasters. Programming costs which are for a specified number
of events are amortized on an event-by-event basis; programming costs which are for a specified
season are amortized over the season on a straight-line basis. We allocate that portion of sports
programming costs which are related to sponsorship and marketing activities to sales and marketing
expenses on a straight-line basis over the term of the agreement.
Advertising Costs
We record the costs associated with advertising in accordance with Statement of Position
(SOP) No. 93-7, Reporting on Advertising Costs. Media is expensed when aired and advertising
production costs are expensed as incurred. Market development funds are fixed and variable payments
to reimburse retailers for the cost of advertising and other product awareness activities. Fixed
market development funds are expensed over the periods specified in the applicable agreement;
variable costs are expensed at the time a subscriber is activated.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs for
the years ended December 31, 2007, 2006 and 2005 were $38,082, $46,460 and $53,401, respectively,
and are included in engineering, design and development expenses.
F-15
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
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.
In June 2006, the Emerging Issues Task Force reached a consensus on EITF No. 06-03, How
Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement. EITF No. 06-03 permits that
such taxes may be presented on either a gross basis or a net basis as long as
that presentation is used consistently. The adoption of EITF No. 06-03 on January 1, 2007
did not impact our consolidated results of operations or financial position.
We present the taxes within the scope of EITF No. 06-03 on a net basis.
Net (Loss) Income Per Share
We compute net (loss) income per share in accordance with SFAS No. 128, Earnings Per Share.
Basic net (loss) income per share is based on the weighted average common shares outstanding during
each reporting period. Diluted net (loss) income per share adjusts the weighted average 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 165,000,000, 194,000,000 and 235,000,000 were not considered in the
calculation of diluted net loss per share for the years ended December 31, 2007, 2006 and 2005,
respectively, as the effect would have been anti-dilutive.
Comprehensive (Loss) Income
We report comprehensive (loss) income in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 established a standard for reporting and displaying other
comprehensive (loss) income and its components within financial statements. Unrealized gains and
losses on available-for-sale securities were the only component of our other comprehensive loss for
the year ended December 31, 2005. There were no unrealized gains and losses on available-for-sale
securities for the years ended December 31, 2007 and December 31, 2006. Comprehensive loss for the
years ended December 31, 2007, 2006 and 2005 was $565,252, $1,104,867 and $862,973, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, money market funds, certificates of deposit
and investments with an original maturity of three months or less when purchased. Cash and cash
equivalents are stated at fair market value.
Investments
Our investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Marketable securities |
|
$ |
469 |
|
|
$ |
15,500 |
|
Restricted investments |
|
|
53,000 |
|
|
|
77,850 |
|
Investment, stated at cost |
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
Total investments |
|
$ |
53,469 |
|
|
$ |
98,350 |
|
|
|
|
|
|
|
|
F-16
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
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 and auction rate securities. For the years ended December 31, 2007 and
2006, certificates of deposit were $469 and $4,650, respectively, and auction rate securities were
$0 and $10,850, 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. While the underlying securities of auction
rate securities had contractual maturities of more than 20 years, the interest rates on such
securities were reset at intervals of 28 or 35 days. Auction rate securities were priced and traded
as short-term investments because of such interest rate reset feature.
We received proceeds from the sale or maturity of marketable securities of $15,031, $229,715
and $36,935 for the years ended December 31, 2007, 2006 and 2005, respectively. There were no
unrealized holding gains or losses on marketable securities as of December 31, 2007 and 2006.
Restricted Investments
As of December 31, 2007 and 2006, short-term restricted investments of $35,000 and $25,000,
respectively, included certificates of deposit placed in escrow primarily for the benefit of a
third party pursuant to a programming agreement.
As of December 31, 2007 and 2006, long-term restricted investments of $18,000 and $52,850,
respectively, 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 office space.
Cost Method Investment
In September 2006, we invested in a third party for strategic purposes. We account for this
investment under the cost method. The carrying value of our investment was $5,000 at December 31,
2006 and was included in other long-term assets in our accompanying consolidated balance sheets.
We terminated our relationship with this third party in 2008 and have classified this amount as a
receivable in other current assets as of December 31, 2007.
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 consolidated statements of operations. We
recorded $0, $4,445 and $6,938 for the years ended December 31, 2007, 2006 and 2005, respectively,
for our share of SIRIUS Canadas net loss. We do not expect to recognize future net losses as we
are not contractually obligated to commit to provide additional funding.
F-17
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
Accounts Receivable
Accounts receivable are stated at amounts due from customers net of an allowance for doubtful
accounts. We specifically reserve for customers with known disputes or collectibility issues. The
remaining reserve recorded in the allowance for doubtful accounts is our best estimate of the
amount of probable losses in our existing accounts receivable based on our actual write-off
experience.
All accounts receivable balances greater than approximately 30 days past the due date
are considered delinquent. Delinquent accounts are written off after
approximately 30 days.
Receivables from Distributors
Receivables
from distributors are amounts due from OEMs and special market
distributors related to
the distribution of prepaid subscriptions.
Inventory
Inventory consists of finished goods, chip sets and other raw material components used in
manufacturing radios. Inventory is stated at the lower of cost, determined on a first-in, first-out
basis, or market. We record an estimated allowance 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 consolidated statements of operations. The remaining provision is recorded to subscriber
acquisition costs in our consolidated statements of operations.
Property and Equipment
Property and equipment is stated at cost and depreciated on a straight-line basis over the
estimated useful lives of the related assets, which range from 2 to 30 years. Our satellite system
is depreciated on a straight-line basis over the respective remaining useful lives of our
satellites from the date we launched our service in February 2002 or, in the case of our spare
satellite, from the date it was delivered to ground storage in April 2002. Leasehold improvements
are depreciated using the straight-line method over the lesser of the lease term or the estimated
useful life. We capitalize a portion of the interest on funds borrowed to finance the construction
and launch of our satellites and launch vehicles. Capitalized interest is recorded as part of the
assets cost and depreciated over the satellites useful life. Capitalized interest costs for the
years ended December 31, 2007 and 2006 was $8,914 and $4,205, respectively.
Major
additions and improvements were capitalized, while replacements, repairs and maintenance
that do not improve or extend the life of the assets are charged to expense. In the period assets
are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts, and any gain or loss on disposal is included in our results of operations.
The costs of acquiring, developing and testing software are capitalized under SOP No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. We
capitalize costs associated with software developed or obtained for internal use when the following
occur: (1) the preliminary project stage is completed and (2) management has authorized funding a
computer software project and it is probable that the project will be completed and the software
will be used to perform the function intended. Capitalized costs include external direct costs of
materials and services consumed in developing or obtaining internal-use software. Capitalization of
such costs ceases no later than the point at which the project is substantially complete and ready
for its intended use. The total net book value of capitalized software costs was $14,394 and
$17,349 for the years ended December 31, 2007 and 2006, respectively. Costs charged to expense for
the amortization of capitalized software costs were $5,352, $4,971 and $3,451 for the years ended
December 31, 2007, 2006 and 2005, respectively, and are included in depreciation in our
accompanying consolidated statements of operations.
F-18
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
The estimated useful lives of our property and equipment are as follows:
|
|
|
Capitalized software and hardware |
|
3-7 years |
Furniture, fixtures, equipment and other |
|
2-7 years |
Broadcast studio equipment |
|
3-15 years |
Satellite telemetry, tracking and control facilities |
|
3, 4 or 15 years |
Terrestrial repeater network |
|
3-15 years |
Leasehold improvements |
|
2-15 years |
Satellite system |
|
13 or 15 years |
Building |
|
30 years |
The expected useful lives of our three in-orbit satellites were originally 15 years from the
date they were placed into orbit. In June 2006, we adjusted the useful lives of two of our in-orbit
satellites to 13 years to reflect the way we intend to operate the constellation. We continue to
expect our spare satellite to operate effectively for 15 years from the date of launch.
Our in orbit satellites have experienced circuit failures on their solar arrays. We continue
to monitor the operating condition of our in-orbit satellites. If events or circumstances indicate
that the useful lives of our in-orbit satellites have changed we will modify the depreciable life
accordingly.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, we review our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset is not recoverable. At the time an impairment in
value of a long-lived asset is identified, except for our FCC license discussed below, the
impairment is measured as the amount by which the carrying amount of a long-lived asset exceeds its
fair value. To determine fair value, we employ an expected present value technique, which utilizes
multiple cash flow scenarios that reflect the range of possible outcomes and an appropriate
discount rate.
In June 2006 we wrote-off $10,917 for the net book value of certain satellite long-lead time
parts purchased in 1999 that we will no longer need. Such amount is included in satellite and
transmission expenses in our accompanying consolidated statements of operations.
FCC License
In October 1997, the FCC granted us a license to operate a commercial satellite radio service
in the United States. While our FCC license has a renewable eight-year term, we expect to renew our
license as there are no legal, regulatory, contractual, competitive, economic or other factors that
limit its useful life. As a result, we treat our FCC license as an indefinite-lived intangible
asset under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. We re-evaluate
the useful life determination for our FCC license each reporting period to determine whether events
and circumstances continue to support an indefinite useful life. To date, we have not recorded any
amortization expense related to our FCC license.
We test our FCC license for impairment at least annually or more frequently if indicators of
impairment exist. We used the Greenfield Method utilizing a discounted cash flow model to evaluate
the fair value of our FCC license. The key assumptions in building the model included projected
revenues and estimated start up costs, which were based primarily on historical operations. If
these estimates or projections change in the future, we may be required to record an impairment
charge related to this asset.
Deferred Financing Fees
Costs associated with the issuance of debt are deferred and amortized to interest expense over
the term of the respective debt.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts and other receivables, and
accounts payable approximate fair value due to the short-term nature of these instruments.
We determined the estimated fair values of our debt using available market information.
F-19
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
Quoted market prices were used to estimate the fair market values of our debt as of December
31, 2007 and 2006. The following table summarizes the book and fair values of our debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2007 |
|
2006 |
|
|
Book Value |
|
Fair Value |
|
Book Value |
|
Fair Value |
Senior
Secured Term Credit Agreement |
|
$ |
249,375 |
|
|
$ |
231,295 |
|
|
$ |
|
|
|
$ |
|
|
95/8% Senior Notes due 2013 |
|
|
500,000 |
|
|
|
465,000 |
|
|
|
500,000 |
|
|
|
496,250 |
|
31/4% Convertible Notes due 2011 |
|
|
230,000 |
|
|
|
223,675 |
|
|
|
230,000 |
|
|
|
266,838 |
|
21/2% Convertible Notes due 2009 |
|
|
299,998 |
|
|
|
314,572 |
|
|
|
300,000 |
|
|
|
310,125 |
|
31/2% Convertible Notes due 2008 |
|
|
33,301 |
|
|
|
74,474 |
|
|
|
36,505 |
|
|
|
100,024 |
|
83/4% Convertible Subordinated Notes due 2009 |
|
|
1,744 |
|
|
|
N/A |
|
|
|
1,744 |
|
|
|
N/A |
|
Merger Costs
We incurred approximately $35,600 in direct costs for the year ended December 31, 2007 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 consolidated balance sheets.
Reclassifications
Certain amounts in the prior period consolidated financial statements have been reclassified
to conform to the current period presentation. Specifically, we reclassified both broadcast and
webstreaming royalties from programming and content expenses; revenue share from programming and
content expenses and sales and marketing expenses; and residuals from sales and marketing expenses
to a separate line item, revenue share and royalties. In addition, we reclassified bad debt expense
from general and administrative expenses to customer service and billing expenses.
Recent Accounting Pronouncements
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. We are currently
evaluating the effects that SFAS No. 159 will have on our consolidated results of operations and
financial position.
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. We are currently evaluating the impact of the adoption, if any,
that SFAS No. 157 will have 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.
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. We are
currently evaluating the impact that the adoption of EITF 07-03 will have on
our consolidated results of operations and financial position.
F-20
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
3. Subscriber Revenue
Subscriber revenue consists of subscription fees, 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.
Subscriber revenue consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Subscription fees |
|
$ |
853,832 |
|
|
$ |
572,386 |
|
|
$ |
233,635 |
|
Activation fees |
|
|
20,878 |
|
|
|
15,612 |
|
|
|
6,790 |
|
Effect of rebates |
|
|
(19,777 |
) |
|
|
(12,594 |
) |
|
|
(16,810 |
) |
|
|
|
|
|
|
|
|
|
|
Total subscriber revenue |
|
$ |
854,933 |
|
|
$ |
575,404 |
|
|
$ |
223,615 |
|
|
|
|
|
|
|
|
|
|
|
4. Interest Costs
During the years ended December 31, 2007 and 2006, we capitalized 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 cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Interest costs charged to expense |
|
$ |
70,328 |
|
|
$ |
64,032 |
|
|
$ |
45,361 |
|
Interest costs capitalized |
|
|
8,914 |
|
|
|
4,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest costs incurred |
|
$ |
79,242 |
|
|
$ |
68,237 |
|
|
$ |
45,361 |
|
|
|
|
|
|
|
|
|
|
|
5. Inventory
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
Raw Materials |
|
$ |
9,987 |
|
|
$ |
16,459 |
|
Finished
Goods |
|
|
19,550 |
|
|
|
18,043 |
|
|
|
|
|
|
|
|
Total
Inventory |
|
$ |
29,537 |
|
|
$ |
34,502 |
|
|
|
|
|
|
|
|
F-21
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
6. Property and Equipment
Property
and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
Satellite system |
|
$ |
933,433 |
|
|
$ |
933,141 |
|
Terrestrial repeater network |
|
|
68,658 |
|
|
|
63,753 |
|
Leasehold improvements |
|
|
35,178 |
|
|
|
33,334 |
|
Broadcast studio equipment |
|
|
39,373 |
|
|
|
37,350 |
|
Capitalized
software and hardware |
|
|
37,295 |
|
|
|
35,796 |
|
Satellite telemetry, tracking and control facilities |
|
|
17,838 |
|
|
|
17,611 |
|
Furniture, fixtures, equipment and other |
|
|
69,687 |
|
|
|
54,027 |
|
Land |
|
|
311 |
|
|
|
311 |
|
Building |
|
|
2,432 |
|
|
|
2,343 |
|
Construction in progress |
|
|
174,565 |
|
|
|
101,848 |
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
1,378,770 |
|
|
|
1,279,514 |
|
Accumulated depreciation |
|
|
(572,507 |
) |
|
|
(469,125 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
806,263 |
|
|
$ |
810,389 |
|
|
|
|
|
|
|
|
Construction in progress consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
Satellite system |
|
$ |
155,736 |
|
|
$ |
78,491 |
|
Terrestrial repeater network |
|
|
11,885 |
|
|
|
10,973 |
|
Leasehold improvements |
|
|
347 |
|
|
|
100 |
|
Other |
|
|
6,597 |
|
|
|
12,284 |
|
|
|
|
|
|
|
|
Construction in progress |
|
$ |
174,565 |
|
|
$ |
101,848 |
|
|
|
|
|
|
|
|
Satellites
Our orbiting satellites were successfully launched in 2000. Our spare satellite was delivered
to ground storage in 2002. Our three-satellite constellation and terrestrial repeater network were
placed into service in 2002.
We entered into an agreement with Space Systems/Loral for the design and construction of our
fifth and sixth satellites. Construction of our fifth satellite is expected to be completed in the
second quarter of 2009. We expect to launch our sixth satellite in the fourth quarter of 2010. We
plan to launch the fifth satellite on a Proton rocket under our contract with International Launch
Services. 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.
As of December 31, 2007 and 2006, we recorded $155,736 and $78,491, respectively, to property
and equipment in our accompanying consolidated balance sheets in connection with these agreements.
F-22
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
7. 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 used by its
subscribers as well as information technology support costs. In consideration for the rights
granted pursuant to the license and services agreement, SIRIUS Canada
is obligated to pay 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 carries an 8% cumulative dividend.
Total costs reimbursed by SIRIUS Canada for the years ended December 31, 2007, 2006, and 2005
were $7,712, $9,227, and $6,025, respectively. We recorded $1,159, $945, and $10 in royalty income
for the years ended December 31, 2007, 2006, and 2005, respectively. Such royalty income was
recorded to other revenue in our accompanying consolidated statements of operations. We also
recorded dividend income of $422, $700, and $0 for the years ended December 31, 2007, 2006, and
2005, respectively, which was included in interest and investment income in our accompanying
consolidated statements of operations.
Amounts due from SIRIUS Canada at December 31, 2007 were $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 sheets. Amounts due from SIRIUS Canada at December 31, 2006 were $4,157, of
which $2,502 and $1,655 are included in other current assets and other long-term assets,
respectively, on our accompanying consolidated balance sheets. Amounts payable to SIRIUS Canada at
December 31, 2007 and 2006 to fund its remaining capital requirements were $1,148 and are included
in other long-term liabilities for 2007 and accounts payable and accrued expenses in 2006 in the
accompanying consolidated balance sheets.
8. Accounts Payable and Accrued Expenses
Our accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
Accounts payable |
|
$ |
69,540 |
|
|
$ |
25,007 |
|
Accrued programming |
|
|
50,801 |
|
|
|
116,370 |
|
Accrued compensation and other payroll related costs |
|
|
32,611 |
|
|
|
28,543 |
|
Accrued subsidies and distribution |
|
|
160,024 |
|
|
|
185,188 |
|
Accrued web streaming and broadcast royalties |
|
|
44,250 |
|
|
|
15,370 |
|
Other accrued expenses |
|
|
107,717 |
|
|
|
67,435 |
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses |
|
$ |
464,943 |
|
|
$ |
437,913 |
|
|
|
|
|
|
|
|
F-23
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
9. Debt and Accrued Interest
Our debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion |
|
|
|
|
|
|
Price |
|
|
As
of December |
|
|
|
(per share) |
|
|
2007 |
|
|
2006 |
|
Senior Secured Term Credit Agreement |
|
|
N/A |
|
|
$ |
249,375 |
|
|
$ |
|
|
95/8% Senior Notes due 2013 |
|
|
N/A |
|
|
|
500,000 |
|
|
|
500,000 |
|
31/4% Convertible Notes due 2011 |
|
$ |
5.30 |
|
|
|
230,000 |
|
|
|
230,000 |
|
21/2% Convertible Notes due 2009 |
|
|
4.41 |
|
|
|
299,998 |
|
|
|
300,000 |
|
31/2% Convertible Notes due 2008 |
|
|
1.38 |
|
|
|
33,301 |
|
|
|
36,505 |
|
83/4% Convertible Subordinated Notes due 2009 |
|
|
28.4625 |
|
|
|
1,744 |
|
|
|
1,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,314,418 |
|
|
|
1,068,249 |
|
Less current maturities |
|
|
|
|
|
|
35,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
$ |
1,278,617 |
|
|
$ |
1,068,249 |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest associated with our debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
95/8% Senior Notes due 2013 |
|
$ |
20,053 |
|
|
$ |
20,053 |
|
31/4% Convertible Notes due 2011 |
|
|
1,557 |
|
|
|
1,557 |
|
21/2% Convertible Notes due 2009 |
|
|
2,902 |
|
|
|
2,902 |
|
31/2% Convertible Notes due 2008 |
|
|
97 |
|
|
|
107 |
|
83/4% Convertible Subordinated Notes due 2009 |
|
|
38 |
|
|
|
38 |
|
Space Systems/Loral Credit Agreement |
|
|
125 |
|
|
|
125 |
|
|
|
|
|
|
|
|
Total accrued interest |
|
$ |
24,772 |
|
|
$ |
24,782 |
|
|
|
|
|
|
|
|
The
maturities of our debt as of December 31, 2007 are as follows:
|
|
|
|
|
2008 |
|
$ |
35,801 |
|
2009 |
|
|
304,242 |
|
2010 |
|
|
2,500 |
|
2011 |
|
|
232,500 |
|
2012 |
|
|
239,375 |
|
Thereafter |
|
|
500,000 |
|
|
|
|
|
Total debt |
|
$ |
1,314,418 |
|
|
|
|
|
F-24
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
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 December 31, 2007, the interest rate was 7.0625%
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 wholly owned subsidiaries, including Satellite CD Radio, Inc.
and Sirius Asset Management Company LLC (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.
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.
During the year ended December 31, 2007, holders of $2 in aggregate principal amount of our
21/2% Convertible Notes due 2009 presented such notes for conversion in accordance with the terms of
the indenture. We issued 453 shares of our common stock upon conversion of these notes.
F-25
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
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, subject to
certain adjustments. Our 31/2% Convertible Notes due 2008 mature on June 1, 2008 and interest is
payable semi-annually on June 1 and December 1 of each year. The obligations under our 31/2%
Convertible Notes due 2008 are not secured by any of our assets.
During the year ended December 31, 2007, holders of $3,204 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 2,321,737 shares of our common stock upon conversion of these notes.
During the year ended December 31, 2006, holders of $16,188 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 11,730,431 shares of our common stock upon conversion of these notes.
83/4% Convertible Subordinated Notes due 2009
In 1999, we issued our 83/4% Convertible Subordinated Notes due 2009. The remaining balance of
our 83/4% Convertible Subordinated Notes due 2009 mature on September 29, 2009 and interest is
payable semi-annually on March 29 and September 29 of each year. These notes are convertible, at
the option of the holder, into shares of our common stock at any time at a conversion rate of
35.134 shares of common stock for each $1,000.00 principal amount, or $28.4625 per share of common
stock, subject to certain adjustments. The obligations under our 83/4% Convertible Subordinated Notes
due 2009 are not secured by any of our assets.
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 the 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 December 31, 2007.
Covenants and Restrictions
Our
95/8% Senior Notes due 2013, our Loral Credit Agreement and our Term Credit
Agreement 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 Agreements and the Senior Secured Term Credit Agreement. If we fail to
comply with these covenants, our 95/8% Senior Notes due 2013, our Senior Secured Credit
Term Loan and any loans outstanding under the Loral Credit Agreement could become immediately
payable and the Loral Credit Agreement could be terminated. At December 31, 2007, we were in
compliance with all such covenants.
F-26
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
10. 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 December 31, 2007,
approximately 352,067,000 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 year ended December 31, 2007, employees exercised 2,859,232 stock options at
exercise prices ranging from $2.79 to $4.16 per share, resulting in proceeds to us of $3,532. Of
this amount, $2,922 was collected as of December 31, 2007. We also collected $1,175 in 2007 related
to stock option exercises that occurred in 2006. During the year ended December 31, 2006,
19,284,495 stock options were exercised at exercise prices ranging
from $3.52 to $6.81 per share,
resulting in proceeds to us of $26,679. Of this amount, $25,504 was collected as of December 31,
2006.
In January 2007, Howard Stern and his agent were granted an aggregate of 22,059,000 shares of
our common stock as a result of certain performance targets that were satisfied on December 31,
2006. We recognized expense associated with these shares of $82,941 during the year ended December
31, 2006.
In January 2006, Howard Stern and his agent were granted an aggregate of 34,375,000 shares of
our common stock as a result of certain performance targets that were satisfied in January 2006. We
recognized expense associated with these shares of $224,813 during the year ended December 31,
2006.
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 certain transfer restrictions which lapse over time. We
recognized $5,852 of expense associated with these shares during each of the years ended December
31, 2007, 2006 and 2005. Of the remaining $19,125 in common stock value, $5,852 and $13,273 are
included in other current assets and other long-term assets, respectively, on our accompanying
consolidated balance sheets as of December 31, 2007.
Warrants
In June 2004, we issued DaimlerChrysler AG warrants to purchase up to 21,500,000 shares of our
common stock at an exercise price of $1.04 per share. These warrants have vested and are
exercisable. In connection with Daimler AGs sale of Chrysler LLC, Daimler transferred warrants to
purchase up to 5,000,000 shares of our common stock to Chrysler. In 2007, Chrysler LLC exercised
these warrants, and we issued 3,551,532 shares of our common stock in a cashless transaction and
cancelled 5,000,000 warrants.
In February 2004, we announced an agreement with RadioShack Corporation to distribute, market
and sell SIRIUS radios. In connection with this agreement, we issued RadioShack warrants to
purchase up to 10,000,000 shares of our common stock. These warrants have an exercise price of
$5.00 per share and vest and become exercisable if RadioShack achieves activation targets during
the five-year term of the agreement.
In January 2004, we signed an agreement with Penske Motor Group, Inc., Penske Automotive
Group, Inc., Penske Truck Leasing Co. L.P. and Penske Corporation (collectively, the Penske
Companies). In connection with this agreement, we issued the Penske companies warrants to
purchase up to 38,000,000 shares of our common stock at an exercise price of $2.392 per share. The
warrants vest over time and upon achievement of certain milestones by the Penske companies. During
the years ended December 31, 2007 and 2006, Penske companies exercised 4,434,300 and 5,292,500,
respectively, vested warrants in a series of cashless exercises. In connection with these
transactions, we
issued 1,437,194 and 2,862,533 shares of our common stock for the years ended December 31,
2007 and 2006, respectively.
In January 2004, we issued the NFL warrants to purchase 50,000,000 shares of our common stock
at an exercise price of $2.50 per share.
During the year ended December 31, 2004, we issued warrants to purchase 9,425,000 shares of
our common stock at exercise prices of $3.00 to $3.21 per share to other third parties as part of
distribution and programming arrangements. These warrants vest over time and upon achievement of
certain milestones. During the years ended December 31, 2007, 2006 and 2005, 15,000, 30,000 and
230,000 of these warrants to purchase shares of our common stock, respectively, were issued to
consultants and are included in our stock option activity.
F-27
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
Warrants to acquire shares of our common stock were outstanding as follows (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants |
|
|
Average |
|
|
|
|
|
Outstanding as of |
|
|
Exercise |
|
Expiration |
|
December 31, |
|
|
Price |
|
Date |
|
2007 |
|
2006 |
NFL |
|
$ |
2.50 |
|
|
March 2008-March 2010 |
|
|
16,718 |
|
|
|
50,000 |
|
Penske companies |
|
|
2.39 |
|
|
July 2009 |
|
|
6,270 |
|
|
|
29,869 |
|
DaimlerChrysler AG |
|
|
1.04 |
|
|
May 2012 |
|
|
16,500 |
|
|
|
21,500 |
|
RadioShack |
|
|
5.00 |
|
|
December 2010 |
|
|
8,000 |
|
|
|
10,000 |
|
Ford |
|
|
3.00 |
|
|
October 2012 |
|
|
4,000 |
|
|
|
4,000 |
|
Other distributors and programming
providers |
|
|
3.08 |
|
|
December 2008-June 2014 |
|
|
2,788 |
|
|
|
4,053 |
|
Other |
|
|
20.33 |
|
|
June 2005-April 2011 |
|
|
4,533 |
|
|
|
4,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3.85 |
|
|
|
|
|
|
|
58,809 |
|
|
|
123,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognized expense of $10,707, $50,297 and $100,349 in connection with warrants for the
years ended December 31, 2007, 2006 and 2005, respectively.
11. 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 that includes one or all of the following: (1) over time,
generally three to five years from the date of grant; (2) on a specific date in future periods with
acceleration to earlier periods if performance criteria are satisfied; or (3) as certain
performance targets set at the time of grant are achieved. 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.
As of December 31, 2007, approximately 83,223,000 stock options, shares of restricted stock
and restricted stock units were outstanding. As of December 31, 2007, approximately 58,810,000
shares of our common stock were available for grant under the 2003 Plan.
F-28
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
The following table summarizes the stock option activity under our stock incentive plans for
the year ended December 31, 2007 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
|
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
Price |
|
Life (Years) |
|
Value |
Outstanding at
December 31, 2006 |
|
|
71,793 |
|
|
$ |
5.56 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
12,715 |
|
|
|
3.55 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,859 |
) |
|
|
1.43 |
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
(2,049 |
) |
|
|
3.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2007 |
|
|
79,600 |
|
|
|
5.38 |
|
|
|
6.63 |
|
|
$ |
51,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
December 31, 2007 |
|
|
49,549 |
|
|
|
5.94 |
|
|
|
5.86 |
|
|
$ |
44,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the years ended December
31, 2007, 2006 and 2005 was $1.88, $3.11 and $6.17, respectively. The total intrinsic value of
stock options exercised during the years ended December 31, 2007, 2006 and 2005 was $5,286, $51,847
and $76,758, respectively.
As of December 31, 2005, we had $2,073 of deferred compensation in connection with stock
options granted to employees and members of our board of directors. Such deferred compensation was
reversed to additional paid-in capital in connection with the adoption of SFAS No. 123R. We also
record expense for stock options granted to consultants based on fair value at the date of grant as
determined in accordance with SFAS No. 123. We recognized stock compensation expense associated
with stock options of $41,431, $49,083 and $13,814 for the years ended December 31, 2007, 2006 and
2005, respectively
The following table summarizes the non-vested restricted stock unit activity under our stock
incentive plans for the year ended December 31, 2007 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Restricted |
|
Grant Date |
|
|
Stock Units |
|
Fair Value |
Outstanding at December 31, 2006 |
|
|
4,086 |
|
|
$ |
4.64 |
|
Granted |
|
|
2,188 |
|
|
|
3.58 |
|
Exercised |
|
|
(2,575 |
) |
|
|
5.12 |
|
Cancelled or expired |
|
|
(76 |
) |
|
|
1.96 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
3,623 |
|
|
|
$3.70 |
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of restricted stock units granted during the years
ended December 31, 2006 and 2005 were $5.57 and $6.11, respectively. The total intrinsic value of
restricted stock units that vested during the year ended December 31, 2007, 2006 and 2005 was
$8,668, $97,846 and $11,625, respectively.
In November 2004, we granted 3,000,000 shares of restricted common stock. Such shares were
issued and outstanding as of December 31, 2007. The restrictions applicable to these shares lapse
in equal installments on November 18 of each of the five years beginning on November 18, 2005.
F-29
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
As of December 31, 2005, we had $24,621 of deferred compensation associated with restricted
stock and restricted stock units. Such deferred compensation was reversed to additional paid-in
capital in connection with the adoption of SFAS No. 123R in 2006. We recognized stock compensation
expense associated with restricted stock units and shares of restricted stock of $10,623, $16,127
and $34,398 for the years ended December 31, 2007, 2006 and 2005, respectively.
For the year ended December 31, 2007, we also recognized stock compensation expense of $3,859
for restricted stock units expected to be granted for services performed in 2007 or upon the
satisfaction of 2007 performance targets. For the year ended December 31, 2006, we also recognized
stock compensation expense of $86,249 for restricted stock units granted in February 2007 for
services performed in 2006.
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. 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 33 1/3% for each year of employment and is fully vested after three years of
employment. Expense resulting from our matching contribution to the Plan was $1,551, $1,246 and
$926 for the years ended December 31, 2007, 2006 and 2005, respectively.
We may also elect to contribute to the profit sharing portion of the Plan based upon the total
compensation of all participants eligible to receive an allocation. 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 share in profit-sharing contributions during any
year in which they are employed on the last day of the year. Profit sharing contribution expense
was $4,877, $4,251 and $4,378 for the years ended December 31, 2007, 2006 and 2005, respectively.
12. Income Taxes
Our income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Current taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current taxes |
|
$ |
478 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,949 |
|
|
$ |
2,169 |
|
|
$ |
1,952 |
|
State |
|
|
8 |
|
|
|
(104 |
) |
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred taxes |
|
$ |
1,957 |
|
|
$ |
2,065 |
|
|
$ |
2,311 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
2,435 |
|
|
$ |
2,065 |
|
|
$ |
2,311 |
|
|
|
|
|
|
|
|
|
|
|
F-30
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
The following table indicates the significant elements contributing to the difference between
the federal tax benefit at the statutory rate and at our effective rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Federal tax benefit, at statutory rate |
|
$ |
(196,986 |
) |
|
$ |
(385,981 |
) |
|
$ |
(301,240 |
) |
State income tax benefit, net of federal benefit |
|
|
(22,385 |
) |
|
|
(52,650 |
) |
|
|
(55,414 |
) |
Change in state tax rates |
|
|
25,355 |
|
|
|
45,916 |
|
|
|
(23,650 |
) |
Change in taxes resulting from permanent differences, net |
|
|
(2,707 |
) |
|
|
(37,633 |
) |
|
|
(24,163 |
) |
Other |
|
|
261 |
|
|
|
(974 |
) |
|
|
|
|
Change in valuation allowance |
|
|
198,897 |
|
|
|
433,387 |
|
|
|
406,778 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
2,435 |
|
|
$ |
2,065 |
|
|
$ |
2,311 |
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are presented below:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
1,367,744 |
|
|
$ |
1,182,299 |
|
Stock-based awards |
|
|
126,679 |
|
|
|
139,048 |
|
Start-up costs capitalized for tax purposes |
|
|
|
|
|
|
1,904 |
|
Capitalized interest expense |
|
|
42,370 |
|
|
|
43,572 |
|
Deferred revenue |
|
|
18,717 |
|
|
|
12,358 |
|
Other |
|
|
70,390 |
|
|
|
64,910 |
|
|
|
|
|
|
|
|
Total deferred tax asset |
|
|
1,625,900 |
|
|
|
1,444,091 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation of property and equipment |
|
|
(199,808 |
) |
|
|
(216,896 |
) |
Amortization of FCC license |
|
|
(12,771 |
) |
|
|
(10,814 |
) |
|
|
|
|
|
|
|
Total deferred tax liability |
|
|
(212,579 |
) |
|
|
(227,710 |
) |
Net deferred tax assets before valuation allowance |
|
|
1,413,321 |
|
|
|
1,216,381 |
|
Valuation allowance |
|
|
(1,426,092 |
) |
|
|
(1,227,195 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(12,771 |
) |
|
$ |
(10,814 |
) |
|
|
|
|
|
|
|
The net deferred tax liability of $12,771 and $10,814 at December 31, 2007 and 2006,
respectively, is a result of the difference in accounting for our FCC license, which is amortized
over 15 years for tax purposes but not amortized for book purposes. This net deferred tax liability
cannot be offset against our deferred tax assets under U.S. generally accepted accounting
principles since it relates to an indefinite-lived asset and is not anticipated to reverse in the
same period.
A significant portion of our costs incurred to date have been capitalized for tax purposes as
a result of our status as a start-up enterprise. Total unamortized start-up costs as of December
31, 2007 and 2006 were $0 and $4,787, respectively. These capitalized costs were amortized over 60
months.
At December 31, 2007, we had net operating loss (NOL) carryforwards of approximately
$3,513,000 for federal and state income tax purposes available to offset future taxable income.
These NOL carryforwards expire on various dates beginning in 2023. We have had several ownership
changes under Section 382 of the Internal Revenue Code, which limit our ability to utilize tax
deductions. Due to an ownership change on March 4, 2003, we determined that $353,569 of gross
deferred tax assets with respect to pre-March 5, 2003 tax loss carryovers will not be available.
This amount was written off against the valuation allowance in 2003. Furthermore, future changes in
our ownership may limit our ability to utilize our deferred tax asset. Realization of our deferred
tax assets is dependent upon future earnings; accordingly, a full valuation allowance was recorded
against the assets.
F-31
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
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. The cumulative effect of applying this interpretation did not result in
any adjustment to retained earnings as of January 1, 2007.
13. Lease Obligations
We have entered into cancelable and non-cancelable operating leases for office space,
equipment and terrestrial repeaters. These leases provide for minimum lease payments, additional
operating expense charges, leasehold improvements, and rent escalations have initial terms ranging
from one to fifteen years, and certain leases have options to renew. Total rent expense recognized
in connection with leases for the years ended December 31, 2007, 2006 and 2005 was $16,941, $15,984
and $14,958, respectively.
Future minimum lease payments under non-cancelable leases as of December 31, 2007 were as
follows:
|
|
|
|
|
2008 |
|
$ |
12,261 |
|
2009 |
|
|
12,577 |
|
2010 |
|
|
12,189 |
|
2011 |
|
|
11,401 |
|
2012 |
|
|
11,302 |
|
Thereafter |
|
|
22,133 |
|
Total minimum lease payments |
|
$ |
81,863 |
|
|
|
|
|
14. Commitments and Contingencies
Contractual Cash Commitments
The following table summarizes our expected contractual cash commitments (other than debt
obligations, cash interest payments and lease obligations) as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Thereafter |
|
|
Total |
|
Satellite and transmission |
|
$ |
159,824 |
|
|
$ |
64,312 |
|
|
$ |
28,776 |
|
|
$ |
7,459 |
|
|
$ |
7,678 |
|
|
$ |
41,048 |
|
|
$ |
309,097 |
|
Programming and content |
|
|
150,224 |
|
|
|
168,197 |
|
|
|
160,395 |
|
|
|
42,072 |
|
|
|
19,423 |
|
|
|
9,667 |
|
|
|
549,978 |
|
Marketing and distribution |
|
|
69,770 |
|
|
|
22,903 |
|
|
|
26,153 |
|
|
|
18,173 |
|
|
|
5,500 |
|
|
|
|
|
|
|
142,499 |
|
Chip set development and production |
|
|
3,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,681 |
|
Other |
|
|
12,629 |
|
|
|
650 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash commitments |
|
$ |
396,128 |
|
|
$ |
256,062 |
|
|
$ |
215,326 |
|
|
$ |
67,704 |
|
|
$ |
32,601 |
|
|
$ |
50,715 |
|
|
$ |
1,018,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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 a contract we executed in 2006 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.
F-32
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
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.
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. In addition, certain
programming and content agreements 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.
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 and to provide billing and subscriber management services. Amounts associated with these
agreements are included in the commitments table.
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, 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 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 December 31,
2007 and 2006, $53,000 and $77,850, respectively, were classified as restricted investments as a
result of our reimbursement obligations under these letters of credit and escrow deposits.
As of December 31, 2007, 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.
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.
F-33
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
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.
The revenue subject to the royalty includes subscription revenue from our U.S. satellite
digital audio radio subscribers and advertising revenues from channels, other than those channels
that make only incidental performances of sound recordings. Exclusions from revenue subject to the
statutory license fee include, among other things, revenue from channels, programming and products
or other services offered for a separate charge where such channels make only incidental
performances of sound recordings; revenue from channels, programming and products or other services
for which the sound recording performances are exempt from any license requirement or directly
licensed; revenue from equipment sales; revenue from current and future data services (including
video services); intellectual property royalties received by us; credit card, invoice and
fulfillment service fees; and bad debt expense.
U.S. Electronics Arbitration. In May 2006, U.S. Electronics Inc., a licensed distributor and a
former licensed manufacturer of SIRIUS radios, commenced an arbitration proceeding against us. U.S.
Electronics alleges that we breached our contract; failed to pay monies owed under the contract;
tortiously interfered with U.S. Electronics relationships with retailers and manufacturers;
withheld information relating to the FCCs inquiring into SIRIUS radios that include FM modulators;
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, and will be permitted to try to prove in the arbitration, 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 is scheduled to commence in March
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.
F-34
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollar amounts in thousands, unless otherwise stated)
15. Quarterly Financial Data (Unaudited)
Our quarterly results of operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
204,037 |
|
|
$ |
226,427 |
|
|
$ |
241,786 |
|
|
$ |
249,816 |
|
Cost of services |
|
|
(126,263 |
) |
|
|
(121,743 |
) |
|
|
(128,920 |
) |
|
|
(173,030 |
) |
Loss from operations |
|
|
(135,045 |
) |
|
|
(122,600 |
) |
|
|
(105,691 |
) |
|
|
(149,754 |
) |
Net loss |
|
|
(144,745 |
) |
|
|
(134,147 |
) |
|
|
(120,137 |
) |
|
|
(166,223 |
) |
Net loss per share (basic and diluted) (1) |
|
$ |
(0.10 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.11 |
) |
2006:(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
126,664 |
|
|
$ |
150,078 |
|
|
$ |
167,113 |
|
|
$ |
193,380 |
|
Cost of services (3) |
|
|
(342,791 |
) |
|
|
(123,409 |
) |
|
|
(120,623 |
) |
|
|
(157,011 |
) |
Loss from operations |
|
|
(446,169 |
) |
|
|
(230,472 |
) |
|
|
(154,154 |
) |
|
|
(236,929 |
) |
Net loss |
|
|
(458,544 |
) |
|
|
(237,828 |
) |
|
|
(162,898 |
) |
|
|
(245,597 |
) |
Net loss per share (basic and diluted) (1) |
|
$ |
(0.33 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.17 |
) |
|
|
|
(1) |
|
The sum of the quarterly net loss per share applicable to common stockholders (basic and
diluted) does not necessarily agree to the net loss per share for the year due to the timing
of our common stock issuances. |
|
(2) |
|
The first quarter of 2006 includes $224,813 of expense for granting 34,375,000 shares of our
common stock to Howard Stern and his agent in January 2006. |
|
(3) |
|
Costs of services are different than amounts previously
reported due to certain reclassifications made in 2007. Specifically,
we reclassified revenue share from sales and marketing expenses; and
residuals from sales and marketing expenses to revenue share and royalties,
which is included in cost of services. In addition, we reclassified bad debt
expense from general and administrative expenses to customer service and billing
expenses, which is included in cost of services. |
F-35
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
Schedule IISchedule of Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
Beginning of |
|
Charged to |
|
Write-offs/ |
|
Balance at |
|
|
Year |
|
Expense |
|
Other |
|
End of Year |
For the year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts |
|
$ |
532 |
|
|
$ |
4,311 |
|
|
$ |
(3,293 |
) |
|
$ |
1,550 |
|
Deferred Tax Assets Valuation Allowance |
|
|
387,030 |
|
|
|
406,778 |
|
|
|
|
|
|
|
793,808 |
|
For the year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts |
|
$ |
1,550 |
|
|
$ |
9,370 |
|
|
$ |
(5,909 |
) |
|
$ |
5,011 |
|
Deferred Tax Assets Valuation Allowance |
|
|
793,808 |
|
|
|
433,387 |
|
|
|
|
|
|
|
1,227,195 |
|
For the year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts |
|
$ |
5,011 |
|
|
$ |
9,002 |
|
|
$ |
(9,405 |
) |
|
$ |
4,608 |
|
Deferred Tax Assets Valuation Allowance |
|
|
1,227,195 |
|
|
|
198,897 |
|
|
|
|
|
|
|
1,426,092 |
|
F-36
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
|
Description |
2.1
|
|
|
|
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
21, 2007). |
|
|
|
|
|
3.1
|
|
|
|
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). |
|
|
|
|
|
3.2
|
|
|
|
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). |
|
|
|
|
|
4.1
|
|
|
|
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)). |
|
|
|
|
|
4.2
|
|
|
|
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)). |
|
|
|
|
|
4.3
|
|
|
|
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). |
|
|
|
|
|
4.4
|
|
|
|
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). |
|
|
|
|
|
4.5
|
|
|
|
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). |
|
|
|
|
|
4.6
|
|
|
|
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). |
|
|
|
|
|
4.7
|
|
|
|
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). |
|
|
|
|
|
4.8
|
|
|
|
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). |
|
|
|
|
|
4.9
|
|
|
|
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). |
|
|
|
|
|
4.10
|
|
|
|
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). |
E - 1
|
|
|
|
|
Exhibit |
|
|
|
Description |
4.11
|
|
|
|
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). |
|
|
|
|
|
4.12
|
|
|
|
Indenture, dated as of August 9, 2005, between the Company and
The Bank of New York, as trustee relating to the Companys
95/8%
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). |
|
|
|
|
|
4.13
|
|
|
|
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). |
|
|
|
|
|
4.14
|
|
|
|
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). |
|
|
|
|
|
4.15
|
|
|
|
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). |
|
|
|
|
|
4.16
|
|
|
|
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). |
|
|
|
|
|
4.17
|
|
|
|
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)). |
|
|
|
|
|
4.18
|
|
|
|
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). |
|
|
|
|
|
4.19
|
|
|
|
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). |
|
|
|
|
|
10.1.1
|
|
|
|
Lease Agreement, dated as of March 31, 1998, between
Rock-McGraw, Inc. and the Company (incorporated by reference to
Exhibit 10.1.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998). |
|
|
|
|
|
10.1.2
|
|
|
|
Supplemental Indenture, dated as of March 22, 2000, between
Rock-McGraw, Inc. and the Company (incorporated by reference to
Exhibit 10.1.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000). |
|
|
|
|
|
*10.2
|
|
|
|
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). |
|
|
|
|
|
*10.3
|
|
|
|
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). |
|
|
|
|
|
*10.4
|
|
|
|
First Amendment, dated as of August 10, 2005, to the Employment
Agreement, dated as of June 3, 2003, between the Company and
David J. Frear (incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K dated August 12, 2005). |
|
|
|
|
|
*10.5
|
|
|
|
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). |
E - 2
|
|
|
|
|
Exhibit |
|
|
|
Description |
*10.6
|
|
|
|
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). |
|
|
|
|
|
*10.7
|
|
|
|
First Amendment, dated as of August 8, 2005, to the Employment
Agreement, dated as of May 5, 2004, between the Company and Scott
Greenstein (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated August 12, 2005). |
|
|
|
|
|
*10.8
|
|
|
|
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). |
|
|
|
|
|
*10.9
|
|
|
|
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). |
|
|
|
|
|
*10.10
|
|
|
|
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). |
|
|
|
|
|
*10.11
|
|
|
|
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). |
|
|
|
|
|
*10.12
|
|
|
|
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)). |
|
|
|
|
|
*10.13
|
|
|
|
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). |
|
|
|
|
|
*10.14
|
|
|
|
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). |
|
|
|
|
|
10.15
|
|
|
|
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). |
|
|
|
|
|
21.1
|
|
|
|
List of subsidiaries (filed herewith). |
|
|
|
|
|
23.1
|
|
|
|
Consent of Ernst & Young LLP (filed herewith). |
|
|
|
|
|
31.1
|
|
|
|
Certificate of Mel Karmazin, Chief Executive Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
|
|
31.2
|
|
|
|
Certificate of David J. Frear, Executive Vice President and
Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
|
|
32.1
|
|
|
|
Certificate of 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). |
|
|
|
|
|
32.2
|
|
|
|
Certificate of David J. Frear, Executive Vice President and
Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith). |
|
|
|
* |
|
This document has been identified as a management contract or compensatory plan or
arrangement. |
|
|
|
Portions of this exhibit have been omitted pursuant to Applications for Confidential
treatment filed by the Company with the Securities and Exchange Commission. |
E - 3