Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2002
Commission file number 0-24710
SIRIUS SATELLITE RADIO INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1700207
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 Avenue of the Americas, 36th Floor
New York, New York 10020
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip code)
212-584-5100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value 77,255,156 shares
- --------------------------------------------------------------------------------
(Class) (Outstanding as of November 8, 2002)
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Part I - Financial Information
Consolidated Statements of Operations for the three and nine month 1
periods ended September 30, 2002 and 2001 (Unaudited)
Consolidated Balance Sheets as of September 30, 2002 (Unaudited) 2
and December 31, 2001
Consolidated Statements of Stockholders' Equity for the nine month 3
period ended September 30, 2002 (Unaudited)
Consolidated Statements of Cash Flows for the nine month periods 4
ended September 30, 2002 and 2001 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 5
Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
Controls and Procedures 22
Part II - Other Information
Item 3. Default on Senior Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Certifications 25
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Revenue:
Subscriber revenue, net of rebates $ (51) $ - $ 3 $ -
Advertising revenue, net of agency fees 62 - 111 -
Other revenue 6 - 6 -
--------- -------- --------- ---------
Total revenue 17 - 120 -
--------- -------- --------- ---------
Operating expenses:
Cost of services (excludes depreciation expense
shown separately below):
Satellite and transmission 8,140 8,294 25,347 22,717
Programming and content 4,199 2,377 12,107 6,297
Customer service and billing 1,855 1,614 5,579 4,746
Sales and marketing 33,314 5,494 79,874 15,172
General and administrative 8,121 7,605 24,249 19,458
Research and development 2,561 12,145 23,699 38,223
Depreciation expense 23,011 2,336 59,591 6,631
Non-cash stock compensation expense/(benefit) (1) 538 (9,215) (7,995) 3,374
--------- -------- --------- ---------
Total operating expenses 81,739 30,650 222,451 116,618
--------- -------- --------- ---------
Loss from operations (81,722) (30,650) (222,331) (116,618)
Other income (expense):
Expense associated with restructuring (1,905) - (1,905) -
Interest and investment income 1,013 5,010 4,530 14,386
Interest expense, net of amounts capitalized (25,603) (21,260) (80,689) (60,825)
--------- -------- --------- ---------
Total other expense (26,495) (16,250) (78,064) (46,439)
--------- -------- --------- ---------
Net loss (108,217) (46,900) (300,395) (163,057)
Preferred stock dividends (11,287) (10,336) (33,494) (30,724)
Preferred stock deemed dividends (171) (170) (513) (509)
--------- -------- --------- ---------
Net loss applicable to common stockholders $(119,675) $(57,406) $(334,402) $(194,290)
========= ======== ========= =========
Net loss per share applicable to common
stockholders (basic and diluted) $ (1.56) $ (1.06) $ (4.41) $ (3.77)
========= ======== ========= =========
Weighted average common shares outstanding
(basic and diluted) 76,852 54,063 75,820 51,575
========= ======== ========= =========
- -------------
(1) Allocation of non-cash stock compensation expense/(benefit)
to other operating expenses:
Satellite and transmission $ 66 $ (1,519) $ (1,446) $ 166
Programming and content 88 (1,888) (1,774) 97
Customer service and billing 4 (181) (178) 30
Sales and marketing 222 (1,789) (948) 311
General and administrative 99 (1,699) (1,672) 1,336
Research and development 59 (2,139) (1,977) 1,434
--------- -------- --------- ---------
Total non-cash stock compensation expense/(benefit) $ 538 $ (9,215) $ (7,995) $ 3,374
========= ======== ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
1
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, December 31,
2002 2001
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 63,966 $ 4,726
Marketable securities 184,732 304,218
Restricted investments, short-term - 14,798
Prepaid expenses 20,813 12,161
Other current assets 1,985 142
---------- ----------
Total current assets 271,496 336,045
Property and equipment, net 1,056,932 1,082,915
FCC license 83,654 83,654
Restricted investments, long-term 7,200 7,200
Other long-term assets 14,263 17,791
---------- ----------
Total assets $1,433,545 $1,527,605
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 44,435 $ 39,836
Accrued interest 12,250 5,477
Satellite construction payable 1,400 -
Current portion of long-term debt 41,500 15,000
---------- ----------
Total current liabilities 99,585 60,313
Long-term debt 569,768 589,990
Deferred satellite payments and accrued interest 72,354 67,201
Other long-term liabilities 2,259 2,284
---------- ----------
Total liabilities 743,966 719,788
---------- ----------
Commitments and contingencies
9.2% Series A Junior Cumulative Convertible Preferred Stock, $.001 par
value: 4,300,000 shares authorized, 1,742,512 shares issued and
outstanding at September 30, 2002 and December 31, 2001 (liquidation
preference of $174,251), at net carrying value including accrued dividends 189,030 177,120
9.2% Series B Junior Cumulative Convertible Preferred Stock, $.001 par
value: 2,100,000 shares authorized, 781,548 shares issued and
outstanding at September 30, 2002 and December 31, 2001 (liquidation
preference of $78,155), at net carrying value including accrued dividends 82,843 77,338
9.2% Series D Junior Cumulative Convertible Preferred Stock, $.001 par
value: 10,700,000 shares authorized, 2,343,091 shares issued and
outstanding at September 30, 2002 and December 31, 2001 (liquidation
preference of $234,309), at net carrying value including accrued dividends 247,302 230,710
Stockholders' equity:
Common stock, $.001 par value: 500,000,000 shares authorized,
76,992,865 and 57,455,931 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively 77 57
Additional paid-in capital 975,057 827,590
Accumulated other comprehensive income 663 -
Accumulated deficit (805,393) (504,998)
---------- ----------
Total stockholders' equity 170,404 322,649
---------- ----------
Total liabilities and stockholders' equity $1,433,545 $1,527,605
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
2
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
(Unaudited)
Common Stock Accumulated Other
--------------------- Additional Comprehensive Accumulated
Shares Amount Paid-In Capital Income Deficit Total
------------------------------------------------------------------------------
Balance, December 31, 2001.................... 57,455,931 $57 $827,590 $ - $(504,998) $ 322,649
Net loss...................................... - - - - (300,395) (300,395)
Unrealized gain on available-for-sale
securities................................ - - - 663 - 663
Sale of $.001 par value common stock,
$9.85 per share, net of expenses.......... 16,000,000 16 147,484 - - 147,500
Conversion of 8 3/4% Convertible
Subordinated Notes due 2009,
including accrued interest................ 2,913,483 3 39,298 - - 39,301
Compensation in connection with the
issuance of common stock options.......... - - (9,406) - - (9,406)
Issuance of common stock to employees
and employee benefit plans................ 598,872 1 3,130 - - 3,131
Exercise of stock options, $7.50 per share.... 3,000 - 22 - - 22
Warrant expense associated with
acquisition of programming................ - - 20 - - 20
Reduction of warrant exercise price in
connection with the amendment to
our Term Loan Facility.................... - - 926 - - 926
Issuance of common stock in connection with
conversion of 10 1/2% Series C Convertible
Preferred Stock in prior period........... 21,579 - - - - -
Preferred stock dividends..................... - - (33,494) - - (33,494)
Preferred stock deemed dividends.............. - - (513) - - (513)
-------------------------------------------------------------------------------
Balance, September 30, 2002................... 76,992,865 $77 $975,057 $663 $(805,393) $ 170,404
===============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
3
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $(300,395) $(163,057)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation expense 59,591 6,631
Accretion of debt 36,679 32,162
Expense incurred in connection with the conversion of debt 9,650 -
Non-cash stock compensation (benefit)/charge (7,995) 3,374
Loss on impairment of fixed assets 3,666 -
Amortization of in-orbit satellite insurance 8,796 8,269
Amortization of debt issuance costs 2,703 2,402
Expense associated with restructuring 1,905 -
Change in unrealized gain on marketable securities 2,408 (739)
Other 21 -
Increase (decrease) in cash and cash equivalents resulting from
changes in assets and liabilities:
Marketable securities (76,280) (205,468)
Restricted investments (202) (909)
Prepaid expenses and other current assets (17,696) (1,927)
Other long-term assets (117) 2,077
Accounts payable and accrued expenses 13,043 14,433
Accrued interest 6,319 (9,685)
Satellite construction payable 1,400 (9,310)
--------- ---------
Net cash used in operating activities (256,504) (321,747)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (37,274) (53,864)
Maturities of restricted investments, net of purchases 14,500 14,050
Proceeds from the sale of assets - 13
Sales of marketable securities, net of purchases 194,521 -
--------- ---------
Net cash provided by (used in) investing activities 171,747 (39,801)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net - 145,000
Proceeds from issuance of common stock, net 147,500 229,593
Payments associated with restructuring (3,500) -
Other (3) 348
--------- ---------
Net cash provided by financing activities 143,997 374,941
--------- ---------
Net increase in cash and cash equivalents 59,240 13,393
Cash and cash equivalents at the beginning of period 4,726 14,397
--------- ---------
Cash and cash equivalents at the end of period $ 63,966 $ 27,790
========= =========
Supplemental disclosure of cash flows from operating activities:
Cash paid during the period for interest $ 24,039 $ 25,825
Common stock issued in satisfaction of accrued compensation 1,720 2,649
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued in connection with the conversion of 8 3/4%
Convertible Subordinated Notes due 2009, including accrued interest $ 30,592 $ -
Capitalized interest 5,426 14,055
The accompanying notes are an integral part of these consolidated
financial statements.
4
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
1. Business
Sirius Satellite Radio Inc. broadcasts digital-quality radio
programming from three orbiting satellites to motorists throughout the
continental United States for a monthly subscription fee of $12.95. We deliver
60 channels of 100% commercial-free music in virtually every genre, and 40
channels of news, sports and entertainment programming.
Since inception, we have used substantial resources to develop our
satellite radio system. Our satellite radio system currently consists of our FCC
license, three in-orbit satellites, one ground spare satellite, national
broadcast studios, terrestrial repeater network and other assets used in our
operations.
We derive revenue from subscription fees, a one-time activation fee
per subscriber and selling advertising on our non-music channels. As of
September 30, 2002, we had 11,821 subscribers.
2. Restructuring of our Debt and Equity; the Lock-Up Agreement
On October 17, 2002, we entered into a lockup agreement with affiliates
of Apollo Management, L.P. ("Apollo"), The Blackstone Group L.P. ("Blackstone")
and OppenheimerFunds, Inc. ("Oppenheimer"), and members of an informal
noteholders committee, which includes Lehman Commercial Paper Inc. ("Lehman")
and Space Systems/Loral, Inc. ("Loral"), pursuant to which each agreed to use
commercially reasonable best efforts to restructure our debt and equity capital.
Pursuant to the lockup agreement:
o We agreed to commence a public exchange offer for all of our
outstanding debt. Lehman, Loral and the holders of a majority in
aggregate principal amount of our 15% Senior Secured Discount Notes
due 2007, our 14 1/2% Senior Secured Notes due 2009 and our 8 3/4%
Convertible Subordinated Notes due 2009 agreed to tender their debt
securities in such exchange offer for common stock and deliver
consents to amend the indentures under which the notes were issued
and waive any existing defaults or defaults caused as a result
of the restructuring. Assuming that all of our debt is tendered in
this exchange offer, holders of our debt will own approximately 62%
of our outstanding common stock after giving effect to the
restructuring;
o Apollo and Blackstone agreed to tender for cancellation all of our
outstanding preferred stock in exchange for approximately 8% of our
common stock after giving effect to the restructuring, and warrants to
purchase 9.1% of our common stock after giving effect to the
restructuring;
o Apollo, Blackstone and Oppenheimer agreed to purchase newly issued
shares of our common stock for an aggregate purchase price of $200,000
cash. These shares of common stock will represent approximately 22% of
our common stock after giving effect to the restructuring; and
o Existing holders of our common stock will retain 8% of our common
stock after giving effect to the restructuring.
All ownership percentages are shown on a primary basis and do not give effect to
any issuances of our common stock as the result of the exercise of outstanding
options or warrants to purchase common stock.
The completion of the debt exchange offer will be conditioned upon,
among other conditions, our receipt of valid tenders from not less than 97%
in aggregate principal amount of our outstanding debt and 90% in aggregate
principal amount of our 8 3/4% Convertible Subordinated Notes due 2009; provided
that the holders of a majority in aggregate principal amount and accrued
interest on our debt may reduce this minimum tender condition to not less than
5
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
90% in aggregate principal amount of our debt and may lower or eliminate the
minimum condition applicable to our 8 3/4% Convertible Subordinated Notes due
2009. We reserve the right to waive the minimum tender condition, which we will
be able to do only with the prior written consent of our board of directors, the
holders of a majority in aggregate principal amount and accrued interest on our
debt, Apollo and Blackstone.
Consummation of the restructuring is subject to a number of significant
conditions, including completion of the debt exchange offer, approval of
existing stockholders, regulatory approval and other customary conditions. We
expect to file a registration statement and a proxy statement relating to the
restructuring with the Securities and Exchange Commission in November.
Pursuant to the lockup agreement, we are also preparing a prepackaged
plan of reorganization to file with the bankruptcy court as an alternative for
effecting the restructuring if the conditions to completion of the exchange
offer, including the minimum tender condition, are not met or waived but we do
receive the required acceptances to seek confirmation of the prepackaged plan.
We plan to solicit the vote of each holder of our debt and our stockholders in
favor of this prepackaged plan.
The prepackaged plan consists of a plan of reorganization that would
effect the same transactions contemplated by the restructuring, including the
issuance of common stock in exchange for our debt and our preferred stock and
the new equity investment by Apollo, Blackstone and Oppenheimer. However, in the
event that we determine to file the prepackaged plan with the bankruptcy court,
Apollo, Blackstone and Oppenheimer may elect to terminate their obligations to
purchase common stock. In that event, and provided no suitable alternative new
equity investment is located, we will not seek confirmation of the prepackaged
plan.
We do not expect to pay the interest that comes due on our outstanding
debt after October 17, 2002, the date of the lockup agreement, and prior to the
consummation of the restructuring. Following the closing of the restructuring,
we expect to cure any payment defaults with respect to any of our debt that
remains outstanding.
3. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements, including
the accounts of Sirius Satellite Radio Inc. and Satellite CD Radio, Inc., our
wholly owned subsidiary, have been prepared in accordance with accounting
principles generally accepted in the United States and the instructions to Form
10-Q and Article 10 of Regulation S-X for interim financial reporting.
Accordingly, these statements do not include all of the information and
footnotes disclosures required by accounting principles generally accepted in
the United States for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal, recurring adjustments)
considered necessary for fair presentation have been included. All intercompany
transactions have been eliminated in consolidation. Our consolidated financial
statements should be read together with our consolidated financial statements
and the notes thereto contained in our Annual Report on Form 10-K for the year
ended December 31, 2001.
We emerged from development stage and entered commercial operations on
February 14, 2002; as such, we revised our Consolidated Statements of Operations
to reflect our operational status. Operating results for the nine months ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
Risks and Uncertainties
Our future operations are subject to the risks and uncertainties
frequently encountered by companies in new and
6
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
rapidly evolving markets. Among the key factors that have a direct bearing on
our results of operations are: our need for substantial additional financing by
early 2003, although we have sufficient cash to cover our estimated funding
needs through the second quarter of 2003; our dependence upon third parties to
manufacture, distribute, market and sell our radios and components for those
radios; the unproven market for our service; our competitive position; and the
useful life of our satellites.
Revenue Recognition
Revenue from subscribers consists of our monthly subscription fee,
recognized as service is provided, and a non-refundable activation fee. Our
non-refundable activation fee is recognized on a pro rata basis over the term of
the subscriber relationship, assumed to be 3.5 years for amortization purposes.
The assumed term of a subscriber relationship is based on market research and
management's judgment and, if necessary, will be refined in the future as
historical data becomes available.
During the three months ended September 30, 2002, we offered a mail-in
rebate program to new subscribers. As required by Emerging Issues Task Force No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor's Products)," we reported the cost of this program as
a reduction of subscription revenue, as we pay mail-in rebates directly to
subscribers. We have accrued for 100% of all potential rebates that were
available to new subscribers, as historical data on our rebate program is not
currently available. We will adjust the related accrual at the end of the
mail-in rebate program to reflect the actual amounts paid to subscribers.
We recognize advertising revenue from the sale of spot announcements to
advertisers as the announcements are 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 on our
Consolidated Statements of Operations.
Net Loss Per Share
Basic net loss per share is based on the weighted average number of
outstanding shares of our common stock during each reporting period. Diluted net
loss per share adjusts the weighted average for the potential dilution that
could occur if common stock equivalents (convertible preferred stock,
convertible debt, warrants and stock options) were exercised or converted into
common stock. Approximately 16,038,000 and 17,044,000 common stock equivalents
were outstanding as of September 30, 2002 and 2001, respectively, and were
excluded from the calculation of diluted net loss per share, as they were
anti-dilutive.
Property and Equipment
All costs incurred to prepare our satellite radio system for use were
capitalized. Such costs consist of satellite and launch vehicle construction,
broadcast studio equipment, terrestrial repeater equipment and interest. The
estimated useful lives of our property and equipment are as follows:
Leasehold improvements................................. 15 years
Satellite system....................................... 15 years
Broadcast studio equipment............................. 3-8 years
Terrestrial repeater equipment......................... 5-15 years
Satellite telemetry, tracking and control.............. 3-15 years
Customer care, billing and conditional access.......... 3-7 years
Furniture, fixtures, equipment and other............... 3-7 years
7
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
The estimated useful lives of our satellites are fifteen years from the
date that they were placed into orbit. We depreciate our satellite system 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.
All other property and equipment is depreciated over the estimated useful lives
stated above.
We review our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset is not
recoverable. At such time as an impairment in value of a long-lived asset is
identified, except for our FCC license discussed below, the impairment will be
measured in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," 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 a risk-free rate.
FCC License
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires, for
all fiscal years beginning after December 15, 2001, that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. In accordance with SFAS No. 142, we
determined that our FCC license has an indefinite life and we will evaluate it
for impairment on an annual basis. We completed an impairment analysis of our
FCC license as of January 1, 2002 and concluded that there were no indicators of
impairment. To date, we have not recorded any amortization expense related to
our FCC license, and therefore are not required to include the transitional
disclosures contained in SFAS No. 142.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections,"
which requires gains and losses from extinguishments of debt to be classified as
extraordinary items only if they meet the criteria in Accounting Principles
Board ("APB") Opinion No. 30, "Reporting the Results of Operations, Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." Applying the provisions of
APB Opinion No. 30 will distinguish transactions that are part of an entity's
recurring operations from those that are unusual and infrequent or that meet the
criteria for classification as an extraordinary item. SFAS No. 145 is effective
for all fiscal years beginning after May 15, 2002, with early adoption
encouraged. Our adoption of SFAS No. 145, effective May 15, 2002, required us to
reclassify the extraordinary gain we recognized on the extinguishment of $16,500
in principal amount at maturity of our 15% Senior Secured Discount Notes due
2007 in December 2001.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a liability
associated with an exit or disposal activity be measured at fair value and
recognized when the liability is incurred. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. Our adoption of SFAS No. 146, effective
June 30, 2002, had no impact on our financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires 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
revenue and expenses during the
8
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
reported period. These estimates involve judgments with respect to, among other
things, various future factors which are difficult to predict and are beyond our
control. Actual amounts could differ from these estimates.
Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current presentation.
4. Subscriber Revenue
Subscriber revenue, which consists of subscription and activation fees,
was offset by amounts accrued in connection with our mail-in rebate program.
Mail-in rebates are paid by us directly to subscribers and are recorded as a
reduction to subscription revenue in the period the subscriber activates our
service. Historical data related to our mail-in rebate program is not currently
available, therefore we are required to accrue 100% of all potential rebates
that were available to new subscribers. We will adjust the related accrual at
the end of the mail-in rebate program to reflect the actual amounts paid to
subscribers. The mail-in rebate program has resulted in negative subscriber
revenue for the three months ended September 30, 2002 and reduced subscriber
revenue for the nine months ended September 30, 2002.
The following table details the components of subscriber revenue:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
2002 2001 2002 2001
------ ------ ------ ------
Subscriber Revenue:
Subscription revenue $ 259 $ - $ 310 $ -
Activation revenue 9 - 12 -
Subscriber rebates (319) - (319) -
----- ---- ----- ----
Total Subscriber Revenue $ (51) $ - $ 3 $ -
===== ==== ===== ====
5. Interest Expense
Interest expense, net of amounts capitalized, for the nine months ended
September 30, 2002 and 2001 was $80,689 and $60,825, respectively. Included in
the nine months ended September 30, 2002 was a non-cash expense associated with
the induced conversion of our 8 3/4% Convertible Subordinated Notes due 2009 of
$9,650. There were no induced conversions of our 8 3/4% Convertible Subordinated
Notes due 2009 during the nine months ended September 30, 2001.
6. Non-cash Stock Compensation
In connection with the grant of certain stock options, the issuance of
common stock to employees and the issuance of common stock to an employee
benefit plan, we record non-cash stock compensation benefits or expenses. In
accordance with FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," we recognized a non-cash stock compensation
benefit of $9,717 for the nine month period ended September 30, 2002 related to
certain repriced stock options. We may record future non-cash stock compensation
benefits or expenses associated with these repriced stock options based on the
market value of our common stock at the end of each reporting period.
9
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
7. Investments
Marketable Securities
Marketable securities consist of U.S. government agency obligations.
Effective April 1, 2002, we began classifying marketable securities as
available-for-sale securities rather than trading securities because management
no longer intends to buy and sell marketable securities with the objective of
generating profits. Available-for-sale securities are carried at fair market
value and unrealized gains and losses are included as a component of
stockholders' equity. In prior periods, marketable securities were classified
as trading securities and unrealized holding gains and losses were recognized
in earnings. We had an unrealized holding gain on marketable securities of $608
and $3,387 at September 30, 2002 and December 31, 2001, respectively.
Restricted Investments
Restricted investments consist of fixed income securities, which are
stated at amortized cost plus accrued interest. Included in restricted
investments are short-term and long-term certificates of deposit of $7,200 and
$7,789 as of September 30, 2002 and December 31, 2001, respectively, which are
pledged to secure our reimbursement obligations under letters of credit issued
primarily for the benefit of the lessor of our headquarters. Also included in
restricted investments as of December 31, 2001 were U.S. Treasury Notes of
$14,209, which were used to pay interest on our 14 1/2% Senior Secured Notes due
2009 on May 15, 2002. These U.S. Treasury Notes were classified as
held-to-maturity securities and unrealized holding gains and losses were not
reflected in earnings. As of December 31, 2001, we had an unrealized holding
gain of $196 related to these held-to-maturity securities.
8. Deferred Satellite Payments
Loral has deferred $50,000 due under our amended and restated satellite
contract. The amount deferred, which approximates fair value, bears interest at
10% per year and was originally due in quarterly installments beginning in June
2002. Our fourth, spare, satellite was delivered to ground storage on April 19,
2002 and was originally expected to be delivered to ground storage in October
2000. Loral's delay in delivering this satellite resulted in a revision to the
deferred payment schedule as follows: $8,333 due in 2003, $25,001 due in 2004
and $16,666 due in 2005. We have the right to prepay any deferred payments
together with accrued interest, without penalty. As collateral security for
this deferred amount, we have granted Loral a security interest in our
terrestrial repeater network.
Pursuant to the lockup agreement, Loral has agreed to tender its debt
in exchange for shares of our common stock (See Note 2, "Restructuring of our
Debt and Equity; the Lock-Up Agreement"). Upon consummation of the
restructuring, the agreement relating to this debt and the security interest
in our terrestrial repeater network will be cancelled.
9. Long-term Debt
Our long-term debt consists of the following:
Maturity September 30, December 31,
Date 2002 2001
-------- ------------- ------------
15% Senior Secured Discount Notes due 2007 12/01/07 $273,073 $242,286
14 1/2% Senior Secured Notes due 2009 5/15/09 178,618 176,346
8 3/4% Convertible Subordinated Notes due 2009 9/29/09 16,461 45,936
Term Loan Facility (current interest rate of 6.8%) Various 143,116 140,422
-------- --------
Total debt $611,268 $604,990
Less: current portion (41,500) (15,000)
-------- --------
Total long-term debt $569,768 $589,990
======== ========
10
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
Our obligations under the 15% Senior Secured Discount Notes due 2007,
14 1/2% Senior Secured Notes due 2009 and term loan facility are secured by
liens on the stock of Satellite CD Radio, Inc., our subsidiary that holds our
FCC license, and our fourth, spare satellite.
Acquisitions of 8 3/4% Convertible Subordinated Notes due 2009
During the nine months ended September 30, 2002, we acquired $29,475 in
aggregate principal amount of our 8 3/4% Convertible Subordinated Notes due 2009
in exchange for 2,913,483 shares of our common stock.
Default on 8 3/4% Convertible Subordinated Notes due 2009
On September 29, 2002, we elected not to pay the interest due on our
8 3/4% Convertible Subordinated Notes due 2009. This failure to pay interest
matured into an event of default under the indenture relating to our 8 3/4%
Convertible Subordinated Notes due 2009 on October 30, 2002. If the holders of,
or the trustee for, our 8 3/4% Convertible Subordinated Notes due 2009
accelerate the maturity of these notes, then this acceleration may result in an
event of default under the indentures relating to our 15% Senior Secured
Discount Notes due 2007 and our 14 1/2% Senior Secured Notes due 2009. Pursuant
to the lockup agreement, Lehman and Loral have agreed not to pursue their rights
to accelerate the maturity of their debt so long as the lockup agreement has
not been terminated.
Amendment of Term Loan Facility
On March 26, 2002, we entered into an amendment to our term loan
agreement with Lehman, which adjusted the financial covenants, accelerated the
payment schedule of the term loan and reduced the exercise price of the warrants
that had been issued in connection with the term loan from $29.00 to $15.00 per
share. In connection with this exercise price reduction, we adjusted the book
value of our term loan and future amortization schedule.
As amended, the term loan matures in installments as set forth below:
Installment Amount
----------- ------
June 30, 2002 $ 7,500
September 30, 2002 7,500
December 31, 2002 7,500
March 31, 2003 7,500
June 30, 2003 11,500
March 31, 2004 3,375
June 30, 2004 3,375
September 30, 2004 3,375
December 31, 2004 3,375
March 31, 2005 23,750
June 30, 2005 23,750
September 30, 2005 23,750
December 31, 2005 23,750
At our option, we may defer the payments due on June 30, 2002, September 30,
2002, December 31, 2002, March 31, 2003 and June 30, 2003 for a period of ninety
days. We elected to defer the June 30, 2002 and September 30, 2002 installments
for ninety days.
Pursuant to the lockup agreement, Lehman has agreed to tender its term
loan in exchange for shares of our common stock (See Note 2, "Restructuring of
our Debt and Equity; the Lock-Up Agreement"). Further, pursuant to the lockup
agreement, Lehman has agreed not to pursue its right to payment of principal,
including the
11
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)
principal payments originally due on June 30, 2002 and September 30, 2002, and
interest due under the term loan agreement so long as the lock-up agreement has
not been terminated. We have paid interest on the term loan through September
10, 2002.
10. Commitments and Contingencies
We have entered into agreements with providers of non-music programming
and, in certain instances, are obligated to pay license fees, to share
advertising revenues from this programming or to purchase advertising on
properties owned or controlled by these providers. These obligations aggregate
$942, $15,189, $28,075, $22,627 and $674 for the remainder of 2002 and for the
years ending December 31, 2003, 2004, 2005 and 2006, respectively.
We have entered into various marketing agreements to promote our brand.
Our obligations under these agreements aggregate $10,534, $37,595, $16,343,
$10,129 and $6,000 for the remainder of 2002 and for the years ending December
31, 2003, 2004, 2005 and 2006, respectively.
We have also entered into agreements with automakers, radio
manufacturers and others that include per-radio and per-subscriber required
payments and revenue sharing arrangements. These future costs are dependent upon
many factors and are difficult to anticipate; however, these costs may be
substantial. We may enter into additional programming, marketing and other
agreements that contain provisions similar to our current agreements.
11. Common Stock Issuance
In January 2002, we sold 16,000,000 shares of our common stock in an
underwritten public offering, resulting in net proceeds of approximately
$147,500.
12. Subsequent Events
On October 7, 2002, we cancelled the warrant previously issued to Ford
Motor Company and issued a new warrant to Ford which entitles Ford to purchase
up to 4,000,000 shares of our common stock at a purchase price of $3.00 per
share. On October 25, 2002, we cancelled the warrant previously issued to
DaimlerChrysler Corporation and issued a new warrant to Daimler which entitles
Daimler to purchase up to 4,000,000 shares of our common stock at a purchase
price of $3.00 per share.
12
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, unless otherwise stated)
Special Note Regarding Forward-looking Statements
The following cautionary statements identify important factors that
could cause our actual results to differ materially from those projected in
forward-looking statements made in this Quarterly Report on Form 10-Q and in
other reports and documents published by us from time to time. Any statements
about our beliefs, plans, objectives, expectations, assumptions, future events
or performance are not historical facts and may be forward-looking. These
statements are often, but not always, made through the use of words or phrases
such as "will likely result," "are expected to," "will continue," "is
anticipated," "estimated," "intends," "plans," "projection" and "outlook." Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed throughout our Annual Report on Form 10-K for the year ended
December 31, 2001 (the "Form 10-K") and in other reports and documents published
by us from time to time, particularly the risk factors described under
"Business--Risk Factors" in Part I of the Form 10-K. Among the significant
factors that could cause our actual results to differ materially from those
expressed in the forward-looking statements are:
o our need for substantial additional financing by early 2003, although
we have sufficient cash to cover our estimated funding needs through
the second quarter of 2003;
o our dependence upon third parties to manufacture, distribute, market
and sell our radios and components for those radios;
o the unproven market for our service;
o our competitive position; XM Satellite Radio, the other satellite
radio provider in the United States, began offering its service before
us, has a substantial number of subscribers and may have certain
competitive advantages; and
o the useful life of our satellites, which have experienced circuit
failures on their solar arrays. At this time, the circuit failures our
satellites have experienced are not expected to limit the power of our
broadcast signal, reduce the expected useful life of our satellites or
otherwise affect our operations.
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 such forward-looking statements. In addition, any forward-looking statements
speak only as of the date on which such statement 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 such statement is made or 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 results to
differ materially from those contained in any forward-looking statements.
Overview
From our three orbiting satellites, we directly broadcast
digital-quality radio to motorists throughout the continental United States for
a monthly subscription fee of $12.95. We deliver 60 channels of 100%
commercial-free music in virtually every genre, and 40 channels of news, sports,
and entertainment programming. We hold one of only two licenses issued by the
FCC to operate a national satellite radio system.
We emerged from the development stage in the first quarter of 2002
following the launch of our service on February 14, 2002 in Denver, Colorado;
Houston, Texas; Phoenix, Arizona; and Jackson, Mississippi. We continued to
expand our commercial service throughout the United States during the first and
second quarters of
13
2002 and completed our national roll out on July 1, 2002. We had 11,821
subscribers as of September 30, 2002, and 16,136 subscribers as of October 31,
2002.
We derive revenue from subscription fees, a one-time activation fee
per subscriber and selling advertising on our non-music channels.
Our operating expenses consist primarily of:
o marketing costs, including marketing and sales personnel,
advertising, promotions, equipment subsidies, and payments to
retailers, dealers, distributors and automakers;
o programming costs, including royalties to copyright holders,
license fees to programming providers, and advertising revenue
sharing arrangements;
o costs of operating and maintaining our broadcast system,
including the costs of tracking, controlling and insuring our
satellites, operating our terrestrial repeater network, and
maintaining our national broadcast studio;
o costs associated with the continuing development of our radio
technology, including the costs of designing and developing
future integrated circuits ("chip sets");
o general and administrative costs, including salary and employment
related expenses, rent and occupancy costs, corporate insurance
expenses and other miscellaneous costs, such as legal and
consulting fees; and
o depreciation associated with our satellite system, broadcast
studio equipment, terrestrial repeater network and other systems
and facilities.
Results of Operations
Three Months Ended September 30, 2002 Compared with Three Months Ended
September 30, 2001
We had negative subscriber revenue of $51 for the three months ended
September 30, 2002. Revenue from subscribers consists of our monthly
subscription fee, recognized as service is provided, and a non-refundable
activation fee, recognized on a pro rata basis over the term of the subscriber
relationship, currently assumed to be 3.5 years. Subscription and activation
revenue totaling $268 was offset by a $319 reduction in revenue related to our
mail-in rebate program. Mail-in rebates are paid by us directly to subscribers
and are recorded as a reduction to subscription revenue in the period the
subscriber activates our service. Historical data related to our mail-in rebate
program is not currently available, therefore we are required to accrue 100% of
all potential rebates that were available to new subscribers, which resulted in
negative subscriber revenue for the three months ended September 30, 2002. We
will adjust the related accrual at the end of the mail-in rebate program
to reflect the actual amounts paid to subscribers.
Average monthly revenue per subscriber was approximately $12.38 for the
three months ended September 30, 2002. Average monthly revenue per subscriber,
which is not a measure of financial performance under accounting principles
generally accepted in the United States, is derived from total earned
subscription revenue (excluding amounts accrued in connection with the mail-in
rebate program) and activation revenue over the daily weighted average number of
subscribers for the quarter. We expect average revenue per subscriber to remain
relatively stable during the remainder of 2002. Average revenue per subscriber
in future periods will be dependent upon the amount of subscriber discounts and
the identification of additional revenue streams from subscribers.
Advertising revenue, net of agency fees of $11, was $62 for the three
months ended September 30, 2002. We recognize advertising revenue from sales of
spot announcements to advertisers as the announcements are broadcast.
14
We had net losses of $108,217 and $46,900 for the three months ended
September 30, 2002 and 2001, respectively. Operating expenses increased to
$81,739 for the three months ended September 30, 2002 from $30,650 for the three
months ended September 30, 2001. The increase in operating expenses was
attributable to the continued implementation of our sales and marketing campaign
following the launch of our service, depreciation of our satellite system and
terrestrial repeater network, amounts paid to radio manufacturers to subsidize a
portion of the costs of our radios and the increase in our workforce. We expect
operating expenses to continue to increase as we build our subscriber base and
expand our operations.
Satellite and transmission expenses decreased to $8,140 for the three
months ended September 30, 2002 from $8,294 for the three months ended September
30, 2001. Satellite and transmission expenses consist primarily of personnel
costs, in-orbit satellite insurance expense and costs associated with the
operation and maintenance of our satellite tracking, telemetry and control
system, terrestrial repeater network and national broadcast studio. We expect
that a significant portion of our satellite and transmission costs will remain
relatively constant, and that increases or decreases in satellite and
transmission costs will be due, in large part, to increased or decreased costs
of insuring our in-orbit satellites. Our indentures currently require us to
maintain insurance covering our in-orbit satellites. We intend to evaluate the
benefits of continuing to purchase in-orbit satellite insurance in light of the
increased costs and the probability of an insurable failure occurring, and may
decline to purchase such insurance.
Programming and content expenses increased to $4,199 for the three
months ended September 30, 2002 from $2,377 for the three months ended September
30, 2001. Programming and content expenses include license fees to third parties
that provide non-music content, costs associated with the production of our
music and non-music programming, costs of our on-air talent, royalties for music
broadcast on our service and programming personnel costs. The increase in costs
during the 2002 period was primarily attributable to costs of on-air talent and
amounts paid to acquire programming. We anticipate that our programming costs
will increase over time as we continue to develop our channel line-up, share
additional advertising revenue from the increased price of spot advertisements
sold to advertisers and incur additional royalties as a result of increased
subscriber revenue.
Customer service and billing costs increased to $1,855 for the
three months ended September 30, 2002 from $1,614 for the three months ended
September 30, 2001. Customer service center and billing costs include costs
associated with the full time operation of our customer service center and
subscriber management system. The increase in costs during the 2002 period was
primarily attributable to additional customer representatives at our customer
service center. We expect that our customer service center and billing costs
will increase as we acquire subscribers. Customer service and billing costs on
a per subscriber basis will be significantly reduced as our fixed operating
costs are spread over a larger subscriber base. We have identified defects in
our subscriber management system which, if not corrected in a timely manner,
could negatively impact our business, including our ability to bill subscribers
and accurately report financial information. We have notified the provider of
this system that these defects must be resolved promptly.
Sales and marketing expenses increased to $33,314 for the three months
ended September 30, 2002 from $5,494 for the three months ended September 30,
2001. Sales and marketing expenses include costs related to sales and marketing
personnel, advertising, sponsorships, consumer promotions, brand building
activities, subsidies paid to radio manufacturers, commission payments to
distributors and retailers and other payments to distributors and retailers to
reimburse them for marketing and promotional activities. Sales and marketing
expenses increased during the 2002 period due to the national launch of our
service, marketing activities by distributors and retailers, our marketing and
promotional efforts and the costs associated with subsidies paid to radio and
chip set manufacturers in advance of acquiring subscribers. Sales and marketing
expenses may increase in the future as we build brand awareness through national
advertising, offer additional hardware subsidies paid to manufacturers of our
radios and other incentives to acquire subscribers including commissions to
retailers and other distributors.
General and administrative expenses increased to $8,121 for the three
months ended September 30, 2002 from $7,605 for the three months ended September
30, 2001. General and administrative expenses include rent and occupancy costs,
corporate overhead and general and administrative personnel. The increase in the
2002 period is associated with the expansion of our workforce and a loss of
$924
15
on the disposal of assets associated with terminating a lease on non-essential
office space, which was offset by a decrease in rent due to this termination.
Research and development costs decreased to $2,561 for the three months
ended September 30, 2002 from $12,145 for the three months ended September 30,
2001. Research and development includes costs associated with our agreements
with Agere Systems, Inc. to develop and manufacture chip sets for use in our
radios. In addition, we have agreements with Alpine Electronics Inc., Audiovox
Corporation, Clarion Co., Ltd., Delphi Corporation, Kenwood Corporation,
Matsushita Communications Industrial Corporation USA, Visteon Automotive Systems
and others to design, develop and produce our radios and have agreed to pay
certain costs associated with these radios. We record expenses under these
agreements as work is performed. The decrease in the 2002 period related to a
reduction in expenses as we completed our first generation of chip sets and
Sirius radios. The amount of our future research and development costs is
dependent upon modifications to our existing technology and enhancements to our
radios, and we expect this amount to decrease on an annual basis for 2003.
Depreciation expense increased to $23,011 for the three months ended
September 30, 2002 from $2,336 for the three months ended September 30, 2001.
The increase principally relates to our satellite system and terrestrial
repeater network, which we began depreciating during 2002, our first year of
commercial operations.
We recognized non-cash stock compensation expense of $538 and non-cash
stock compensation benefit of $9,215 for the three months ended September 30,
2002 and 2001, respectively. Non-cash stock compensation includes charges and
benefits associated with the grant of certain stock options, the issuance of
common stock to employees and the issuance of common stock to an employee
benefit plan. The non-cash stock compensation benefit for the 2001 period was
principally due to the repricing of certain employee stock options. We may
record future non-cash stock compensation benefits or expense related to the
repriced stock options based on the market value of our common stock at the end
of each reporting period.
Expenses associated with the restructuring of our debt and equity,
consisting primarily of legal and advisory fees, totaled $1,905 for the three
months ended September 30, 2002. We expect to incur significant additional
expenses related to the restructuring of our debt and equity until the time the
restructuring is consummated.
Interest and investment income decreased to $1,013 for the three months
ended September 30, 2002 from $5,010 for the three months ended September 30,
2001. This decrease was attributable to lower returns on our investments in U.S.
government securities and lower average balances of cash, cash equivalents and
marketable securities during the 2002 period.
Interest expense was $25,603 for the three months ended September 30,
2002 and $21,260 for the three months ended September 30, 2001, net of amounts
capitalized of $0 and $4,982, respectively.
Nine Months Ended September 30, 2002 Compared with Nine Months Ended
September 30, 2001
Revenue from subscribers was $3 for the nine months ended September 30,
2002. Subscription and activation revenue totaling $322 was offset by $319
accrued for our mail-in rebate program. Mail-in rebates are paid by us directly
to subscribers and are recorded as a reduction to subscription revenue in the
period the subscriber activates our service. Historical data related to our
mail-in rebate program is not currently available, therefore we are required to
accrue 100% of all potential rebates that were available to new subscribers,
which significantly reduced our subscriber revenue for the three months ended
September 30, 2002. We will adjust the related accrual at the end of the
mail-in rebate program to reflect the actual amounts paid to subscribers.
Average monthly revenue per subscriber was approximately $12.41 for the
nine months ended September 30, 2002. Average monthly revenue per subscriber,
which is not a measure of financial performance under accounting principles
generally accepted in the United States, is derived from total earned
subscription revenue (excluding amounts accrued in connection with the mail-in
rebate program) and activation revenue over the daily weighted average number of
subscribers for the quarter.
Advertising revenue, net of agency fees of $19, was $111 for the nine
months ended September 30, 2002.
16
We had net losses of $300,395 and $163,057 for the nine months ended
September 30, 2002 and 2001, respectively. Operating expenses increased to
$222,451 for the nine months ended September 30, 2002 from $116,618 for the nine
months ended September 30, 2001. The increase in operating expenses was
primarily attributable to the continued implementation of our sales and
marketing campaign for the launch of our service, depreciation of our satellite
system and terrestrial repeater network, amounts paid to radio manufacturers to
subsidize a portion of the costs of these radios and the increase in our
workforce.
Satellite and transmission costs increased to $25,347 for the nine
months ended September 30, 2002 from $22,717 for the nine months ended September
30, 2001. The increase in costs related primarily to the expanded operation of
our terrestrial repeater network as we prepared for our national launch and an
increase in the cost of in-orbit satellite insurance.
Programming and content expenses increased to $12,107 for the nine
months ended September 30, 2002 from $6,297 for the nine months ended September
30, 2001. The increase in costs during the 2002 period was primarily
attributable to costs of on-air talent, license fees paid to acquire programming
and advertising revenue share.
Customer service and billing costs increased to $5,579 for the
nine months ended September 30, 2002 from $4,746 for the nine months ended
September 30, 2001. The increase in costs during the 2002 period was primarily
attributable to costs of additional customer representatives at our customer
service center.
Sales and marketing expenses increased to $79,874 for the nine months
ended September 30, 2002 from $15,172 for the nine months ended September 30,
2001. Sales and marketing expenses increased during the 2002 period due to the
launch of our service, marketing activities by distributors and retailers, our
marketing and promotional efforts, costs associated with subsidies paid to
radio and chip set manufacturers in advance of acquiring subscribers and costs
of providing live feeds of our service to retailers and other distributors. In
addition, during the 2002 period we incurred a one-time charge of $2,742 related
to the disposal of certain elements of our website.
General and administrative expenses increased to $24,249 for the nine
months ended September 30, 2002 from $19,458 for the nine months ended September
30, 2001. The increase in the 2002 period is associated with the expansion of
our workforce and a loss of $924 on the disposal of assets associated with
terminating a lease on non-essential office space, which was offset by a
decrease in rent due to this termination.
Research and development costs decreased to $23,699 for the nine months
ended September 30, 2002 from $38,223 for the nine months ended September 30,
2001. Research and development costs decreased during the 2002 period as we
completed our first generation chip set and our radio manufacturers
substantially completed development of our first generation radios. The overall
decrease was partially offset by a payment of $8,134 to Panasonic to release us
from our purchase commitment and reduce the factory price of our radios.
Depreciation expense increased to $59,591 for the nine months ended
September 30, 2002 from $6,631 for the nine months ended September 30, 2001. The
increase principally relates to the depreciation of our satellite system and
terrestrial repeater network.
We recognized a non-cash stock compensation benefit of $7,995 and
non-cash stock compensation expense of $3,374 for the nine months ended
September 30, 2002 and 2001, respectively. The non-cash stock compensation
benefit for the 2002 period was principally due to the repricing of certain
employee stock options. We may record future non-cash stock compensation
benefits or expenses related to the repriced stock options based on the market
value of our common stock at the end of each reporting period.
Expenses associated with the restructuring of our debt and equity,
consisting primarily of legal and advisory fees, totaled $1,905 for the nine
months ended September 30, 2002. We expect to incur significant additional
expenses related to the restructuring of our debt and equity.
Interest and investment income decreased to $4,530 for the nine months
ended September 30, 2002, from $14,386 for the nine months ended September 30,
2001. This decrease was attributable to lower returns on our investments in U.S.
government securities and lower average balances of cash, cash equivalents and
marketable securities during the 2002 period.
17
Interest expense was $80,689 for the nine months ended September 30,
2002 and $60,825 for the nine months ended September 30, 2001, net of amounts
capitalized of $5,426 and $14,055, respectively. Included in interest expense
for the nine months ended September 30, 2002 was $9,650 of non-cash expense
related to the induced conversion of $29,475 in aggregate principal amount of
our 8 3/4% Convertible Subordinated Notes due 2009.
Liquidity and Capital Resources
At September 30, 2002, we had cash, cash equivalents and marketable
securities totaling $248,698 and working capital of $171,911 compared with cash,
cash equivalents, marketable securities and short-term restricted investments
totaling $323,742 and working capital of $275,732 at December 31, 2001.
Cash Flows
Net cash used in operating activities was $256,504 for the nine months
ended September 30, 2002, as compared to $321,747 for the nine months ended
September 30, 2001. The decrease in cash used in operations was primarily
attributable to a reduction in cash used to purchase marketable securities
during the 2002 period. This decrease was offset by an increase in sales and
marketing costs, an increase in programming and content costs, and prepayments
related to advertising.
Net cash provided by investing activities for the nine months ended
September 30, 2002 was $171,747 as compared to net cash used in investing
activities of $39,801 for the nine months ended September 30, 2001. The change
from the prior period was principally due to a change in the classification of
our marketable securities from trading to available-for-sale securities during
the second quarter of 2002, offset by a decrease in capital expenditures.
Transactions relating to trading securities are considered operating activities;
transactions relating to available-for-sale securities are classified as
investing activities. During the second and third quarter of 2002, we received
cash from the maturity of marketable securities of $194,521.
Net cash provided by financing activities for the nine months ended
September 30, 2002 was $143,997 as compared to $374,941 for the nine months
ended September 30, 2001. During 2002, we issued 16,000,000 shares of common
stock resulting in net proceeds of $147,500 and paid fees associated with the
restructuring of $3,500. During 2001, we completed an equity offering resulting
in net proceeds of $229,300 and had net borrowings under our term loan facility
of $145,000.
Funds Raised to Date
Since inception, we have funded the development of our system and the
introduction of our service through the issuance of debt and equity securities.
As of September 30, 2002, we had raised approximately $1,250,800 in equity
capital from the sale of our common stock and convertible preferred stock. In
addition, we have received approximately $638,000 in net proceeds from public
debt offerings and private credit arrangements.
Additional Funding Requirements
We have sufficient cash and cash equivalents to cover our estimated
funding needs through the second quarter of 2003, without giving effect to the
net proceeds from the sale of our common stock we expect to receive upon the
closing of the restructuring discussed below. If the restructuring is not
completed, we anticipate that our additional funding needs will total
approximately $600,000 until our operations become self-sustaining, which we
currently anticipate will not occur for several years, when we have
approximately three million subscribers. However, if the growth rate of the
number of subscribers is slower than expected or the cost of obtaining these
subscribers is higher than forecast, our operations may become self-sustaining
at a later date or may never become self-sustaining. The
18
amount and timing of our cash requirements also depends upon other factors,
including the rate of growth of our business, subscriber acquisition costs and
costs of financing.
On October 17, 2002, we entered into a lockup agreement with affiliates
of Apollo Management, L.P. ("Apollo"), The Blackstone Group L.P. ("Blackstone")
and OppenheimerFunds, Inc. ("Oppenheimer"), and members of an informal
noteholders committee, which includes Lehman Commercial Paper Inc. ("Lehman"),
Space Systems/Loral, Inc. ("Loral"), pursuant to which each agreed to use
commercially reasonable best efforts to restructure our debt and equity capital.
Pursuant to the lockup agreement:
o We agreed to commence a public exchange offer for all of our
outstanding debt. Lehman, Loral and the holders of a majority in
aggregate principal amount of our 15% Senior Secured Discount Notes due
2007, our 14 1/2% Senior Secured Notes due 2009 and our 8 3/4%
Convertible Subordinated Notes due 2009 agreed to tender their debt
securities in such exchange offer for our common stock and deliver
consents to amend the indentures under which the notes were issued
and waive any existing defaults or defaults caused as a result of
the restructuring. Assuming that all of our debt is tendered in this
exchange offer, holders of our debt will own approximately 62% of our
outstanding common stock after giving effect to the restructuring;
o Apollo and Blackstone agreed to tender for cancellation all of our
outstanding preferred stock in exchange for approximately 8% of our
common stock after giving effect to the restructuring, and warrants
to purchase 9.1% of our common stock after giving effect to the
restructuring;
o Apollo, Blackstone and Oppenheimer agreed to purchase newly issued
shares of our common stock for an aggregate purchase price of $200,000
cash. These shares of common stock will represent approximately 22% of
our common stock after giving effect to the restructuring; and
o Existing holders of our common stock will retain 8% of our common
stock after giving effect to the restructuring.
All ownership percentages are shown on a primary basis and do not give effect to
any issuances of our common stock as the result of the exercise of outstanding
options or warrants to purchase common stock.
The completion of the debt exchange offer will be conditioned upon,
among other conditions, our receipt of valid tenders from not less than 97%
in aggregate principal amount of our outstanding debt and 90% in aggregate
principal amount of our 8 3/4% Convertible Subordinated Notes due 2009; provided
that the holders of a majority in aggregate principal amount and accrued
interest on our debt may reduce this minimum tender condition to not less than
90% in aggregate principal amount of our debt and may lower or eliminate the
minimum condition applicable to our 8 3/4% Convertible Subordinated Notes due
2009. We reserve the right to waive the minimum tender condition, which we will
be able to do only with the prior written consent of our board of directors, the
holders of a majority in aggregate principal amount and accrued interest on our
debt securities, Apollo and Blackstone.
Consummation of the restructuring is subject to a number of significant
conditions, including completion of the debt exchange offer, approval of
existing stockholders, regulatory approval and other customary conditions. We
expect to file a registration statement and a proxy statement relating to the
restructuring with the Securities and Exchange Commission in November.
Pursuant to the lockup agreement, we are also preparing a prepackaged
plan of reorganization to file with the bankruptcy court as an alternative for
effecting the restructuring if the conditions to completion of the exchange
offer, including the minimum tender condition, are not met or waived but we do
receive the required acceptances to seek confirmation of the prepackaged plan.
We plan to solicit the vote of each holder of our debt and our stockholders in
favor of this prepackaged plan.
The prepackaged plan consists of a plan of reorganization that would
effect the same transactions contemplated by the restructuring, including the
issuance of common stock in exchange for our debt and our preferred stock and
the new equity investment by Apollo, Blackstone and Oppenheimer. However, in
the event
19
that we determine to file the prepackaged plan with the bankruptcy court,
Apollo, Blackstone and Oppenheimer may elect to terminate their obligations
to purchase common stock. In that event, and provided no suitable alternative
new equity investment is located, we will not seek confirmation of the
prepackaged plan.
We do not expect to pay the interest that comes due on our outstanding
debt after October 17, 2002, the date of the lockup agreement, and prior to the
consummation of the restructuring. Following the closing of the restructuring,
we expect to cure any payment defaults with respect to any of our debt that
remains outstanding.
Following consummation of the restructuring, we expect to have
sufficient cash to cover our funding needs into the second quarter of 2004.
After giving effect to the restructuring, we anticipate that we can achieve cash
flow breakeven with further additional funding of approximately $75,000.
We are continuing to evaluate initiatives that could enable us to achieve
cash flow breakeven without raising additional funds. However, if the number
of actual subscribers, or the costs to acquire new subscribers, differs
substantially from our expectations, we may need substantial additional
financing. These amounts are estimates and may change, and we may need
additional funding in excess of these estimates. We may have to raise more
funds than expected to remain in business and continue to develop and market
our satellite radio service.
Default on our 8 3/4% Convertible Subordinated Notes due 2009
On September 29, 2002, we elected not to pay the interest due on our
8 3/4% Convertible Subordinated Notes due 2009. As of September 30, 2002, there
was $16,461 in principal amount of our 8 3/4% Convertible Subordinated Notes due
2009 outstanding, and the aggregate amount of interest due with respect to these
notes was $720. This failure to pay interest matured into an event of default
under the indenture relating to our 8 3/4% Convertible Subordinated Notes due
2009 on October 30, 2002.
If the holders of, or the trustees for, our 8 3/4% Convertible
Subordinated Notes due 2009 accelerates the maturity of these notes, then this
acceleration may result in an event of default under the indentures relating to
our 15% Senior Secured Discount Notes due 2007 and our 14 1/2% Senior Secured
Notes due 2009. Pursuant to the lockup agreement, Lehman and Loral have agreed
not to pursue their rights to accelerate the maturity of their debt so long as
the lockup agreement has not been terminated.
We expect to file a registration statement with the Securities and
Exchange Commission relating to an offer to exchange these notes for shares of
our common stock in November.
Contractual Commitments
We have entered into agreements with providers of non-music programming
and, in certain instances, are obligated to pay license fees, to share
advertising revenues from this programming or to purchase advertising on
properties owned or controlled by these providers. These obligations aggregate
$942, $15,189, $28,075, $22,627 and $674 for the remainder of 2002, and for the
years ending December 31, 2003, 2004, 2005 and 2006, respectively.
We have entered into marketing agreements to promote our brand. Our
obligations under these agreements aggregate $10,534, $37,595, $16,343, $10,129
and $6,000 for the remainder of 2002, and for the years ending December 31, 2003
and 2004, 2005 and 2006, respectively.
We have also entered into agreements with automakers, radio
manufacturers and others that include per-radio and per-subscriber required
payments and revenue sharing arrangements. These future costs are dependent upon
many factors and are difficult to anticipate; however, these costs may be
substantial. We may enter into additional programming, marketing and other
agreements that contain provisions similar to our current agreements.
20
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods. Our significant accounting
policies are described in Note 2 to our consolidated financial statements in
Item 14 of our Annual Report on Form 10-K for the year ended December 31, 2001.
We have identified the following policies as critical to our business and
understanding of our results of operations.
Subscription Revenue Recognition. Revenue from subscribers consists of
our monthly subscription fee, recognized as the service is provided, and a
non-refundable activation fee, recognized on a pro rata basis over the term of
the subscriber relationship, currently estimated to be 3.5 years. The estimated
term of a subscriber relationship is based on market research and management's
judgment and, if necessary, will be refined in the future as historical data
becomes available. Mail-in rebates are paid by us directly to subscribers and
are recorded as a reduction to subscription revenue in the period the subscriber
activates our service. Historical data related to our mail-in rebate program is
not currently available, therefore we are required to accrue 100% of all
potential rebates that were available to new subscribers.
Average Monthly Revenue per Subscriber. Average monthly revenue per
subscriber, which is not a measure of financial performance under accounting
principles generally accepted in the United States, is derived from total earned
subscription revenue (excluding amounts accrued for the mail-in rebate program)
and activation revenue over the daily weighted average number of subscribers for
the quarter.
Useful Lives of Satellites. We consider our satellite system to include
the cost of satellite construction, launch vehicles, launch insurance and
capitalized interest, including the cost of our spare satellite. The expected
useful lives of our in-orbit satellites are fifteen years from the date they
were placed into orbit. We are depreciating our three in-orbit satellites over
their respective remaining useful lives beginning February 14, 2002 or, in the
case of our spare satellite, from the date it was delivered to ground storage on
April 19, 2002. If placed into orbit, our spare satellite is expected to operate
effectively for fifteen years; however, the spare satellite may be replaced at
the time we launch a new satellite system.
Marketable Securities. Marketable securities consist of U.S. government
agency obligations. Effective April 1, 2002, marketable securities are
classified as available-for-sale securities because management no longer intends
to buy and sell marketable securities with the objective of generating profits.
Available-for-sale securities are carried at fair market value and unrealized
gains and losses are included as a component of stockholders' equity. In prior
periods, marketable securities were classified as trading securities and
unrealized holding gains and losses were recognized in earnings.
21
Controls and Procedures
As of September 30, 2002, an evaluation was performed under the
supervision and with the participation of our management, including Joseph P.
Clayton, our President and Chief Executive Officer, and John J. Scelfo, our
Executive Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure and control procedures. Based on that
evaluation, our management, including our chief executive officer and chief
financial officer, concluded that our disclosure controls and procedures were
effective as of September 30, 2002. There have been no significant changes in
our internal controls or in other factors that could significantly affect
internal controls subsequent to September 30, 2002.
22
PART II - OTHER INFORMATION
(Dollar amounts in thousands)
ITEM 3. Default on Senior Securities
On September 29, 2002, we elected not to pay the interest due on our
8 3/4% Convertible Subordinated Notes due 2009. As of September 30, 2002, there
was $16,461 in principal amount of our 8 3/4% Convertible Subordinated Notes due
2009 outstanding, and the aggregate amount of interest due with respect to these
notes was $720. The failure to pay this interest matured into an event of
default under the indenture relating to our 8 3/4% Convertible Subordinated
Notes due 2009 on October 30, 2002.
If the holders of, or the trustee for, our 8 3/4% Convertible
Subordinated Notes due 2009 accelerates the maturity of these notes, then this
acceleration may result in an event of default under the indentures relating
to our 15% Senior Secured Discount Notes due 2007 and our 14 1/2% Senior Secured
Notes due 2009. Pursuant to the lockup agreement, Lehman and Loral have agreed
not to pursue their rights to accelerate the maturity of their debt so long as
the lockup agreement has not been terminated.
We expect to file a registration statement with the Securities and
Exchange Commission relating to an offer to exchange these notes for shares of
our common stock in November.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See Exhibit Index attached hereto.
(b) Reports on Form 8-K.
23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SIRIUS SATELLITE RADIO INC.
By: /s/ John J. Scelfo
---------------------------------
John J. Scelfo
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
November 14, 2002
24
Certifications
I, Joseph P. Clayton, the Chief Executive Officer of Sirius Satellite
Radio Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sirius Satellite
Radio Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Joseph P. Clayton
-----------------------------------
Joseph P. Clayton
President and Chief Executive Officer
(Principal Executive Officer)
November 14, 2002
25
I, John J. Scelfo, the Chief Financial Officer of Sirius Satellite
Radio Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sirius Satellite
Radio Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ John J. Scelfo
--------------------------------
John J. Scelfo
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
November 14, 2002
26
Exhibit Index
Exhibit Description
- ------- -----------
3.1.1 Certificate of Amendment, dated June 16, 1997, to the Company's
Certificate of Incorporation and the Company's Amended and Restated
Certificate of Incorporation, dated January 31, 1994 (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999).
3.1.2 Certificate of Ownership and Merger merging Sirius Satellite Radio
Inc. into CD Radio Inc. dated November 18, 1999 (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-8 (File No. 333-31362)).
3.2 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001).
3.3 Certificate of Designations of 5% Delayed Convertible Preferred Stock
(incorporated by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1996 (the "1996
Form 10-K")).
3.4 Form of Certificate of Designations of Series B Preferred Stock
(incorporated by reference to Exhibit A to Exhibit 1 to the Company's
Registration Statement on Form 8-A filed on October 30, 1997 (the
"Form 8-A")).
3.5.1 Form of Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of 10 1/2% Series C
Convertible Preferred Stock (the "Series C Certificate of
Designations") (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (File No. 333-34761)).
3.5.2 Certificate of Correction to Series C Certificate of Designations
(incorporated by reference to Exhibit 3.5.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (the "1997
Form 10-K")).
3.5.3 Certificate of Increase of 10 1/2% Series C Convertible Preferred
Stock (incorporated by reference to Exhibit 3.5.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).
3.6 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of the Company's 9.2% Series A
Junior Cumulative Convertible Preferred Stock (incorporated by
reference to Exhibit 3.6 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).
3.7 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of the Company's 9.2% Series B
Junior Cumulative Convertible Preferred Stock (incorporated by
reference to Exhibit 3.7 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).
Exhibit Description
- ------- -----------
3.8 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of the Company's 9.2% Series D
Junior Cumulative Convertible Preferred Stock (incorporated by
reference to Exhibit 99.2 to the Company's Current Report on Form 8-K
dated December 29, 1999).
4.1 Form of certificate for shares of Common Stock (incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1 (File No. 33-74782) (the "S-1 Registration Statement")).
4.2 Form of certificate for shares of 10 1/2% Series C Convertible
Preferred Stock (incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-4 (File No. 333-34761)).
4.3 Form of certificate for shares of 9.2% Series A Junior Cumulative
Convertible Preferred Stock (incorporated by reference to Exhibit
4.10.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 Form 10-K")).
4.4 Form of certificate for shares of 9.2% Series B Junior Cumulative
Convertible Preferred Stock (incorporated by reference to Exhibit
4.10.2 to the 1998 Form 10-K).
4.5 Form of certificate for shares of 9.2% Series D Junior Cumulative
Convertible Preferred Stock (incorporated by reference to Exhibit 4.5
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (the "1999 Form 10-K")).
4.6.1 Rights Agreement, dated as of October 22, 1997 (the "Rights
Agreement"), between the Company and Continental Stock Transfer &
Trust Company, as rights agent (incorporated by reference to Exhibit 1
to the Form 8-A).
4.6.2 Form of Right Certificate (incorporated by reference to Exhibit B to
Exhibit 1 to the Form 8-A).
4.6.3 Amendment to the Rights Agreement dated as of October 13, 1998
(incorporated by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K dated October 13, 1998).
4.6.4 Amendment to the Rights Agreement dated as of November 13, 1998
(incorporated by reference to Exhibit 99.7 to the Company's Current
Report on Form 8-K dated November 17, 1998).
4.6.5 Amended and Restated Amendment to the Rights Agreement dated as of
December 22, 1998 (incorporated by reference to Exhibit 6 to Amendment
No. 1 to the Form 8-A filed on January 6, 1999).
4.6.6 Amendment to the Rights Agreement dated as of June 11, 1999
(incorporated by reference to Exhibit 4.1.8 to the Company's
Registration Statement on Form S-4 (File No. 333-82303) (the "1999
Units Registration Statement")).
2
Exhibit Description
- ------- -----------
4.6.7 Amendment to the Rights Agreement dated as of September 29, 1999
(incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on October 13, 1999).
4.6.8 Amendment to the Rights Agreement dated as of December 23, 1999
(incorporated by reference to Exhibit 99.4 to the Company's Current
Report on Form 8-K filed on December 29, 1999).
4.6.9 Amendment to the Rights Agreement dated as of January 28, 2000
(incorporated by reference to Exhibit 4.6.9 to the 1999 Form 10-K).
4.6.10 Amendment to the Rights Agreement dated as of August 7, 2000
(incorporated by reference to Exhibit 4.6.10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000).
4.6.11 Amendment to the Rights Agreement dated as of January 8, 2002
(incorporated by reference to Exhibit 4.6.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 (the "2001
Form 10-K")).
4.6.12 Amendment to the Rights Agreement dated as of October 22, 2002
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K filed on October 24, 2002).
4.7 Indenture, dated as of November 26, 1997, between the Company and IBJ
Schroder Bank & Trust Company, as trustee, relating to the Company's
15% Senior Secured Discount Notes due 2007 (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-3
(File No. 333-34769) (the "1997 Units Registration Statement")).
4.8 Form of 15% Senior Secured Discount Note due 2007 (incorporated by
reference to Exhibit 4.2 to the 1997 Units Registration Statement).
4.9 Warrant Agreement, dated as of November 26, 1997, between the Company
and IBJ Schroder Bank & Trust Company, as warrant agent (incorporated
by reference to Exhibit 4.3 to the 1997 Units Registration Statement).
4.10 Form of Warrant (incorporated by reference to Exhibit 4.4 to the 1997
Units Registration Statement).
4.11 Form of Preferred Stock Warrant Agreement, dated as of April 9, 1997,
between the Company and each warrantholder thereof (incorporated by
reference to Exhibit 4.12 to the 1997 Form 10-K).
4.12 Form of Common Stock Purchase Warrant granted by the Company to
Everest Capital Master Fund, L.P. and to The Ravich Revocable Trust of
1989 (incorporated by reference to Exhibit 4.11 to the 1997 Form
10-K).
4.13 Indenture, dated as of May 15, 1999, between the Company and United
States Trust Company of New York, as trustee, relating to the
Company's 14 1/2% Senior Secured Notes due 2009 (incorporated by
reference to Exhibit 4.4.2 to the 1999 Units Registration Statement).
3
Exhibit Description
- ------- -----------
4.14 Form of 14 1/2% Senior Secured Note due 2009 (incorporated by
reference to Exhibit 4.4.3 to the 1999 Units Registration Statement).
4.15 Warrant Agreement, dated as of May 15, 1999, between the Company and
United States Trust Company of New York, as warrant agent
(incorporated by reference to Exhibit 4.4.4 to the 1999 Units
Registration Statement).
4.16 Common Stock Purchase Warrant granted by the Company to Ford Motor
Company, dated October 7, 2002 (filed herewith).
4.17 Indenture, dated as of September 29, 1999, between the Company and
United States Trust Company of Texas, N.A., as trustee, relating to
the Company's 8 3/4% Convertible Subordinated Notes due 2009
(incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K filed on October 13, 1999).
4.18 First Supplemental Indenture, dated as of September 29, 1999, between
the Company and United States Trust Company of Texas, N.A., as
trustee, relating to the Company's 8 3/4% Convertible Subordinated
Notes due 2009 (incorporated by reference to Exhibit 4.01 to the
Company's Current Report on Form 8-K filed on October 1, 1999).
4.19 Form of 8 3/4% Convertible Subordinated Note due 2009 (incorporated by
reference to Article VII of Exhibit 4.01 to the Company's Current
Report on Form 8-K filed on October 1, 1999).
4.20 Common Stock Purchase Warrant granted by the Company to
DaimlerChrysler Corporation dated October 25, 2002 (filed herewith).
4.21 Term Loan Agreement, dated as of June 1, 2000 (the "Term Loan
Agreement"), among the Company, Lehman Brothers Inc., as arranger, and
Lehman Commercial Paper Inc., as syndication and administrative agent
(incorporated by reference to Exhibit 4.22 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000).
4.22 First Amendment, dated as of October 20, 2000, to the Term Loan
Agreement (incorporated by reference to Exhibit 4.22 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001).
4.23 Second Amendment, dated as of December 27, 2000, to the Term Loan
Agreement (incorporated by reference to Exhibit 4.23 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001).
4.24 Third Amendment, dated as of March 26, 2002, to the Term Loan
Agreement (incorporated by reference to Exhibit 4.24 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
4
Exhibit Description
- ------- -----------
4.25 Amended and Restated Warrant Agreement, dated as of December 27, 2000,
between the Company and United States Trust Company of New York, as
warrant agent and escrow agent (incorporated by reference to Exhibit
4.27 to the Company's Registration Statement on Form S-3 (File No.
333-65602)).
4.26 Second Amended and Restated Pledge Agreement, dated as of March 7,
2001, among the Company, as pledgor, The Bank of New York, as trustee
and collateral agent, United States Trust Company of New York, as
trustee, and Lehman Commercial Paper Inc., as administrative agent
(incorporated by reference to Exhibit 4.25 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).
4.27 Collateral Agreement, dated as of March 7, 2001, between the Company,
as borrower, and The Bank of New York, as collateral agent
(incorporated by reference to Exhibit 4.26 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).
4.28 Amended and Restated Intercreditor Agreement, dated as of March 7,
2001, by and between The Bank of New York, as trustee and collateral
agent, United States Trust Company of New York, as trustee, and Lehman
Commercial Paper, as administrative agent (incorporated by reference
to Exhibit 4.27 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001).
9.1 Voting Trust Agreement, dated as of August 26, 1997, by and among
Darlene Friedland, as Grantor, David Margolese, as Trustee, and the
Company (incorporated by reference to Exhibit (c) to the Company's
Issuer Tender Offer Statement on Form 13E-4 filed on October 16,
1997).
10.1.1 Lease Agreement, dated as of March 31, 1998, between Rock-McGraw, Inc.
and the Company (incorporated by reference to Exhibit 10.1.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
10.1.2 Supplemental Indenture, dated as of March 22, 2000, between
Rock-McGraw, Inc. and the Company (incorporated by reference to
Exhibit 10.1.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
10.1.3 Supplemental Indenture, dated as of November 30, 2001, between
Rock-McGraw, Inc. and the Company (incorporated by reference to
Exhibit 10.1.3 to the 2001 Form 10-K).
*10.2 Employment Agreement, dated as of March 28, 2000, between the Company
and Patrick L. Donnelly (incorporated by reference to Exhibit 10.6 to
the 1999 Form 10-K).
*10.3 Employment Agreement, dated as of March 7, 2001, between the Company
and John J. Scelfo (incorporated by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001).
*10.4 Employment Agreement, dated as of August 29, 2001, between the Company
and Michael S. Ledford (incorporated by reference to Exhibit 10.6 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001).
5
Exhibit Description
- ------- -----------
*10.5 Employment Agreement, dated as of November 26, 2002, between the
Company and Joseph P. Clayton (incorporated by reference to Exhibit
10.6 to the 2001 Form 10-K).
*10.6 Employment Agreement, dated as of January 7, 2002, between the Company
and Guy Johnson (incorporated by reference to Exhibit 10.7 to the 2001
Form 10-K).
*10.7 Employment Agreement, dated as of May 3, 2002, between the Company and
Mary Patricia Ryan (filed herewith).
*10.8 Agreement, dated as of October 16, 2001, between the Company and David
Margolese (incorporated by reference to Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001).
*10.9 1994 Stock Option Plan (incorporated by reference to Exhibit 10.21 to
the S-1 Registration Statement).
*10.10 Amended and Restated 1994 Directors' Nonqualified Stock Option Plan
(incorporated by reference to Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
*10.11 CD Radio Inc. 401(k) Savings Plan (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement on Form S-8 (File
No. 333-65473)).
*10.12 Sirius Satellite Radio 1999 Long-Term Stock Incentive Plan
(incorporated by reference to Exhibit 4.4 of the Company's
Registration Statement on Form S-8 (File No. 333-31362)).
10.13 Lock-Up Agreement, dated as of October 17, 2002, among the Company and
affiliates of Apollo Management, L.P., affiliates of The Blackstone
Group L.P., OppenheimerFunds, Inc., as investment advisers for its
affiliates, Lehman Commercial Paper Inc., Space Systems/Loral, Inc.
and certain holders of the Company's 15% Senior Secured Discount Notes
due 2007 and 14 1/2% Senior Secured Notes due 2009 (filed herewith).
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 Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
10.15.1 Stock Purchase Agreement, dated as of November 13, 1998 (the "Apollo
Stock Purchase Agreement"), by and among the Company, Apollo
Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P.
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K dated November 17, 1998).
10.15.2 First Amendment, dated as of December 23, 1998, to the Apollo Stock
Purchase Agreement (incorporated by reference to Exhibit 10.28.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.15.3 Second Amendment, dated as of December 23, 1999, to the Apollo Stock
Purchase Agreement (incorporated by reference to Exhibit 99.3 to the
Company's Current Report on Form 8-K filed on December 29, 1999).
6
Exhibit Description
- ------- -----------
10.16 Stock Purchase Agreement, dated as of December 23, 1999, by and
between the Company and Blackstone Capital Partners III Merchant
Banking Fund L.P. (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed on December 29, 1999).
10.17 Stock Purchase Agreement, dated as of January 28, 2000, among the
Company, Mercedes-Benz USA, Inc., Freightliner Corporation and
DaimlerChrysler Corporation (incorporated by reference to Exhibit
10.24 to the 1999 Form 10-K).
10.18 Tag-Along Agreement, dated as of November 13, 1998, by and among
Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P.,
the Company and David Margolese (incorporated by reference to Exhibit
99.6 to the Company's Current Report on Form 8-K dated November 17,
1998).
'D'10.19 Joint Development Agreement, dated as of February 16, 2000, between
the Company and XM Satellite Radio Inc. (incorporated by reference to
Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
99.1 Certificate of Joseph P. Clayton, President and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.2 Certificate of John J. Scelfo, Executive Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
- ----------
* This document has been identified as a management contract or compensatory
plan or arrangement.
'D' Portions of these exhibits have been omitted pursuant to Applications for
Confidential treatment filed by the Company with the Securities and
Exchange Commission.
7
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as............................... 'SS'
The dagger symbol shall be expressed as................................ 'D'