________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24710
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SIRIUS SATELLITE RADIO INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
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DELAWARE 52-1700207
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OF ORGANIZATION)
1221 AVENUE OF THE AMERICAS, 36TH FLOOR
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 584-5100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
-------------------- --------------------
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(TITLE OF CLASS)
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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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
On March 25, 2002, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, using the closing price
of the Registrant's common stock on such date, was $321,837,131.
The number of shares of the Registrant's common stock outstanding as of
March 25, 2002 was 76,588,797.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Part into which incorporated:
Stockholders to be held on June 21, 2002: Part III -- Items 10, 11, 12 and 13
________________________________________________________________________________
SIRIUS SATELLITE RADIO INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE
- -------- ----------- ----
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 4A. Executive Officers of the Registrant........................ 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
Item 6. Selected Consolidated Financial Data........................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Item 7A. Quantitative and Qualitative Disclosures About Market
Risks..................................................... 24
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 24
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 24
Item 11. Executive Compensation...................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 25
Item 13. Certain Relationships and Related Transactions.............. 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 25
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following cautionary statements identify important factors that could
cause our actual results to differ materially from those projected in
forward-looking statements made in this Annual Report on Form 10-K and in other
reports and documents published by us from time to time. Any statements about
our beliefs, plans, objectives, expectations, assumptions, future events or
performance are not historical facts and may be forward-looking. These
statements are often, but not always, made through the use of words or phrases
such as 'will likely result,' 'are expected to,' 'will continue,' 'is
anticipated,' 'estimated,' 'intends,' 'plans,' 'projection' and 'outlook.' Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed throughout this Annual Report on Form 10-K and in other
reports and documents published by us from time to time, particularly the risk
factors described under 'Business -- Risk Factors' in Part I of this Annual
Report on Form 10-K. Among the significant factors that could cause our actual
results to differ materially from those expressed in the forward-looking
statements are:
our dependence upon third parties to manufacture, distribute, market and
sell Sirius radios and components for those radios;
the potential risk of delay in implementing our business plan;
the unproven market for our service;
our competitive position; XM Radio, the other satellite radio provider in
the United States, began offering its service nationally during the fourth
quarter of 2001 and may have certain competitive advantages; and
our need for additional financing.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance on
any of these forward-looking statements. In addition, any forward-looking
statement speaks only as of the date on which it is made, and we undertake no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which the statement is made, to
reflect the occurrence of unanticipated events or otherwise. New factors emerge
from time to time, and it is not possible for us to predict which will arise or
to assess with any precision the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
ITEM 1. BUSINESS
From our three orbiting satellites, we directly broadcast 100 channels of
digital-quality radio to motorists throughout the continental United States for
a monthly subscription fee of $12.95. We deliver 60 channels of commercial-free
music in virtually every genre, and 40 channels of news, sports, talk, comedy
and children's programming. Our broad and deep range of almost every music
format as well as our news, sports and entertainment programming is not
available on conventional radio in any market in the United States. We hold one
of only two licenses issued by the Federal Communications Commission (the 'FCC')
to operate a national satellite radio system.
We launched our service on February 14, 2002 in Denver, Colorado; Houston,
Texas; Phoenix, Arizona; and Jackson, Mississippi. We are employing a phased
roll out in order to test various marketing initiatives, further refine our
receiver technology and optimize our service on a market-by-market basis. This
strategy allows us to enhance our subscriber experience before our nationwide
launch. We plan to offer our service in additional markets during the second and
third quarters of 2002 and to offer our service on a national basis during the
third quarter of 2002. We expect to generate most of the subscriptions we sell
in 2002 in the second half of the year as we expand our service nationally.
Our primary source of revenues is subscription fees. In addition, we derive
revenues from selling limited advertising on our non-music channels. Currently,
our subscription and advertising revenues are not material due to the limited
number of subscribers to our service to date.
2
We have alliances with Ford Motor Company, DaimlerChrysler Corporation, BMW
of North America, LLC and Volkswagen of America, Inc. that contemplate the
manufacture and sale of vehicles that include Sirius radios. These alliances
cover all major brands and affiliates of these automakers, including Ford,
Chrysler, Mercedes, BMW, Jaguar, Mazda, Dodge, Jeep, Volvo, Volkswagen and Audi.
Our agreement with DaimlerChrysler also makes us the preferred provider of
satellite radio in Freightliner and Sterling heavy trucks. Ford,
DaimlerChrysler, BMW and Volkswagen are not required to manufacture or sell
vehicles that include Sirius radios pursuant to these alliances. In 2001, Ford,
DaimlerChrysler, BMW and Volkswagen sold or leased approximately 7 million
vehicles in the continental United States, which was approximately 41% of all
new cars and trucks sold or leased in the continental United States last year.
In the autosound aftermarket, Sirius radios are available for sale in
selected markets at various national and regional retailers, such as Best Buy,
Circuit City, Tweeter Home Entertainment Group, Crutchfield and Good Guys. We
expect that Sirius radios will be available at approximately 3,500 retail
locations when our service is available nationally. In 2001, consumer
electronics retailers in the United States sold over 10 million car radios.
We have entered into agreements with numerous consumer electronics
manufacturers, including Alpine Electronics Inc., Clarion Co., Ltd., Delphi
Corporation, Kenwood Corporation, Matsushita Communication Industrial
Corporation of USA, Recoton Corporation, Sony Electronics Inc. and Visteon
Automotive Systems, to develop Sirius radios.
PROGRAMMING
We program 60 channels of commercial-free music under our brand 'Sirius,'
and offer 40 additional channels of other formats, such as news, sports and talk
programming. We believe that 60 music channels enable us to 'superserve' our
subscribers with a greater range of content than is currently offered by
traditional AM/FM radio, even in the most widely broadcast formats.
Our Music Channels. We design and originate the programming on each of our
60 commercial-free music channels. Each channel is operated as an individual
radio station, with a distinct format and its own hosts. Our line-up of music
channels currently consists of:
POP
Top 40 Hits
Adult Contemporary
Alt Pop Mix
Love Songs
The Best of the 50s/60s
The Best of the 70s
The Best of the 80s
The Best of the 90s
ROCK
Soft Rock
Eclectic Rock
Rock Hits
Modern Rock
Mainstream Rock
Classic Rock I
Classic Rock II
Classic Alternative
Alternative I
Alternative II
Hard Rock
CLASSICAL
Symphonic
Chamber Works
Classical Voices
R&B/URBAN
R&B Hits
Today's R&B
Soul Ballads
Classic Soul
R&B Oldies
Rap Hits
Today's Rap
Classic Rap
DANCE
Dance Hits
Mainstream Dance
Electronica
Disco
VARIETY
Blues
Reggae
Gospel
Christian Hits
World Music
New Age
Kids
Specialty Showcase
JAZZ & STANDARDS
Classic Jazz
Latin Jazz
Contemporary Jazz
Smooth Jazz
Standards
Swing
Broadway's Best
LATIN
Latin Hits
Latin Pop Mix
Rock en Espanol
Mexicana
Tejano
COUNTRY
Country Hits
Today's Country
Country Mix
Classic Country
Alt Country
Bluegrass
3
We have assembled an extensive music library consisting of a deep range of
recorded music in each genre, which is updated with new recordings as they are
released. To date, we have acquired approximately two million music titles.
We have recruited program managers from the recording, broadcasting and
entertainment industries to manage the development of daily programming for each
Sirius music channel. To be accessible to these industries, we have built our
national broadcast studio in New York City.
In connection with our music programming, we must negotiate and enter into
royalty arrangements with two sets of rights holders: holders of copyrights in
musical works -- songs -- and holders of copyrights in sound
recordings -- tapes, compact discs or audio files. Musical works rights holders,
generally songwriters and music publishers, are represented by performing rights
societies such as the American Society of Composers, Authors and Publishers
('ASCAP'), Broadcast Music, Inc. ('BMI') and SESAC, Inc. These organizations
negotiate fees with copyright users, collect royalties and distribute them to
the rights holders. Radio broadcasters currently pay approximately 4% of their
revenues to these performing rights societies.
We have entered into a license agreement with ASCAP which gives us the right
to use on our service all the music in ASCAP's repertory, and have agreed to pay
a reasonable royalty for this right. We are in discussions with BMI and SESAC,
Inc. regarding similar license agreements and expect to execute agreements with
both of these entities during 2002. Our ASCAP license provides, and we expect
our BMI and SESAC license to provide, for us to pay the same rates as XM Radio.
Sound recording rights holders, typically large record companies, are
primarily represented by the Recording Industry Association of America, which
negotiates licenses and collects and distributes royalties. Cable audio service
providers currently pay a royalty of 6.5% of gross revenue for the use of sound
recordings for audio services broadcast over cable television systems. This rate
was set by the Librarian of Congress, which has statutory authority to decide
rates through arbitration, and this determination was affirmed on May 21, 1999
by the U.S. Court of Appeals for the District of Columbia. Although we believe
we can distinguish Sirius sufficiently from cable audio services in order to
negotiate or obtain through arbitration a lower rate, we may not be able to do
so, and we could be required to pay a higher rate. The Librarian of Congress is
expected to commence a copyright arbitration royalty proceeding this year to
establish our royalty rate for sound recording rights. In any event, we expect
to pay the same rates as XM Radio.
Our News, Sports and Entertainment Channels. In addition to our music
channels, we offer 40 channels of news, sports and talk programming, which
includes limited commercial advertising. We believe that this array of non-music
programming increases consumer interest in our service because much of the
content is unavailable on conventional radio. We generally do not produce
programming for our non-music channels; we obtain this programming from various
third party content providers.
We currently air the following news, sports and entertainment channels on
Sirius:
CNBC
Fox News Channel
CNN Headline News
Bloomberg
NPR Now
NPR Talk
PRI's Public Radio Channel
World Radio Network
BBC World Service News
C-SPAN Radio
The Weather Channel Radio Network
Sirius Talk
Real Sirius
ABC News & Talk
ESPN Radio Network
ESPNews
Sports Byline USA
The Speed Channel
OLN Adventure Radio
BBC Mundo
La Red Hispana
Radio Deportivo
Radio Mujer
Radio Amigo
Radio Disney
Discovery Radio
E! Entertainment Radio
A&E Satellite Radio
Radio Classics
SCI FI
Sirius Entertainment
Sirius Comedy
Sirius Arts
Personal Achievement
Wisdom Radio
African American Talk
The Scandal Channel
Women's Talk
Guy Talk
Trucker Channel
4
We expect our offering of music and news, sports and entertainment channels
to change over time based upon feedback from our subscribers.
ALLIANCES WITH AUTOMAKERS
On June 11, 1999, we entered into an agreement with Ford Motor Company which
anticipates that Ford will manufacture, market and sell cars and trucks that
include Sirius radios. This agreement includes all Ford brands, including Ford,
Jaguar, Mazda and Volvo. As part of this agreement, we agreed to share with Ford
a portion of the revenues we will derive from subscribers using new Ford
vehicles equipped to receive our broadcasts ('Ford Enabled Vehicles'). We also
agreed to reimburse Ford for certain advertising expenses and hardware costs
of Ford Enabled Vehicles, and issued to Ford warrants to purchase 4,000,000
shares of our common stock at an exercise price of $30.00 per share. These
warrants are exercisable based upon the number of Ford Enabled Vehicles that
Ford manufactures, and are fully exercisable after 4,000,000 Ford Enabled
Vehicles are manufactured. This agreement extends to June 11, 2004, unless
terminated earlier.
On January 28, 2000, we entered into an agreement with DaimlerChrysler
Corporation, Mercedes-Benz USA, Inc. and Freightliner LLC (collectively,
'DaimlerChrysler') which anticipates that DaimlerChrysler will manufacture,
market and sell vehicles that include Sirius radios. This agreement covers all
cars and light trucks manufactured by DaimlerChrysler and Freightliner and
Sterling heavy trucks. As part of this agreement, we agreed to share with
DaimlerChrysler a portion of the revenues we will derive from subscribers using
new DaimlerChrysler vehicles equipped to receive our broadcasts
('DaimlerChrysler Enabled Vehicles'). We also agreed to reimburse
DaimlerChrysler for certain advertising expenses and hardware costs of
DaimlerChrysler Enabled Vehicles, and issued to DaimlerChrysler Corporation
warrants to purchase 4,000,000 shares of our common stock at an exercise price
of $60.00 per share. These warrants are exercisable based upon the number of
DaimlerChrysler Enabled Vehicles that DaimlerChrysler manufactures, and are
fully exercisable after 4,000,000 DaimlerChrysler Enabled Vehicles are
manufactured. Concurrently, DaimlerChrysler Corporation purchased 2,290,322
shares of our common stock for an aggregate purchase price of approximately $100
million. The agreement extends to January 28, 2005, unless terminated earlier.
On June 16, 2000, we entered into an agreement with BMW of North America,
LLC which anticipates that BMW will market and sell vehicles that include Sirius
radios. As part of this agreement, we will share with BMW a portion of the
revenues we will derive from subscribers using certain BMW vehicles equipped to
receive our broadcasts ('BMW Enabled Vehicles'). In addition, we expect to
reimburse BMW for certain advertising expenses and hardware costs of BMW Enabled
Vehicles.
On March 25, 2002, we entered into an agreement with Volkswagen of America,
Inc. which anticipates that Volkswagen and Audi will market and sell vehicles
that include Sirius radios. As part of this agreement, we agreed to reimburse
Volkswagen for a portion of the engineering costs associated with the
introduction of Sirius radios in Volkswagen and Audi vehicles. Under this
agreement, Volkswagen expects to introduce radios capable of receiving both our
service and XM Radio's service when such radios become available. XM Radio has
entered into a similar agreement with Volkswagen.
In addition to our agreements with Ford, DaimlerChrysler, BMW and
Volkswagen, we are in discussions with other automobile manufacturers to include
Sirius radios in new cars and trucks. Under our joint development agreement with
XM Radio, any agreements with new automakers will be on a non-exclusive basis
and will require that such automakers install radios capable of receiving both
Sirius and XM Radio's satellite radio service shortly after such interoperable
radios become available.
THE SIRIUS SYSTEM
Our system is designed to provide clear reception in most areas despite
variations in terrain, buildings and other obstructions. Motorists can receive
Sirius in all outdoor locations where the vehicle has an unobstructed
line-of-sight with one of our satellites or is within range of one of our
terrestrial repeaters.
The FCC has allocated the portion of the S-band located between 2320 MHz and
2345 MHz exclusively for national satellite radio broadcasts. We use 12.5 MHz of
bandwidth in the 2320.0-2332.5
5
MHz frequency allocation to transmit our signals from our satellites to our
subscribers. Uplink transmissions (from the ground to our satellites) use
12.5 MHz of bandwidth in the 7060-7072.5 MHz band.
The Sirius system consists of three principal components:
satellites and terrestrial repeaters;
our national broadcast studio; and
radios.
SATELLITES AND TERRESTRIAL REPEATERS
Space Systems/Loral delivered title to our three operating satellites on
July 31, 2000, September 29, 2000 and December 20, 2000, following the
completion of in-orbit testing of each satellite. Our fourth satellite is
expected to be delivered to ground storage in the second quarter of 2002.
Satellite Design. Our satellites are of the Loral FS-1300 model series. This
family of satellites has a history of reliability with a total of 350 years of
in-orbit operation time. Each satellite is designed to have a useful life of
approximately 15 years.
Each satellite travels in a figure eight pattern extending above and below
the equator, and spends approximately 16 hours per day north of the equator. At
any given time, two of our three satellites operate north of the equator while
the third satellite does not broadcast as it traverses the portion of the orbit
south of the equator. This orbital configuration yields high signal elevation
angles, reducing service interruptions that can result from signal blockage.
Each satellite acts as a 'bent pipe,' relaying our broadcasts directly to
the ground, and does not contain on-board processors. All of our processing
operations occur on the ground where they are accessible for maintenance and
continuing technological upgrade without the need to launch replacement
satellites.
Terrestrial Repeaters. In some areas with high concentrations of tall
buildings, such as urban centers, and in tunnels, signals from our satellites
may be blocked and reception of our satellite signal can be adversely affected.
In many of these areas, we have deployed terrestrial repeaters to supplement our
satellite coverage. To date we have deployed 92 terrestrial repeaters in
59 urban areas. We may deploy additional terrestrial repeaters if we discover
that our existing terrestrial repeaters fail to cover a significant number of
subscribers or potential subscribers.
Risk Management and Insurance. We maintain insurance covering in-orbit
failure during the first two years of operation for each of our satellites. This
insurance covers losses arising from partial and total failure of the
satellites. This insurance expires in June, September and November of 2002 for
our first, second and third satellites, respectively, and we cannot assure you
we will be able to renew this insurance on commercially reasonable terms. Once
properly deployed and operational, the historical risk of premature total
satellite failure has been less than 1% for U.S. geosynchronous commercial
communication satellites. During late 2002, we plan to evaluate the need for
business interruption insurance.
If we are required to launch our spare satellite due to the in-orbit failure
of one of our satellites, our operations would be interrupted, impaired or
delayed for at least six months. The in-orbit failure of two or three satellites
would require us to arrange for an additional satellite or satellites to be
built and would likely disrupt our operations for at least 16 months.
Our satellites are designed to minimize the adverse effects of transmission
component failure through the incorporation of redundant components that
activate automatically or by ground command upon failure. If multiple component
failures occur and the supply of redundant components is exhausted, the
satellite generally will continue to operate, but at reduced capacity.
NATIONAL BROADCAST STUDIO
Our programming originates from our national broadcast studio in New York
City. The national broadcast studio houses our corporate headquarters, music
library, facilities for programming origination, programming
6
personnel and program hosts and facilities to transmit programming to our
orbiting satellites.
The studios and transmission facilities at our national broadcast studio are
100% digital, resulting in no cumulative distortion to degrade the sound of our
music and entertainment product. The national broadcast studio contains
state-of-the-art production facilities and has been designed to broadcast more
than 100 radio stations.
Tracking, telemetry and control of our orbiting satellites is also performed
from our national broadcast studio. These activities include routine satellite
orbital adjustments and monitoring of the satellites. Service commands to
initiate and suspend subscriber service also are relayed from the national
broadcast studio to our satellites for retransmission to subscribers' radios.
RADIOS
In the autosound aftermarket, Sirius subscribers have the choice of two
different receiving devices for their cars -- an FM modulated receiver or a
three-band radio. In certain new cars and trucks, consumers will receive Sirius
through a new generation of three-band (AM/FM/SAT) radios, which we expect will
come installed by automakers.
FM Modulated Receivers. FM modulated receivers enable our service to be
received in all vehicles with FM radios, or approximately 95% of all U.S.
vehicles. Each receiver is a small device, approximately the size of a compact
disc changer, that is mounted in the vehicle's trunk.
Three-Band Radios. Three-band radios are nearly identical in appearance to
existing car stereos and allow the user to listen to AM, FM or Sirius with the
push of a button. Like existing radios, three-band radios may also incorporate
cassette or CD players.
Three-band radios from Kenwood and Clarion and FM modulated receivers from
Jensen are currently available at retailers in Denver, Phoenix, Houston and
Jackson. We expect Kenwood to introduce an FM modulated receiver during the
second quarter of 2002. We are in discussions with Panasonic Consumer Electronic
Corporation to brand, market and sell radios produced by Matsushita's plant in
Peachtree City, Georgia.
Three-band radios and FM modulated devices are available at approximately
200 retail locations in our initial markets. We expect that three-band radios
and FM modulated receivers will be available initially at approximately 3,500
retail locations when our service is available nationally.
The essential element of three-band radios and FM modulated receivers is a
set of integrated circuits, or a chip set, which permits the device to decode,
decompress and output our broadcasts. We expect that new versions of this chip
set, with enhanced features, superior performance or a lower price, will be
introduced periodically.
Unified Standard. On February 16, 2000, we signed an agreement with XM
Radio, the other holder of an FCC license to provide a satellite-based digital
audio radio service, to develop a unified standard for satellite radios to
enable consumers to purchase one radio capable of receiving both Sirius and XM
Radio's services. We expect the unified standard to detail the technology to be
employed by manufacturers of such dual-mode radios. The technology relating to
this unified standard will be jointly developed, funded and owned by the two
companies. In addition, we are working with XM Radio to promote adoption of the
new standard by creating a service mark for satellite radio. This unified
standard is also intended to meet FCC rules that require interoperability of
both licensed satellite radio systems. We anticipate that it will take several
years to develop radios capable of receiving both services.
As part of this joint development agreement, we and XM Radio have licensed
our intellectual property to one another; the value of this license will be
considered part of each company's contribution toward the joint development. In
addition, each company has agreed to license its non-core technology, including
non-essential features of its system, to the other at commercially reasonable
rates. As part of this agreement, our previous patent litigation against XM
Radio has been resolved.
Both companies expect to work with their automobile and radio manufacturing
partners to integrate the new unified standard and have agreed that future
agreements with automakers and radio
7
manufacturers will specify the unified satellite radio standard. Furthermore,
we and XM Radio have agreed that future agreements with retail and automotive
distribution partners and content providers will be on a non-exclusive basis.
CUSTOMER CARE, BILLING AND CONDITIONAL ACCESS
Stream International Inc. provides our customer care operations. Employees
of Stream have the ability to access our billing system for various functions
including account activation, billing inquiries, program service changes,
address changes and other general account updates. When appropriate,
representatives at the call center escalate technical concerns to either our
technical help desk or to the appropriate equipment manufacturer. We automate
customer care functions where appropriate using interactive voice response
technology, email, and a customer self-care section on our website. We pay
Stream an hourly rate for each representative assigned to support us.
We have deployed an integrated customer relationship management and billing
solution to meet the needs of our business, including all customer service,
subscriber management and billing operations. Sentraliant, a provider of
information technology services, has designed and deployed this integrated
customer relationship management and billing solution. The customer relationship
management solution developed by Sentraliant is designed to manage the expected
growth of our subscriber base. Our customer relationship management program
enables us to interface electronically and exchange information with automobile
manufacturers, automobile dealers, consumer electronics retailers and radio
manufacturers, and facilitates and encourages subscriber interaction through the
internet and by other electronic means. Sentraliant is paid for billing services
on a per subscriber basis.
To reduce theft of our service, each Sirius radio contains an electronically
encoded identification number. After verification of subscriber billing
information, we transmit a digital signal to activate that radio's Sirius
capability. Through this feature, we can directly (via satellite) deactivate
radios of subscribers who are delinquent in paying our subscription fee.
GOVERNMENT REGULATION
As an operator of a privately owned satellite system, we are regulated by
the FCC under the Communications Act of 1934. The FCC is the government agency
with primary authority in the United States over satellite radio communications.
We currently must comply with regulation by the FCC principally with respect to:
the licensing of our satellite system;
preventing interference with or to other users of radio frequencies; and
compliance with FCC rules established specifically for U.S. satellites and
satellite radio services.
On April 2, 1997, we were one of two winning bidders for an FCC license to
operate a satellite digital audio radio service. Our FCC license expires on
February 14, 2010. We anticipate that, absent significant misconduct on our
part, our FCC license will be renewed in due course to permit operation of our
satellites for their useful lives, and that a license would be granted for any
replacement satellites, although we cannot assure you of this renewal or grant.
One of the losing bidders for an FCC license to provide satellite radio
requested the FCC to review the grant of our license. The FCC denied this
request and this matter is currently being appealed to the United States Court
of Appeals for the District of Columbia Circuit.
Any assignment or transfer of control of our FCC license must be approved by
the FCC. We cannot assure you that the FCC would approve any transfers or
assignments.
In some areas with high concentrations of tall buildings, such as urban
centers, signals from our satellites may be blocked and reception can be
adversely affected. In these areas, we have installed terrestrial repeaters to
provide our service. We have constructed 92 terrestrial repeaters in 59 markets
throughout the United States. The FCC has not yet established rules governing
terrestrial repeaters. A rulemaking on the subject was initiated by the FCC on
March 3, 1997 and is still pending. Many comments have been filed as part of
this rulemaking, including comments from the National Association
8
of Broadcasters, major cellular telephone system operators and other holders of
spectrum adjoining ours. The comments cover many topics relating to the
operation of our terrestrial repeaters, but principally seek to protect
adjoining wireless services from interference. We cannot predict the outcome or
timing of these FCC proceedings and the final rules adopted by the FCC may limit
our ability to deploy additional repeaters and/or require us to reduce the power
of our existing terrestrial repeaters. In the interim, the FCC has granted us
special temporary authority to operate our terrestrial repeaters and offer
commercial service to the public. This special temporary authority is being
challenged by operators of terrestrial wireless systems. This authority is
effective until such time as the FCC acts to terminate it and requires us not
to cause harmful interference to other wireless services.
Our FCC license is conditioned on us certifying that our system includes a
receiver design that will permit end users to access XM Radio's system. On
February 16, 2000, we signed an agreement with XM Radio to jointly develop a
unified standard for satellite radios to facilitate the ability of consumers to
purchase one radio capable of receiving both our and XM Radio's services. We
believe that this agreement, and our efforts with XM Radio to develop this
unified standard for satellite radios, will satisfy the interoperability
condition contained in our FCC license although we cannot assure you of this. We
notified the FCC of this agreement on October 6, 2000 and asked it to concur
that our efforts to develop this unified standard satisfied the conditions to
our license. The FCC has not responded to this request.
The FCC has updated certain regulations and has proposed to update other
regulations to govern the operations of unlicensed devices, including RF
lighting devices, that may generate radio energy in the part of the spectrum to
be used by us. The devices would be required to comply with FCC rules that
prohibit these devices from causing harmful interference to an authorized radio
service such as Sirius. If the FCC does not adopt adequate technical standards
specifically applicable to these devices and use of these unlicensed devices
becomes commonplace, it may be difficult for us to enforce our rights to use
spectrum without interference from such unlicensed devices. We believe that the
currently proposed FCC rules must be strengthened to ensure protection of the
spectrum allocated for our operations. During the past four years, we filed
comments and other written submissions to the FCC and met with FCC staff to
express our concerns and protect our right to use our spectrum without
interference from unlicensed devices. The FCC's failure to adopt adequate
standards could have an adverse effect on the reception of our service.
The Communications Act prohibits the issuance of a license to a foreign
government or a representative of a foreign government, and contains limitations
on the ownership of common carrier, broadcast and some other radio licenses by
non-U.S. citizens. We are regulated as a private carrier, not a common carrier,
by the FCC and are not a broadcast service. As such, we are not bound by the
foreign ownership provisions of the Communications Act. On November 30, 2001, in
response to a petition to apply the foreign ownership rules to satellite digital
audio radio services, the FCC confirmed that these rules do not apply. That
decision has been appealed to the U.S. Court of Appeals for the D.C. Circuit. As
a private carrier, we are free to set our own prices and serve customers
according to our own business judgment, without economic regulation.
The foregoing discussion reflects the application of current communications
law and FCC regulations to our service in the United States. Changes in law or
regulations relating to communications policy or to matters affecting
specifically our service could adversely affect our ability to retain our FCC
license or the manner in which our service is operated. Further, actions of the
FCC may be reviewed by U.S. federal courts and we cannot assure you that if
challenged, these actions would be upheld.
THE SIRIUS TRADEMARK
We have an application pending in the U.S. Patent and Trademark Office for
the registration of the trademark 'Sirius' in connection with our service. We
intend to maintain our trademark and the anticipated registration. We are not
aware of any material claims of infringement or other challenges to our right to
use the 'Sirius' trademark in the United States in connection with our service.
9
PERSONNEL
As of March 25, 2002, we had 247 employees. In addition, we rely upon a
number of consultants and other advisors. The extent and timing of the increase
in our staffing will depend on the availability of qualified personnel and other
developments in our business. None of our employees are represented by a labor
union, and we believe that our relationship with our employees is good.
CORPORATE INFORMATION
Sirius Satellite Radio Inc. was incorporated in the State of Delaware as
Satellite CD Radio, Inc. on May 17, 1990. On December 7, 1992, we changed our
name to CD Radio Inc., and we formed a wholly owned subsidiary, Satellite CD
Radio, Inc., that is the holder of our FCC license. On November 18, 1999, we
changed our name again to Sirius Satellite Radio Inc. Our executive offices are
located at 1221 Avenue of the Americas, New York, New York 10020 and our
telephone number is (212) 584-5100. Our internet address is sirius.com.
Sirius.com is an inactive textual reference only, meaning that the information
contained on the website is not part of this Annual Report on Form 10-K and is
not incorporated in this report by reference.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K, the
following risk factors should be considered carefully in evaluating us and our
business. This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the federal securities laws. Actual results and the timing
of events could differ materially from those projected in forward-looking
statements due to a number of factors, including those set forth below and
elsewhere in this Annual Report on Form 10-K. See 'Special Note Regarding
Forward-Looking Statements.'
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
As of December 31, 2001, we had total indebtedness of $672 million and
stockholders' equity of $323 million. Our substantial indebtedness could have
important consequences. For example, it could:
increase our vulnerability to general adverse economic and industry
conditions;
require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general corporate
purposes;
limit our flexibility in planning for, or reacting to, changes in our
business and industry;
place us at a competitive disadvantage compared to our competitors that
have less debt; and
limit our ability to raise additional capital.
Our term loan agreement with Lehman Brothers contains financial and
operating covenants. These covenants include requirements that we:
achieve at least $2.3 million in revenues from subscribers for the quarter
ending March 31, 2003, and achieve increasing revenue from subscribers each
quarter thereafter through the maturity of the term loan on December 31,
2005;
achieve a minimum negative cash flow, before subscriber acquisition costs,
of $65 million for the quarter ending March 31, 2003, and have improving
cash flow, before subscriber acquisition costs, each quarter thereafter
through the maturity of the term loan;
achieve a minimum negative cash flow, before subscriber acquisitions costs
and adjusted to give effect to subscribers who cancel or fail to renew
their subscriptions, of $58.4 million for the quarter ending September 30,
2003, and have improving adjusted cash flow, each quarter thereafter
through the maturity of the term loan; and
not permit our capital expenditures, other than the costs of constructing,
launching and insuring replacement satellites and installing terrestrial
repeaters, to exceed $100 million during the period from June 1, 2001
through the period in which the term loan is outstanding.
10
Our failure to comply with these covenants could result in an event of
default which, if not cured or waived, could have a material adverse effect on
us. If Lehman Brothers, the holder of the term loan, were to accelerate the
maturity of this loan as a result of our failure to satisfy a covenant, the
trustees of our 15% Senior Secured Discount Notes due 2007 and our 14 1/2%
Senior Secured Notes due 2009 would have the right to accelerate the outstanding
indebtedness under these notes. If the maturity of the term loan, our 15% Senior
Secured Discount Notes due 2007 and our 14 1/2% Senior Secured Notes due 2009
were accelerated, we would be required to seek relief from creditors under
the Bankruptcy Code.
WE NEED ADDITIONAL FINANCING TO OPERATE OUR SERVICE AND ADDITIONAL FINANCING
MIGHT NOT BE AVAILABLE.
We have sufficient cash to cover our estimated funding needs through the
first quarter of 2003. However, if the number of actual subscribers, or the cost
to acquire each new subscriber, differs substantially from our expectations, we
may need substantial additional funding. We anticipate that our additional
funding needs through the end of 2003 will total approximately $275 million, and
that we will require additional funding thereafter. These amounts are estimates
and may change, and we may need additional financing in excess of these
estimates. Our actual funding requirements could vary materially from our
current estimates. We may have to raise more funds than expected to remain in
business and to continue to develop and market Sirius.
We plan to raise future funds by selling debt or equity securities, or both,
publicly and/or privately, and by obtaining loans or other credit lines from
banks or other financial institutions. We may not be able to raise sufficient
funds on favorable terms or at all. If we fail to obtain any necessary financing
on a timely basis, then the growth of our business would be materially impacted
and we could default on commitments to our distribution partners, creditors or
others, and may have to discontinue operations or seek a purchaser for our
business or assets.
WE HAVE RECENTLY STARTED OPERATIONS AND HAVE NOT GENERATED ANY SIGNIFICANT
REVENUES.
We were a development stage company through 2001. We began generating
revenues on February 14, 2002, although, to date, those revenues have not been
significant. Our ability to generate significant revenues and ultimately to
become profitable will depend upon several factors, including whether we can
attract and retain a sufficient number of subscribers and advertisers to Sirius;
whether our system operates at an acceptable level; and whether we compete
successfully.
OUR EXPENDITURES AND LOSSES HAVE BEEN SIGNIFICANT AND ARE EXPECTED TO GROW.
We had incurred capital expenditures, excluding capitalized interest, of
approximately $939 million and aggregate net losses of approximately $505
million from our inception, May 17, 1990, through December 31, 2001. We expect
our net losses and negative cash flow to grow as we make payments under our
various contracts, incur marketing and subscriber acquisition costs and make
interest payments on our outstanding indebtedness. If we are unable ultimately
to generate sufficient revenues to become profitable and have positive cash flow
we could default on commitments to our distribution partners, creditors or
others, and may have to discontinue operations or seek a purchaser for our
business or assets.
DEMAND FOR OUR SERVICE MAY BE INSUFFICIENT FOR US TO BECOME PROFITABLE.
We cannot estimate with any certainty the consumer demand for our service or
the degree to which we will meet that demand. Among other things, consumer
acceptance of Sirius will depend upon whether we obtain, produce and market high
quality programming consistent with consumers' tastes; the willingness of
consumers to pay subscription fees to obtain satellite radio; the cost and
availability of Sirius radios; our marketing and pricing strategy; and the
marketing and pricing strategy of our competitor, XM Radio. If demand for our
service does not develop as expected, we may not be able to generate enough
revenues to become profitable or to generate positive cash flow.
11
FAILURE OF THIRD PARTIES TO PERFORM COULD AFFECT OUR REVENUES.
We need to assure continued proper manufacturing and distribution of Sirius
radios and development and provision of programming in connection with our
service. Many of these tasks depend on the efforts of third parties, including
Agere Systems, Inc., which has designed, developed and is manufacturing our chip
set and is designing, developing and manufacturing the next generation of our
chip set; consumer electronics manufacturers, which are manufacturing,
distributing and marketing Sirius radios; retailers, which are marketing and
selling Sirius radios and promoting subscriptions to our service; automakers,
which have entered into agreements which contemplate manufacturing, marketing
and selling vehicles capable of receiving our service, but are under no
obligation to do so; and other third party vendors, who have designed or operate
important elements of our system, such as our call center or subscriber
management system. If one or more of these third parties do not perform in a
sufficient manner, our revenues could be less than expected and our business may
suffer.
HIGHER THAN EXPECTED SUBSCRIBER ACQUISITION COSTS OR SUBSCRIBER TURNOVER COULD
ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
We are spending substantial funds on advertising and marketing and in
transactions with car and radio manufacturers and other parties to obtain and
attract subscribers. If the costs of attracting subscribers or incentivizing
other parties is greater than expected, our financial performance and results of
operations will be adversely affected.
We expect to experience some subscriber turnover, or churn. We cannot
predict the amount of churn we will experience or how successful we will be at
retaining customers who purchase or lease vehicles that include a subscription
to our service. Subscriber turnover or our inability to attract customers who
purchase or lease new vehicles with our service could adversely affect our
financial performance and results of operations.
OUR SYSTEM MIGHT NOT WORK AS EXPECTED.
Our system of satellites, terrestrial repeaters, national broadcast studio
and radios has only recently been integrated and is still in the process of
being tested, and may not function as expected within any particular market. We
may be required to supplement our terrestrial repeater network in certain
markets in order to achieve our expected performance.
COMPETITION FROM XM RADIO AND TRADITIONAL AND EMERGING AUDIO ENTERTAINMENT
PROVIDERS COULD ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUES.
We compete for both listeners and advertising revenues from many sources,
including XM Radio, the other satellite radio licensee; traditional AM/FM radio
and digital AM/FM radio when it becomes available; internet based audio
providers; direct broadcast satellite television audio services; and cable
systems that carry audio services. XM Radio began commercial operations in
September 2001, offers its service for a monthly charge of $9.99, features
100 channels, and has acquired a significant number of subscribers. If consumers
perceive that XM Radio offers a more attractive service, enhanced features,
superior equipment alternatives, or has stronger marketing or distribution
channels, it may gain a long term competitive advantage over us.
Unlike Sirius, traditional AM/FM radio has a well established and dominant
market presence for its services and generally offers free broadcast reception
supported by commercial advertising rather than by a subscription fee. Further,
the incumbent terrestrial broadcasters have announced intentions to enhance
their existing broadcasts with digital quality services utilizing new technology
in the near future. Also, many radio stations offer information programming of a
local nature, such as traffic and weather reports, which Sirius is not expected
to offer as effectively as local radio, or at all. To the extent that consumers
place a high value on these features of traditional AM/FM radio, we are at a
competitive disadvantage.
12
PREMATURE DEGRADATION OR FAILURE OF OUR SATELLITES COULD DAMAGE OUR BUSINESS.
We expect that our satellites will last approximately 15 years, and that
after this period their performance in delivering Sirius will deteriorate. We
cannot assure you, however, of the useful life of any particular satellite. Our
operating results would be adversely affected if the useful life of our
satellites is significantly shorter than 15 years.
The useful lives of our satellites will vary and will depend on a number of
factors, including:
degradation and durability of solar panels;
quality of construction;
amount of fuel our satellites consume;
durability of component parts;
random failure of satellite components, which could result in damage to or
loss of a satellite; and
in rare cases, damage or destruction by electrostatic storms or collisions
with other objects in space.
Space Systems/Loral, the manufacturer of our satellites, has identified
circuit failures in solar arrays on satellites launched since 1997, including
our satellites. 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. If a substantial
number of additional circuit failures were to occur, the estimated useful life
of our satellites could be reduced. We cannot assure you that additional circuit
failures will not occur or whether the useful life of our satellites will be
reduced.
If one of our three satellites fails in orbit and we are required to launch
our spare satellite, our operations could be suspended for up to six months. If
two or more of our satellites fail in orbit, our operations could be suspended
for at least 16 months.
LOSSES FROM SATELLITE DEGRADATION MAY NOT BE FULLY COVERED BY INSURANCE.
We maintain in-orbit insurance policies from global space insurance
underwriters. This insurance expires in June, September and November of 2002 for
our first, second and third satellites, respectively, and we cannot assure you
that we will be able to renew this insurance on commercially reasonable terms.
If one of our satellites suffers a total or partial failure, our insurance may
not fully cover our losses. For example, our insurance does not cover and we do
not have protection against business interruption, loss of business or similar
losses. Also, our insurance policies contain customary exclusions and material
change conditions that could limit our recovery.
JOINT DEVELOPMENT AGREEMENT FUNDING REQUIREMENTS COULD BE SIGNIFICANT.
Under our agreement with XM Radio, each party is obligated to fund one half
of the development cost of the technologies used to develop a unified standard
for satellite radios. Each party will be entitled to license fees or a credit
towards its one half of the cost based upon the validity, value, use, importance
and available alternatives of the technology it contributes. This may require
significant additional capital.
FAILURE TO COMPLY WITH FCC REQUIREMENTS COULD DAMAGE OUR BUSINESS.
As an owner of one of two FCC licenses to operate a satellite radio service
in the United States, we are subject to FCC rules and regulations, and the terms
of our license, which require us to meet certain conditions such as
interoperability of our system with XM Radio, the other licensed satellite radio
system in the United States; coordination of our satellite radio service with
radio systems operating in the same range of frequencies in neighboring
countries; and coordination of our communications links to our satellites with
other systems that operate in the same frequency band.
Non-compliance by us with these conditions could result in fines, additional
license conditions, license revocation or other detrimental FCC actions. We may
also be subject to interference from
13
adjacent radio frequency users if the FCC does not adequately protect us against
such interference in its rulemaking process.
The FCC has not yet issued final rules permitting us to operate and deploy
terrestrial repeaters to fill gaps in satellite coverage. We are operating our
repeaters on a non-interference basis pursuant to a grant of special temporary
authority from the FCC, and this authority is currently being challenged by
operators of terrestrial wireless systems who have asserted that our repeaters
may cause interference. The FCC's final terrestrial repeater rules may
require us to reduce the power at which our terrestrial repeaters transmit and
limit our ability to deploy additional repeaters in the future. If we are
required to significantly reduce the power of our terrestrial repeaters, this
would have an adverse effect on the quality of our service in certain markets
and/or cause us to alter our terrestrial repeater infrastructure at a
substantial cost. If the FCC limits our ability to deploy additional terrestrial
repeaters, this would adversely affect our ability to improve any deficiencies
in our service quality that may be identified in the future.
OUR NATIONAL BROADCAST STUDIO, TERRESTRIAL REPEATER NETWORK OR OTHER GROUND
FACILITIES COULD BE DAMAGED BY NATURAL CATASTROPHES OR TERRORIST ACTIVITIES.
An earthquake, tornado, flood or other catastrophic events anywhere in the
United States could damage our terrestrial repeater network, interrupt our
service and harm our business in the affected area. We do not have replacement
or redundant facilities that can be used to assume the functions of our
terrestrial repeater network or national broadcast studio in the event of a
catastrophic event. Any damage to our terrestrial repeater network would likely
result in degradation of our service for some subscribers and could result in
complete loss of service in affected areas. Damage to our national broadcast
studio would restrict our production of programming and require us to obtain
programming from third parties to continue our service.
CONSUMERS COULD PIRATE OUR SERVICE.
Like all radio transmissions, the Sirius signal is subject to interception.
Pirates may be able to obtain or rebroadcast Sirius without paying the
subscription fee. Although we use encryption technology to mitigate the risk of
signal theft, such technology may not be adequate to prevent theft of the Sirius
signal. If widespread, signal theft could harm our business.
WE NEED TO OBTAIN RIGHTS TO PROGRAMMING, WHICH COULD BE MORE COSTLY THAN
ANTICIPATED.
We must negotiate and enter into music programming royalty arrangements with
performing rights societies, such as Broadcast Music, Inc. and SESAC, Inc. Radio
broadcasters currently pay a combined total of approximately 4% of their
revenues to performing rights societies. We expect to negotiate or establish
license fees through a rate court proceeding in the U.S. District Court for the
Southern District of New York, but such royalty arrangements may be more costly
than anticipated.
We must also enter into royalty arrangements with the owners of the
copyrights in the sound recordings we play, who are primarily represented by the
Recording Industry Association of America. Cable audio services currently pay
these owners 6.5% of gross subscriber revenue, a royalty rate determined in an
arbitration proceeding before the Librarian of Congress. Although we believe we
can distinguish Sirius sufficiently from cable audio services in order to
negotiate or obtain through arbitration a lower rate, we may not be able to do
so, and we could be required to pay a higher rate. In any event, we expect to
pay the same rates as XM Radio, the other satellite radio licensee.
14
RAPID TECHNOLOGICAL AND INDUSTRY CHANGES COULD MAKE OUR SERVICE OBSOLETE.
The satellite industry and the audio entertainment industry are both
characterized by rapid technological change, frequent new product innovations,
changes in customer requirements and expectations, and evolving industry
standards. If we are unable to keep pace with these changes, our business may be
unsuccessful. Products using new technologies, or emerging industry standards,
could make our technologies obsolete. In addition, we may face unforeseen
problems in operating our system that could harm our business. Because we have
depended on third parties to develop technologies used in key elements of our
system, more advanced technologies that we may wish to use may not be available
to us on reasonable terms or in a timely manner. Further, our competitors may
have access to technologies not available to us, which may enable them to
produce entertainment products of greater interest to consumers, or at a more
competitive cost.
OUR BUSINESS MAY BE IMPAIRED BY THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.
Development of our system has depended largely upon intellectual property
that we have developed or licensed from third parties. If the intellectual
property that we have developed or use is not adequately protected, others will
be permitted to duplicate our system or service without liability. In addition,
others may challenge, invalidate or circumvent our intellectual property rights,
patents or existing licenses. Some of the know-how and technology we have
developed and plan to develop will not be covered by United States patents.
Trade secret protection and contractual agreements may not provide adequate
protection if there is any unauthorized use or disclosure.
Other parties may have patents or pending patent applications which will
later mature into patents or inventions which may block our ability to operate
our system or license our technology. We may have to resort to litigation to
enforce our rights under license agreements or to determine the scope and
validity of other parties' proprietary rights in the subject matter of those
licenses. This may be expensive. Also, we may not succeed in any such
litigation.
Third parties may bring suit against us for patent or other infringement of
intellectual property rights. Any such litigation could result in substantial
cost to, and diversion of effort by, our company, and adverse findings in any
proceeding could subject us to significant liabilities to third parties; require
us to seek licenses from third parties; block our ability to operate our system
or license our technology; or otherwise adversely affect our ability to
successfully market Sirius.
The loss of necessary technologies could require us to obtain substitute
technology of lower quality performance standards, at greater cost or on a
delayed basis, which could harm our business.
WE NEED PEOPLE WITH SPECIAL SKILLS TO DEVELOP AND MAINTAIN OUR NEW SERVICE. IF
WE CANNOT FIND AND KEEP THESE PEOPLE, OUR BUSINESS COULD SUFFER.
We depend on the continued efforts of our executive officers and key
employees, who have specialized technical knowledge regarding our satellite and
radio systems and business knowledge regarding the radio industry and
subscription services. If we lose the services of one or more of these
employees, or fail to attract qualified replacement personnel, it could harm our
business and our future prospects.
ITEM 2. PROPERTIES
On March 31, 1998, we signed a lease for the 36th and 37th floors and
portions of the roof at 1221 Avenue of the Americas, New York, New York, to
house our headquarters and national broadcast studio. We use portions of the
roof for satellite transmission equipment and an emergency generator. The term
of the lease is 15 years and 10 months, with an option to renew for an
additional five years at fair market value. The annual rent is approximately
$4.5 million, with specified increases and escalations based on operating
expenses.
On March 22, 2000, we signed a lease for the 32nd floor at 1221 Avenue of
the Americas to house our engineering staff. On November 30, 2001, we agreed to
terminate this lease, and surrender the space
15
on or before April 15, 2002. In connection with the termination of this lease,
we paid termination fees and real estate commissions of approximately $2.6
million.
ITEM 3. LEGAL PROCEEDINGS
On September 18, 2001, a purported class action lawsuit, entitled Sterbenk
v. Sirius Satellite Radio, Inc., 2:01-CV-295, was filed against us and certain
of our current and former executive officers in the United States District Court
for the District of Vermont. Subsequently, additional purported class action
lawsuits were filed. These actions have been consolidated in a single purported
class action, entitled In re: Sirius Satellite Radio Securities Litigation,
No. 01-CV-10863, pending in the United Stated District Court for the Southern
District of New York. This action has been brought on behalf of all persons who
acquired our common stock on the open market between February 16, 2000 and
April 2, 2001. The complaint alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
complaint alleges, among other things, that the defendants issued materially
false and misleading statements and press releases concerning when our service
would be commercially available, which caused the market price of our common
stock to be artificially inflated. The complaint seeks an unspecified amount of
money damages. We believe that the allegations in the complaint have no merit
and we will vigorously defend against this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held on November 20, 2001, the persons
whose names are set forth below were elected as directors. The relevant voting
information for each person is set forth opposite such person's name:
VOTES CAST
----------------------
FOR WITHHELD
--- --------
Leon D. Black............................................... 48,723,933 646,699
Lawrence F. Gilberti........................................ 48,416,598 954,034
James P. Holden............................................. 48,733,276 637,356
David Margolese............................................. 47,193,177 2,177,455
Peter G. Peterson........................................... 48,721,156 649,476
Joseph V. Vittoria.......................................... 48,731,293 639,339
In addition to the election of directors, the appointment of Arthur Andersen
LLP as our independent auditors for the fiscal year ending December 31, 2001 was
ratified by a vote of 48,716,838 shares in favor, 630,723 shares against and
23,071 shares abstaining.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding our executive officers is provided below:
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
Joseph P. Clayton............... 52 President and Chief Executive Officer and a Director
Guy D. Johnson.................. 41 Executive Vice President, Sales and Marketing
John J. Scelfo.................. 44 Executive Vice President and Chief Financial Officer
Patrick L. Donnelly............. 40 Executive Vice President, General Counsel and Secretary
Joseph S. Capobianco............ 52 Senior Vice President, Content
Michael S. Ledford.............. 52 Senior Vice President, Engineering
JOSEPH P. CLAYTON has served as President and Chief Executive Officer since
November 2001. Mr. Clayton served as Vice Chairman of Global Crossing Ltd., a
global internet and long distance services provider, and President, Global
Crossing North America, from September 1999 until November 2001. On January 28,
2002, Global Crossing Ltd. and certain of its affiliates filed petitions for
relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Southern District of New York. From August 1997
to September 1999, Mr. Clayton was President and Chief Executive Officer of
Frontier Corporation, a Rochester-based national provider of local
16
telephone, long distance, data, conferencing and wireless communications
services, which was acquired by Global Crossing in September 1999. Prior to
joining Frontier, Mr. Clayton was Executive Vice President, Marketing and
Sales -- Americas and Asia, of Thomson MultiMedia S.A., a leading consumer
electronics company. Mr. Clayton is a member of the Board of Directors of
Global Crossing Ltd., Good Guys Inc. and Transcend Services Inc. He is also
a trustee of Bellarmine College and The Rochester Institute of Technology
and a member of the advisory board of the Indiana University School of
Business.
GUY D. JOHNSON has served as Executive Vice President, Sales and Marketing,
since January 2002. From 1999 until January 2002, Mr. Johnson was a senior
strategic consultant to Thomson MultiMedia S.A., a leading consumer electronics
company. Prior to 1999, he was Senior Vice President, Sales and Product
Management -- Americas, for Thomson MultiMedia S.A.
JOHN J. SCELFO has served as Executive Vice President and Chief Financial
Officer since April 2001. From November 1999 to April 2001, Mr. Scelfo was Vice
President, Finance, for the Asian operations of Dell Computer Corporation, the
leading direct global computer systems company. Prior to Dell, he spent 19
years with Mobil Oil Corporation, an integrated energy operator, including as
its Corporate Assistant Treasurer, Vice President of Global Risk Management,
and Chief Financial Officer of its operations in Japan and South-East Asia.
PATRICK L. DONNELLY has served as Executive Vice President, General Counsel
and Secretary since May 1998. From June 1997 to May 1998, he was Vice President
and deputy general counsel of ITT Corporation, a hotel, gaming and entertainment
company that was acquired by Starwood Hotels & Resorts Worldwide, Inc. in
February 1998. From October 1995 to June 1997, he was assistant general counsel
of ITT Corporation. Prior to October 1995, Mr. Donnelly was an associate at the
law firm of Simpson Thacher & Bartlett.
JOSEPH S. CAPOBIANCO has served as Senior Vice President, Content, since
April 1997. From 1981 to April 1997, he was an independent consultant providing
programming, production, marketing and strategic planning consulting services to
media and entertainment companies, including Home Box Office, a premium cable
television network and a subsidiary of Time Warner Entertainment Company, L.P.,
and ABC Radio. From May 1990 to February 1995, he served as vice president of
programming at Music Choice, which operates a 40-channel music service available
to subscribers to DIRECTV and is partially owned by Warner Music Group Inc.,
Sony Entertainment Inc. and EMI.
MICHAEL S. LEDFORD has served as Senior Vice President, Engineering, since
September 2001. From July 2000 to September 2001, Mr. Ledford was Vice President
of Automotive Strategy at Wingcast, a joint venture between Ford Motor Company
and Qualcomm developing advanced wireless vehicle applications, or telematics.
Prior to Wingcast, he was the Executive Director of Telematics at Ford, and
prior to that was Corporate Executive Director for Process Engineering
responsible for overseeing Ford's worldwide introduction of new technologies.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the Nasdaq SmallCap Market on
September 13, 1994. From October 24, 1997 to January 11, 2000, our common stock
was traded on the Nasdaq National Market under the symbol 'CDRD'. On January 12,
2000, our common stock began trading on the Nasdaq National Market under the
symbol 'SIRI'.
The following table sets forth the high and low closing bid price for our
common stock, as reported by Nasdaq, for the periods indicated below.
HIGH LOW
---- ---
Year ended December 31, 2000
First Quarter........................................... 66 1/2 38 3/8
Second Quarter.......................................... 50 15/16 31 1/8
Third Quarter........................................... 56 3/8 37
Fourth Quarter.......................................... 54 7/16 21 1/2
Year ended December 31, 2001
First Quarter........................................... 35 12 7/16
Second Quarter.......................................... 18 11/32 6 29/32
Third Quarter........................................... 10 13/16 3 11/32
Fourth Quarter.......................................... 11 5/8 2 19/64
On March 25, 2002, the closing bid price of our common stock on the Nasdaq
National Market was $4.38 per share. On March 25, 2002, there were approximately
558 record holders of our common stock. We have never paid cash dividends on our
capital stock. We currently intend to retain earnings, if any, for use in our
business and do not anticipate paying any cash dividends in the foreseeable
future. The indentures governing our senior secured notes and our senior secured
discount notes and our term loan agreement with Lehman Brothers contain
provisions that limit our ability to pay dividends on our preferred stock and
common stock. The certificates of designation for our preferred stock contain
provisions that also limit our ability to pay dividends on our common stock.
Recent Sales of Unregistered Securities. During the year ended December 31,
2001, we acquired $34,900,000 in aggregate principal amount of our 8 3/4%
Convertible Subordinated Notes due 2009 and $16,500,000 in aggregate principal
amount at maturity of our 15% Senior Secured Discount Notes due 2007 in exchange
for 2,283,979 and 948,565 shares of our common stock, respectively. These
transactions were negotiated by us directly with the holders of our 8 3/4%
Convertible Subordinated Notes due 2009 and 15% Senior Secured Discount Notes
due 2007 and no commissions or remuneration was paid or given directly or
indirectly for soliciting such exchange. The issuance of our common stock in
these transactions was exempt from registration under the Securities Act by
virtue of the exemption contained in Section 3(a)(9) of the Securities Act.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data set forth below with respect to the
statements of operations for the years ended December 31, 1999, 2000 and 2001,
and with respect to the balance sheets at December 31, 2000 and 2001 are derived
from our consolidated financial statements, audited by Arthur Andersen LLP,
independent accountants, included in Item 8 of this report. Our selected
consolidated financial data with respect to the balance sheets at December 31,
1997, 1998 and 1999 and with respect to the statement of operations data for the
years ended December 31, 1997 and 1998, are derived from our audited
consolidated financial statements, which are not included in this report. This
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included in Item 8
of this report and 'Management's Discussion and Analysis of Financial Condition
and Results of Operations.'
18
STATEMENT OF OPERATIONS DATA
CUMULATIVE
FOR THE PERIOD
MAY 17, 1990
YEAR ENDED DECEMBER 31, (DATE OF INCEPTION)
------------------------------------------------------ TO DECEMBER 31,
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues................. $ -- $ -- $ -- $ -- $ -- $--
Net loss................. $ (4,737) $(48,396) $(62,822) $(134,744) $(235,763) $(504,998)
Net loss applicable to
common stockholders.... $(59,050) $(85,953) $(96,981) $(183,715) $(277,919) $(722,154)
Net loss per share
applicable to common
stockholders (basic and
diluted)............... $ (5.08) $ (4.79) $ (3.96) $ (4.72) $ (5.30)
Weighted average common
shares outstanding
(basic and diluted).... 11,626 17,932 24,470 38,889 52,427
BALANCE SHEET DATA
DECEMBER 31,
----------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(IN THOUSANDS)
Cash and cash equivalents............. $ 900 $150,190 $ 81,809 $ 14,397 $ 4,726
Marketable securities, at market...... $169,482 $109,044 $ 311,560 $ 121,862 $ 304,218
Restricted investments, at amortized
cost................................ $ -- $ 6,389 $ 73,704 $ 48,801 $ 21,998
Working capital....................... $170,894 $180,821 $ 303,720 $ 143,981 $ 282,932
Total assets.......................... $323,808 $643,880 $1,206,612 $1,323,582 $1,527,605
Deferred satellite payments and
accrued interest.................... $ -- $ 31,324 $ 55,140 $ 60,881 $ 67,201
Long-term debt........................ $131,387 $152,888 $ 488,690 $ 472,602 $ 589,990
Convertible preferred stock........... $176,025 $294,510 $ 362,417 $ 443,012 $ 485,168
Deficit accumulated during development
stage............................... $(23,273) $(71,669) $ (134,491) $ (269,235) $ (504,998)
Stockholders' equity (1).............. $ 15,980 $ 77,953 $ 134,179 $ 290,483 $ 322,649
- ---------
(1) No cash dividends were declared or paid in any of the periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the federal securities laws. Actual results and the timing of
events could differ materially from those projected in forward-looking
statements due to a number of factors, including those described under
'Business -- Risk Factors' and elsewhere in this Annual Report. See 'Special
Note Regarding Forward-Looking Statements.'
(All dollar amounts referenced in this Item 7 are in thousands, unless
otherwise stated)
OVERVIEW
From our three orbiting satellites, we directly broadcast 100 channels of
digital-quality radio to motorists throughout the continental United States for
a monthly subscription fee of $12.95. We deliver 60 channels of commercial-free
music in virtually every genre, and 40 channels of news, sports, talk, comedy
and children's programming. Our broad and deep range of almost every music
format as well as our news, sports and entertainment programming is not
available on conventional radio in any market
19
in the United States. We hold one of only two licenses issued by the FCC to
operate a national satellite radio system.
We launched our service on February 14, 2002 in Denver, Colorado; Houston,
Texas; Phoenix, Arizona; and Jackson, Mississippi. We are employing a phased
roll out in order to test various marketing initiatives, further refine our
receiver technology and optimize our service on a market-by-market basis. This
strategy allows us to enhance our subscriber experience before our nationwide
launch. We plan to offer our service in additional markets during the second and
third quarters of 2002 and to offer our service on a national basis during the
third quarter of 2002. We expect to generate most of the subscriptions we sell
in 2002 in the second half of the year as we expand our service nationally.
Our primary source of revenues is our $12.95 per month subscription fee and
a one-time activation fee per subscriber. In addition, we derive revenues from
selling limited advertising on our non-music channels. Currently our
subscription and advertising revenues are not material due to the limited number
of subscribers to our service to date.
Our operating expenses consist primarily of:
marketing costs, including advertising, promotions, payments to retailers,
dealers, distributors and automakers, and subsidies to radio manufacturers;
programming costs, including royalty payments to copyright holders, license
fees to programming providers and advertising revenue sharing arrangements;
expenses of operating and maintaining of our broadcast system, including
costs of tracking and controlling our satellites, operating our terrestrial
repeater network, and operating and maintaining our national broadcast
studio;
expenses associated with the continuing development of our radio
technology, including the costs of designing and developing future chip
sets; and
general and administrative costs, including salary and employment related
expenses, rent and occupancy costs, insurance expenses and other
miscellaneous costs, such as travel, legal and consulting fees.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
We had net losses before extraordinary items of $241,076 and $134,744 for
the years ended December 31, 2001 and 2000, respectively. Extraordinary items
for the years ended December 31, 2001 and 2000 were $5,313 and $0, respectively,
and consisted of a gain resulting from our acquisition of $16,500 in principal
amount at maturity of our 15% Senior Secured Discount Notes due 2007. Our total
operating expenses were $168,456 and $125,634 for the years ended December 31,
2001 and 2000, respectively.
Engineering design and development costs were $58,453 and $70,690 for the
years ended December 31, 2001 and 2000, respectively. These engineering costs
represented primarily payments to Agere Systems, Inc. (47% in 2001 and 38% in
2000) and other radio partners (17% in 2001 and 33% in 2000). The decrease in
costs in 2001 was primarily due to the decreased development activity by our
radio partners, many of which completed a substantial portion of their efforts
in 2000 and early 2001.
General and administrative expenses increased for the year ended December
31, 2001 to $95,959 from $47,768 for the year ended December 31, 2000. General
and administrative expenses increased principally due to the growth of our
workforce, operation of our terrestrial repeater network, depreciation of our
broadcast studio equipment and the cost of in-orbit insurance for our three
satellites during 2001. The major components of general and administrative
expenses in 2001 were salaries and employment related costs (23%), rent and
occupancy costs (18%) and marketing costs (13%), while in 2000 the major
components were salaries and employment related costs (30%), rent and occupancy
costs (15%) and marketing costs (16%). The remaining portion of general and
administrative expenses (46% in 2001 and 39% in 2000) consisted of other costs,
such as legal and regulatory, insurance,
20
programming, consulting, travel, and depreciation, with only insurance (12%)
exceeding 10% of the total in 2001 and no amount exceeding 10% of the total in
2000.
Non-cash stock compensation charge increased for the year ended December 31,
2001 to $14,044 from $7,176 for the year ended December 31, 2000. The increase
in 2001 resulted primarily from the compensation expense associated with the
repricing of employee stock options in April 2001. We expect to record future
non-cash stock compensation charges or benefits based on the market value of our
common stock at the end of each reporting period due to the variable accounting
associated with the repricing of certain employees stock options.
The decrease in interest and investment income to $17,066 for the year ended
December 31, 2001, from $24,485 for the year ended December 31, 2000, resulted
from significantly lower returns on our investments in U.S. government
securities and commercial paper issued by major U.S. corporations during 2001.
Interest expense was $89,686 for the year ended December 31, 2001 and
$33,595 for the year ended December 31, 2000, net of capitalized interest of
$19,270 and $63,728, respectively. Gross interest expense for 2001 increased by
$11,633 and capitalized interest decreased by $44,458, compared to 2000. The
increase in gross interest resulted primarily from the amount outstanding under
our term loan with Lehman Brothers, which was not outstanding during the 2000
period. This increase is offset by a decrease in conversion expense associated
with the acquisition of a portion of our 8 3/4% Convertible Subordinated Notes
due 2009. The decrease in capitalized interest during the 2001 period was
primarily due to the lower level of construction in process. Construction in
process decreased as compared to the 2000 period due to the launch of our
satellites. Construction in process during the 2001 period related principally
to our fourth, spare satellite and construction of our terrestrial repeater
network.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
We had net losses of $134,744 and $62,822 for the years ended December 31,
2000 and 1999, respectively. Our total operating expenses were $125,634 and
$63,518 for the years ended December 31, 2000 and 1999, respectively.
Engineering design and development costs were $70,690 and $32,987 for the
years ended December 31, 2000 and 1999, respectively. These engineering costs
represented primarily payments to Agere Systems, Inc. (38% in 2000 and 56% in
1999) and other radio partners (33% in 2000 and 19% in 1999). The increase was
primarily due to increased development efforts by Agere Systems, Inc. on our
chip set and radio development activity by our radio partners.
General and administrative expenses increased for the year ended December
31, 2000 to $47,768 from $29,325 for the year ended December 31, 1999. General
and administrative expenses increased principally due to the growth of our
workforce and the cost of in-orbit insurance for our three satellites, that were
in-orbit during a significant portion of 2000. The major components of general
and administrative expenses in 2000 were salaries and employment related costs
(30%), rent and occupancy costs (15%) and marketing costs (16%), while in 1999
the major components were salaries and employment related costs (29%), rent and
occupancy costs (19%) and marketing costs (15%). The remaining portion of
general and administrative expenses (39% in 2000 and 37% in 1999) consisted of
other costs, such as legal and regulatory, insurance, consulting, travel, and
depreciation, with no amounts exceeding 10% of the total in 2000 or 1999.
Non-cash stock compensation charge increased for the year ended December 31,
2000 to $7,176 from $1,206 for the year ended December 31, 1999. The increase in
2000 resulted primarily from the increase in compensation expense associated
with stock options granted to certain employees and consultants.
The increase in interest and investment income to $24,485 for the year ended
December 31, 2000, from $17,502 for the year ended December 31, 1999, resulted
from higher returns on our investments in U.S. government securities and
commercial paper issued by major U.S. corporations during 2000.
Interest expense was $33,595 for the year ended December 31, 2000 and
$16,806 for the year ended December 31, 1999, net of capitalized interest of
$63,728 and $56,567, respectively. Gross interest
21
expense for 2000 increased by $23,950 and capitalized interest increased by
$7,161, compared to 1999. The increase in gross interest from the prior year was
due to interest accruing on our 14 1/2% Senior Secured Notes due 2009 issued in
May 1999 and our 8 3/4% Convertible Subordinated Notes due 2009 issued in
September and October 1999, which were outstanding for all of 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had cash, cash equivalents, marketable securities
and restricted investments totaling $330,942 and working capital of $282,932,
compared with cash, cash equivalents, marketable securities and restricted
investments totaling $185,060 and working capital of $143,981 at December 31,
2000.
SOURCES OF FUNDING
Since inception, we have funded the development of our satellite radio
system and the related introduction of our service through the issuance of debt
and equity securities. As of December 31, 2001, we had raised approximately
$1,103,300 in equity capital from the sale of our common stock and convertible
preferred stock. As of December 31, 2001, we had received approximately $638,000
in net proceeds from public debt offerings and private credit arrangements.
At December 31, 2001, we had three issues of public debt securities
outstanding: $280,430 in aggregate principal amount at maturity of 15% Senior
Secured Discount Notes due 2007, $200,000 in aggregate principal amount of
14 1/2% Senior Secured Notes due 2009 and $45,936 in aggregate principal amount
of 8 3/4% Convertible Subordinated Notes due 2009. As of December 31, 2001, we
had acquired $16,500 in principal amount at maturity of our 15% Senior Secured
Discount Notes due 2007 and $97,814 in principal amount of our 8 3/4%
Convertible Subordinated Notes due 2009 in exchange for shares of our common
stock. In addition to these public debt securities, we have also entered into a
$50,000 Deferral Credit Agreement with Space Systems/Loral and a $150,000 term
loan agreement with Lehman Brothers. We intend to seek opportunities to reduce
our outstanding debt, and may pursue privately negotiated transactions with
holders of our debt from time to time or an offer to purchase all or a portion
of our debt in exchange for cash, common stock, new debt or a combination of
those items.
Space Systems/Loral has deferred a total of $50,000 of payments under the
Loral Satellite Contract originally scheduled for payment in 1999. Under the
Deferral Credit Agreement with Space Systems/Loral, these deferred amounts bear
interest at 10% per year and were originally scheduled to be paid in quarterly
installments beginning in June 2002. However, the agreement governing these
deferred amounts provides that this date, and subsequent payment dates, will be
extended by the number of days that the achievement of any milestone under the
Loral Satellite Contract is delayed beyond the dates set forth in the Loral
Satellite Contract. Our fourth satellite was originally expected to be delivered
to ground storage in October 2000 and now is expected to be delivered to ground
storage in the second quarter of 2002. As a result of this delay, we do not
expect to make any required payments with respect to these deferred payments
until September 2003, at the earliest.
On March 7, 2001, we borrowed $150,000 under a term loan agreement with
Lehman Brothers. In connection with this term loan, we granted Lehman Brothers
Commercial Paper Inc. 2,100,000 warrants, each to purchase one share of our
common stock, at an exercise price of $29.00 per share. The term loan bears
interest at an annual rate equal to the eurodollar rate plus 4% or a base rate,
typically the prime rate, plus 5%. On March 26, 2002, we entered into an
amendment to this term loan agreement adjusting the financial covenants,
accelerating the amortization schedule of the term loan and reducing the
exercise price of the warrants to $15.00 per share.
As amended, the term loan matures in installments, commencing on June 30,
2002, in the amounts described below:
22
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 each of 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.
Our term loan agreement with Lehman Brothers contains financial and
operating covenants. These covenants include requirements that we:
achieve at least $2,300 in revenues from subscribers for the quarter ending
March 31, 2003, and achieve increasing revenues from subscribers each
quarter thereafter through the maturity of the term loan on December 31,
2005;
achieve a minimum negative cash flow, before subscriber acquisition costs,
of $65,000 for the quarter ending March 31, 2003, and have improving cash
flow, before subscriber acquisition costs, each quarter thereafter through
the maturity of the term loan;
achieve a minimum negative cash flow, before subscriber acquisition costs
and adjusted to give effect to subscribers who cancel or fail to renew
their subscriptions, of $58,400 for the quarter ending September 30, 2003,
and have improving adjusted cash flow, each quarter thereafter through the
maturity of the term loan; and
not permit our capital expenditures, other than the costs of constructing,
launching and insuring replacement satellites and installing terrestrial
repeaters, to exceed $100,000 during the period from June 1, 2001 through
the period in which the term loan is outstanding.
Our failure to comply with these covenants could result in an event of
default which, if not cured or waived, could have a material adverse effect on
us. If Lehman Brothers, the holder of the term loan, were to accelerate the
maturity of this loan as a result of our failure to satisfy a covenant, the
trustees of our 15% Senior Secured Discount Notes due 2007 and our 14 1/2%
Senior Secured Notes due 2009 would have the right to accelerate the outstanding
indebtedness under these notes. If the maturity of the term loan, our 15% Senior
Secured Discount Notes due 2007 and our 14 1/2% Senior Secured Notes due 2009
were accelerated, we would be required to seek relief from creditors under the
Bankruptcy Code.
The indentures governing our 15% Senior Secured Discount Notes due 2007, our
14 1/2% Senior Secured Notes due 2009 and our term loan agreement with Lehman
Brothers contain limitations on our ability to issue additional debt. Our 15%
Senior Secured Discount Notes due 2007, our 14 1/2% Senior Secured Notes due
2009 and our obligations under the term loan agreement are secured by a pledge
of the stock of Satellite CD Radio, Inc., our subsidiary that holds our FCC
license, and our rights under the Loral Satellite Contract relating to our
fourth, spare satellite. Under the Deferral Credit Agreement, we granted Space
Systems/Loral a security interest in our terrestrial repeater network.
FUNDING REQUIREMENTS
The amount and timing of our cash requirements depends upon numerous
factors, including the rate of growth of our business, subscriber acquisition
costs, costs associated with the design and development of chip sets for Sirius
radios, costs of financing and the possibility of unanticipated costs.
23
As of March 25, 2002, we had sufficient cash to cover our estimated funding
needs through the first quarter of 2003. However, if the number of actual
subscribers, or the cost to acquire each new subscriber, differs substantially
from our expectations, we may need substantial additional funding. We anticipate
that our additional funding needs through the end of 2003 will total
approximately $275,000, and that we will require additional funding thereafter.
We plan to fund our additional capital needs through the issuance of debt and
equity securities.
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 this Annual Report on Form 10-K. We have identified the following
policies as critical to our business and understanding of our results of
operations.
o Revenue Recognition. Revenue from subscribers will consist of our monthly
service fee, recognized as the service is provided, and a non-refundable
activation fee, recognized on a pro rata basis over the estimated term of
the subscriber relationship. The estimated term of a subscriber
relationship will be based on market research and management's judgment
and will be refined in the future as sufficient historical data becomes
available.
o Warrant Agreements. In connection with the Ford and DaimlerChrylser
agreements, which anticipate that Ford and DaimlerChrylser will
manufacture, market and sell vehicles equipped to receive our service, we
have issued both companies warrants to purchase shares of our common
stock. We have not recorded any expense related to these warrants. We
expect to record non-cash expenses related to these warrants in the
future, based on the number of vehicles equipped to receive our service
that Ford and DaimlerChrylser manufacture.
o Asset Impairment. We review our long-lived assets and identifiable assets
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset is not recoverable. For assets which are
held and used in operations, the asset would be impaired if the book
value of the asset exceeded the undiscounted future net cash flows
related to the asset. For those assets which are to be disposed of, the
asset would be impaired to the extent the fair value does not exceed the
book value. We consider relevant cash flow, estimated future operating
results, trends and other available information in assessing whether the
carrying value of assets are recoverable. No materially impairment losses
have been recognized to date.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ('FASB') issued SFAS
No. 141, 'Business Combinations,' which we adopted on July 1, 2001. SFAS
No. 141 requires the purchase method of accounting for all business combinations
initiated after June 30, 2001. The application of SFAS No. 141 has not had a
material impact on our financial position or results of operations.
In July 2001, the FASB issued SFAS No. 142, 'Goodwill and Other Intangible
Assets,' which requires goodwill and intangible assets with indefinite useful
lives to no longer be amortized but to be tested for impairment at least
annually. Intangible assets that have estimable useful lives will continue to be
amortized over their estimated useful lives. The amortization and
non-amortization provisions of SFAS No. 142 will be applied to all goodwill and
intangible assets acquired after June 30, 2001. Effective January 1, 2002, we
are required to apply all other provisions of SFAS No. 142. We are currently
evaluating the potential impact, if any, the adoption of SFAS No. 142 will have
on our financial position and results of operations.
In July 2001, the FASB issued SFAS No. 143, 'Accounting for Asset Retirement
Obligations,' which requires the fair value for an asset retirement obligation
to be recorded in the period in which it is incurred. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002, with earlier adoption
encouraged. We do not expect that the adoption of SFAS No. 143 will have a
material impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, 'Accounting for the Impairment
or Disposal of Long-Lived Assets,' which is effective for fiscal periods
beginning after December 15, 2001. SFAS No. 144 establishes an accounting model
for impairment or disposal of long-lived assets to be disposed of by sale. We do
not expect that the adoption of SFAS No. 144 will have a material impact on our
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements contained in Item 14 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference to our
definitive proxy statement (the 'Proxy Statement') prepared with respect to our
Annual Meeting of Stockholders to be held on June 21, 2002. The Proxy Statement
will be filed with the Securities and Exchange Commission at a later date that
is not more than 120 days after the end of our 2001 fiscal year. The information
with respect to Executive Officers is set forth, pursuant to General Instruction
G of Form 10-K, under Part I of this Report.
24
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the
Proxy Statement prepared with respect to our Annual Meeting of Stockholders to
be held on June 21, 2002. The Proxy Statement will be filed with the Securities
and Exchange Commission at a later date that is not more than 120 days after the
end of our 2001 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to the
Proxy Statement prepared with respect to our Annual Meeting of Stockholders to
be held on June 21, 2002. The Proxy Statement will be filed with the Securities
and Exchange Commission at a later date that is not more than 120 days after the
end of our 2001 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to the
Proxy Statement prepared with respect to our Annual Meeting of Stockholders to
be held on June 21, 2002. The Proxy Statement will be filed with the Securities
and Exchange Commission at a later date that is not more than 120 days after the
end of our 2001 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements
See index to financial statements appearing on page F-1.
(2) Financial Statement Schedules
None. All schedules have been included in the Consolidated Financial
Statements or Notes thereto.
(3) Exhibits
See Exhibit Index appearing on pages E-1 through E-4 for a list of
exhibits filed or incorporated by reference as part of this Annual Report
on Form 10-K.
(b) Reports on Form 8-K
None.
As of the date of the filing of this Annual Report on Form 10-K, no proxy
materials have been furnished to security holders. Copies of all proxy materials
will be furnished to the Securities and Exchange Commission in compliance with
its rules.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 27th day of
March, 2002.
SIRIUS SATELLITE RADIO INC.
By: /S/ JOHN J. SCELFO
..................................
JOHN J. SCELFO
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
March 27, 2002
/s/ DAVID MARGOLESE Chairman of the Board of Directors
......................................... and Director
(DAVID MARGOLESE)
/s/ JOSEPH P. CLAYTON President and Chief Executive March 27, 2002
......................................... Officer and Director
(JOSEPH P. CLAYTON) (Principal Executive Officer)
/s/ JOHN J. SCELFO Executive Vice President and Chief March 27, 2002
......................................... Financial Officer
(JOHN J. SCELFO) (Principal Financial Officer)
/s/ EDWARD WEBER, JR. Vice President and Controller March 27, 2002
......................................... (Principal Accounting Officer)
(EDWARD WEBER, JR.)
/s/ LEON D. BLACK Director March 27, 2002
.........................................
(LEON D. BLACK)
/s/ LAWRENCE F. GILBERTI Director March 27, 2002
.........................................
(LAWRENCE F. GILBERTI)
/s/ JAMES P. HOLDEN Director March 27, 2002
.........................................
(JAMES P. HOLDEN)
/s/ PETER G. PETERSON Director March 27, 2002
.........................................
(PETER G. PETERSON)
/s/ JOSEPH V. VITTORIA Director March 27, 2002
.........................................
(JOSEPH V. VITTORIA)
26
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2001 and for the
period May 17, 1990 (date of inception) to December 31,
2001...................................................... F-3
Consolidated Balance Sheets as of December 31, 2000 and
2001...................................................... F-4
Consolidated Statements of Stockholders' Equity for each of
the years during the period May 17, 1990 (date of
inception) to December 31, 2001........................... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2001 and for the
period May 17, 1990 (date of inception) to December 31,
2001...................................................... F-9
Notes to Consolidated Financial Statements.................. F-10
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Sirius Satellite Radio Inc.:
We have audited the accompanying consolidated balance sheets of Sirius
Satellite Radio Inc. (a Delaware corporation in the development stage) and
subsidiary as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for the three
years in the period ended December 31, 2001 and for the period from May 17, 1990
(date of inception) to December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sirius Satellite Radio Inc.
and subsidiary, as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the three years in the period ended
December 31, 2001 and for the period from May 17, 1990 (date of inception) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
New York, New York
March 26, 2002
F-2
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CUMULATIVE FOR
THE PERIOD
MAY 17, 1990
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
-------------------------------- TO DECEMBER 31,
1999 2000 2001 2001
-------- --------- --------- -------------------
Revenue...................................... $ -- $ -- $ -- $--
Operating expenses:
Engineering design & development......... (32,987) (70,690) (58,453) (168,512)
General and administrative............... (29,325) (47,768) (95,959) (200,294)
Non-cash stock compensation.............. (1,206) (7,176) (14,044) (25,762)
Special charges.......................... -- -- -- (27,682)
-------- --------- --------- ---------
Total operating expenses............. (63,518) (125,634) (168,456) (422,250)
-------- --------- --------- ---------
Other income (expense):
Interest and investment income........... 17,502 24,485 17,066 70,705
Interest expense......................... (16,806) (33,595) (89,686) (156,471)
-------- --------- --------- ---------
696 (9,110) (72,620) (85,766)
-------- --------- --------- ---------
Loss before income taxes..................... (62,822) (134,744) (241,076) (508,016)
Income taxes:
Federal.................................. -- -- -- (1,982)
State.................................... -- -- -- (313)
-------- --------- --------- ---------
Net loss before extraordinary item........... (62,822) (134,744) (241,076) (510,311)
Extraordinary gain on early extinguishment of
debt....................................... -- -- 5,313 5,313
-------- --------- --------- ---------
Net loss..................................... (62,822) (134,744) (235,763) (504,998)
-------- --------- --------- ---------
Preferred stock dividends.................... (30,321) (39,811) (41,476) (133,326)
Preferred stock deemed dividends............. (3,535) (8,260) (680) (76,126)
Accretion of dividends in connection with the
issuance of warrants on preferred stock.... (303) (900) -- (7,704)
-------- --------- --------- ---------
Net loss applicable to common stockholders... $(96,981) $(183,715) $(277,919) $(722,154)
-------- --------- --------- ---------
-------- --------- --------- ---------
Net loss per share applicable to common
stockholders (basic and diluted)........... $(3.96) $(4.72) $(5.30)
Weighted average common shares outstanding
(basic and diluted)........................ 24,470 38,889 52,427
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
---------------------------
2000 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 14,397 $ 4,726
Marketable securities, at market......................... 121,862 304,218
Restricted investments, at amortized cost................ 48,801 21,998
Prepaid expense and other................................ 13,288 12,303
---------- ----------
Total current assets.................................. 198,348 343,245
---------- ----------
Property and equipment, net................................. 1,013,465 1,082,915
Other assets:
FCC license.............................................. 83,368 83,654
Debt issuance costs, net................................. 20,124 17,176
Deposits and other....................................... 8,277 615
---------- ----------
Total other assets.................................... 111,769 101,445
---------- ----------
Total assets.......................................... $1,323,582 $1,527,605
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................... $ 39,530 $ 39,836
Accrued interest......................................... 5,527 5,477
Satellite construction payable........................... 9,310 --
Current portion of long-term debt........................ -- 15,000
---------- ----------
Total current liabilities............................. 54,367 60,313
Long-term debt.............................................. 472,602 589,990
Deferred satellite payments and accrued interest............ 60,881 67,201
Deferred income taxes....................................... 2,237 2,237
Other long-term liabilities................................. -- 47
---------- ----------
Total liabilities..................................... 590,087 719,788
---------- ----------
Commitments and contingencies:
10 1/2% Series C Convertible Preferred Stock, no par
value: 2,025,000 shares authorized, no shares issued or
outstanding............................................. -- --
9.2% Series A Junior Cumulative Convertible Preferred
Stock, $.001 par value: 4,300,000 shares authorized,
1,595,707 and 1,742,512 shares issued and outstanding at
December 31, 2000 and 2001, respectively (liquidation
preferences of $159,571 and $174,251), at net carrying
value including accrued dividends....................... 162,380 177,120
9.2% Series B Junior Cumulative Convertible Preferred
Stock, $.001 par value: 2,100,000 shares authorized,
715,703 and 781,548 shares issued and outstanding at
December 31, 2000 and 2001, respectively (liquidation
preferences of $71,570 and $78,155), at net carrying
value including accrued dividends....................... 70,507 77,338
9.2% Series D Junior Cumulative Convertible Preferred
Stock, $.001 par value: 10,700,000 shares authorized,
2,145,688 and 2,343,091 shares issued and outstanding at
December 31, 2000 and 2001, respectively (liquidation
preferences of $214,569 and $234,309), at net carrying
value including accrued dividends....................... 210,125 230,710
Stockholders' equity:
Preferred stock, $.001 par value: 50,000,000 shares
authorized, 8,000,000 shares designated as 5% Delayed
Convertible Preferred Stock, no shares issued or
outstanding............................................. -- --
Common stock, $.001 par value: 200,000,000 shares
authorized, 42,107,957 and 57,455,931 shares issued and
outstanding at December 31, 2000 and 2001,
respectively............................................ 42 57
Additional paid-in capital............................... 559,676 827,590
Deficit accumulated during the development stage......... (269,235) (504,998)
---------- ----------
Total stockholders' equity............................ 290,483 322,649
---------- ----------
Total liabilities and stockholders' equity............ $1,323,582 $1,527,605
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK
-----------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Initial sale of no par value common stock,
$5.00 per share,
May 17, 1990............................. 11,080 $ 55 -- $-- -- $ --
Initial issuance of common stock in
satisfaction of amount due to related
party, $5.00 per share................... 28,920 145 -- -- -- --
Conversion of no par value common stock to
Class A and Class B no par value common
stock.................................... (40,000) (200) 2,000,000 169 360,000 31
Sale of Class B common stock, $.4165 per
share.................................... -- -- -- -- 442,000 184
Issuance of Class B common stock in
satisfaction of amount due to related
party, $.4165 per share.................. -- -- -- -- 24,000 10
Net loss.................................. -- -- -- -- -- --
--------- ------- ---------- ----- ---------- -------
Balance, December 31, 1990................ -- -- 2,000,000 169 826,000 225
Sale of Class B common stock, $.50 per
share.................................... -- -- -- -- 610,000 305
Issuance of Class B common stock in
satisfaction of amount due to related
party, $.50 per share.................... -- -- -- -- 300,000 150
Net loss.................................. -- -- -- -- -- --
--------- ------- ---------- ----- ---------- -------
Balance, December 31, 1991................ -- -- 2,000,000 169 1,736,000 680
Sale of Class B common stock, $.50 per
share.................................... -- -- -- -- 200,000 100
Issuance of Class B common stock in
satisfaction of amount due to related
party, $.50 per share.................... -- -- -- -- 209,580 105
Conversion of note payable to related
party to Class B common stock, $.4165 per
share.................................... -- -- -- -- 303,440 126
Conversion of Class A and Class B common
stock to no par value common stock....... 4,449,020 1,180 (2,000,000) (169) (2,449,020) (1,011)
Sale of no par value common stock, $1.25
per share................................ 1,600,000 2,000 -- -- -- --
Conversion of no par value common stock to
$.001 par value common stock............. -- (3,174) -- -- -- --
Sale of $.001 par value common stock,
$5.00 per share.......................... 315,000 -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
--------- ------- ---------- ----- ---------- -------
Balance, December 31, 1992................ 6,364,020 6 -- -- -- --
Sale of $.001 par value common stock,
$5.00 per share, net of commissions...... 1,029,000 1 -- -- -- --
Compensation expense in connection with
issuance of stock options................ -- -- -- -- -- --
Common stock issued in connection with
conversion of note payable at $5.00 per
share.................................... 60,000 -- -- -- -- --
Common stock issued in satisfaction of
commissions payable, at $5.00 per
share.................................... 4,000 -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
--------- ------- ---------- ----- ---------- -------
Balance, December 31, 1993................ 7,457,020 7 -- -- -- --
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
ADDITIONAL DURING ON STOCK
PAID-IN DEVELOPMENT OPTIONS
CAPITAL STAGE GRANTED TOTAL
------- ----- ------- -----
Initial sale of no par value common stock,
$5.00 per share,
May 17, 1990............................. $ -- $-- $-- $ 55
Initial issuance of common stock in
satisfaction of amount due to related
party, $5.00 per share................... -- -- -- 145
Conversion of no par value common stock to
Class A and Class B no par value common
stock.................................... -- -- -- --
Sale of Class B common stock, $.4165 per
share.................................... -- -- -- 184
Issuance of Class B common stock in
satisfaction of amount due to related
party, $.4165 per share.................. -- -- -- 10
Net loss.................................. -- (839) -- (839)
------- ------- ------- -------
Balance, December 31, 1990................ -- (839) -- (445)
Sale of Class B common stock, $.50 per
share.................................... -- -- -- 305
Issuance of Class B common stock in
satisfaction of amount due to related
party, $.50 per share.................... -- -- -- 150
Net loss.................................. -- (575) -- (575)
------- ------- ------- -------
Balance, December 31, 1991................ -- (1,414) -- (565)
Sale of Class B common stock, $.50 per
share.................................... -- -- -- 100
Issuance of Class B common stock in
satisfaction of amount due to related
party, $.50 per share.................... -- -- -- 105
Conversion of note payable to related
party to Class B common stock, $.4165 per
share.................................... -- -- -- 126
Conversion of Class A and Class B common
stock to no par value common stock....... -- -- -- --
Sale of no par value common stock, $1.25
per share................................ -- -- -- 2,000
Conversion of no par value common stock to
$.001 par value common stock............. 3,174 -- -- --
Sale of $.001 par value common stock,
$5.00 per share.......................... 1,575 -- -- 1,575
Net loss.................................. -- (1,551) -- (1,551)
------- ------- ------- -------
Balance, December 31, 1992................ 4,749 (2,965) -- 1,790
Sale of $.001 par value common stock,
$5.00 per share, net of commissions...... 4,882 -- -- 4,883
Compensation expense in connection with
issuance of stock options................ 80 -- -- 80
Common stock issued in connection with
conversion of note payable at $5.00 per
share.................................... 300 -- -- 300
Common stock issued in satisfaction of
commissions payable, at $5.00 per
share.................................... 20 -- -- 20
Net loss.................................. -- (6,568) -- (6,568)
------- ------- ------- -------
Balance, December 31, 1993................ 10,031 (9,533) -- 505
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK
-----------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Sales of $.001 par value common stock,
$5.00 per share, net of commissions...... 250,000 $-- -- $-- -- $ --
Initial public offering of Units,
consisting of two shares of $.001 par
value common stock and one warrant,
$10.00 per Unit, net of expenses......... 1,491,940 2 -- -- -- --
Deferred compensation on stock options
granted.................................. -- -- -- -- -- --
Forfeiture of stock options by officer.... -- -- -- -- -- --
Compensation expense in connection with
issuance of stock options................ -- -- -- -- -- --
Amortization of deferred compensation..... -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
---------- ---- ---------- ----- ---------- -------
Balance, December 31, 1994................ 9,198,960 9 -- -- -- --
Common stock issued for services rendered,
between $3.028 and $3.916 per share...... 107,000 -- -- -- -- --
Amortization of deferred compensation..... -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
---------- ---- ---------- ----- ---------- -------
Balance, December 31, 1995................ 9,305,960 9 -- -- -- --
Exercise of stock warrants at $6.00 per
share.................................... 791,931 1 -- -- -- --
Exercise of stock options by officers,
between $1.00 and $5.00 per share........ 135,000 -- -- -- -- --
Common stock issued for services rendered,
between $5.76 and $12.26 per share....... 67,500 -- -- -- -- --
Common stock options granted for services
rendered, to purchase 60,000 shares at
$4.50 per share.......................... -- -- -- -- -- --
Amortization of deferred compensation..... -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
---------- ---- ---------- ----- ---------- -------
Balance, December 31, 1996................ 10,300,391 10 -- -- -- --
Exercise of stock options between $1.00
and $2.00 per share...................... 43,000 -- -- -- -- --
Value of beneficial conversion feature on
5% Delayed Convertible Preferred Stock... -- -- -- -- -- --
Accretion of deemed dividend.............. -- -- -- -- -- --
Sale of $.001 par value common stock,
$13.12 per share, net of expenses........ 1,905,488 2 -- -- -- --
Exchange of 5% Delayed Convertible
Preferred Stock for 10 1/2% Series C
Convertible Preferred Stock.............. -- -- -- -- -- --
Conversion of 5% Delayed Convertible
Preferred Stock into $.001 par value
common stock............................. 749,812 1 -- -- -- --
Public offering of $.001 par value common
stock at $18.00 per share, net of
expenses................................. 3,050,000 3 -- -- -- --
Dividends on preferred stock.............. -- -- -- -- -- --
Issuance of fully vested in-the-money
stock options............................ -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
---------- ---- ---------- ----- ---------- -------
Balance, December 31, 1997................ 16,048,691 16 -- -- -- --
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
ADDITIONAL DURING ON STOCK
PAID-IN DEVELOPMENT OPTIONS
CAPITAL STAGE GRANTED TOTAL
------- ----- ------- -----
Sales of $.001 par value common stock,
$5.00 per share, net of commissions...... $ 1,159 $ -- $-- $ 1,159
Initial public offering of Units,
consisting of two shares of $.001 par
value common stock and one warrant,
$10.00 per Unit, net of expenses......... 4,834 -- -- 4,836
Deferred compensation on stock options
granted.................................. 1,730 -- (1,730) --
Forfeiture of stock options by officer.... (207) -- 207 --
Compensation expense in connection with
issuance of stock options................ 113 -- -- 113
Amortization of deferred compensation..... -- -- 883 883
Net loss.................................. -- (4,065) -- (4,065)
-------- -------- ------- --------
Balance, December 31, 1994................ 17,660 (13,598) (640) 3,431
Common stock issued for services rendered,
between $3.028 and $3.916 per share...... 347 -- -- 347
Amortization of deferred compensation..... -- -- 320 320
Net loss.................................. -- (2,107) -- (2,107)
-------- -------- ------- --------
Balance, December 31, 1995................ 18,007 (15,705) (320) 1,991
Exercise of stock warrants at $6.00 per
share.................................... 4,588 -- -- 4,589
Exercise of stock options by officers,
between $1.00 and $5.00 per share........ 155 -- -- 155
Common stock issued for services rendered,
between $5.76 and $12.26 per share....... 554 -- -- 554
Common stock options granted for services
rendered, to purchase 60,000 shares at
$4.50 per share.......................... 120 -- -- 120
Amortization of deferred compensation..... -- -- 320 320
Net loss.................................. -- (2,831) -- (2,831)
-------- -------- ------- --------
Balance, December 31, 1996................ 23,424 (18,536) -- 4,898
Exercise of stock options between $1.00
and $2.00 per share...................... 56 -- -- 56
Value of beneficial conversion feature on
5% Delayed Convertible Preferred Stock... 51,975 -- -- 51,975
Accretion of deemed dividend.............. (51,975) -- -- (51,975)
Sale of $.001 par value common stock,
$13.12 per share, net of expenses........ 24,393 -- -- 24,395
Exchange of 5% Delayed Convertible
Preferred Stock for 10 1/2% Series C
Convertible Preferred Stock.............. (63,450) -- -- (63,450)
Conversion of 5% Delayed Convertible
Preferred Stock into $.001 par value
common stock............................. 10,280 -- -- 10,281
Public offering of $.001 par value common
stock at $18.00 per share, net of
expenses................................. 46,424 -- -- 46,427
Dividends on preferred stock.............. (2,338) -- -- (2,338)
Issuance of fully vested in-the-money
stock options............................ 448 448
Net loss.................................. -- (4,737) -- (4,737)
-------- -------- ------- --------
Balance, December 31, 1997................ 39,237 (23,273) -- 15,980
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK
-----------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Sale of $.001 par value common stock,
$20.00 per share, net of expenses........ 5,000,000 $ 5 $ -- $-- -- $ --
Exercise of stock options between $2.00
and $4.50 per share...................... 44,850 -- -- -- -- --
Conversion of 10 1/2% Series C Convertible
Preferred Stock into $.001 par value
common stock............................. 2,107,666 2 -- -- -- --
Sale of $.001 par value common stock to
employee benefit plan.................... 3,328 -- -- -- -- --
Compensation expense in connection with
quick vesting of stock options........... -- -- -- -- -- --
Issuance of $.001 par value common stock
to employee benefit plan................. 4,414 -- -- -- -- --
Value of beneficial conversion feature on
9.2% Series A Junior Cumulative
Convertible Preferred Stock.............. -- -- -- -- -- --
Value of option on 9.2% Series B Junior
Cumulative Convertible Preferred Stock... -- -- -- -- -- --
Amortization of option on 9.2% Series B
Junior Cumulative Convertible Preferred
Stock.................................... -- -- -- -- -- --
Accretion of deemed dividend.............. -- -- -- -- -- --
Dividends on preferred stock.............. -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
---------- --- ---------- ----- ---------- -------
Balance, December 31, 1998................ 23,208,949 23 -- -- -- --
Sale of $.001 par value common stock,
$24.75 per share, net of expenses........ 3,450,000 4 -- -- -- --
Issuance of warrants in connection with
sale of 14 1/2% Senior Secured Notes due
2009..................................... -- -- -- -- -- --
Exercise of stock options between $2.00
and $24.38 per share..................... 205,002 -- -- -- -- --
Conversion of 10 1/2% Series C Convertible
Preferred Stock, including accrued
dividends, into $.001 par value common
stock.................................... 1,409,871 1 -- -- -- --
Conversion of 8 3/4% Convertible
Subordinated Notes due 2009, including
accrued interest......................... 423,221 1 -- -- -- --
Sale of $.001 par value common stock to
employee benefit plan.................... 7,516 -- -- -- -- --
Compensation in connection with the
issuance of common stock options......... -- -- -- -- -- --
Issuance of $.001 common stock to employee
benefit plans............................ 16,482 -- -- -- -- --
Value of premium on issuance of 9.2%
Series B Junior Cumulative Convertible
Preferred Stock.......................... -- -- -- -- -- --
Amortization of option on 9.2% Series B
Junior Cumulative Convertible Preferred
Stock.................................... -- -- -- -- -- --
Accretion of deemed dividend.............. -- -- -- -- -- --
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
ADDITIONAL DURING ON STOCK
PAID-IN DEVELOPMENT OPTIONS
CAPITAL STAGE GRANTED TOTAL
------- ----- ------- -----
Sale of $.001 par value common stock,
$20.00 per share, net of expenses........ $ 97,995 $ -- $-- $ 98,000
Exercise of stock options between $2.00
and $4.50 per share...................... 140 -- -- 140
Conversion of 10 1/2% Series C Convertible
Preferred Stock into $.001 par value
common stock............................. 37,654 -- -- 37,656
Sale of $.001 par value common stock to
employee benefit plan.................... 97 -- -- 97
Compensation expense in connection with
quick vesting of stock options........... 950 -- -- 950
Issuance of $.001 par value common stock
to employee benefit plan................. 117 -- -- 117
Value of beneficial conversion feature on
9.2% Series A Junior Cumulative
Convertible Preferred Stock.............. 10,884 -- -- 10,884
Value of option on 9.2% Series B Junior
Cumulative Convertible Preferred Stock... (6,600) -- -- (6,600)
Amortization of option on 9.2% Series B
Junior Cumulative Convertible Preferred
Stock.................................... 181 -- -- 181
Accretion of deemed dividend.............. (11,676) -- -- (11,676)
Dividends on preferred stock.............. (19,380) -- -- (19,380)
Net loss.................................. -- (48,396) -- (48,396)
-------- -------- ------- --------
Balance, December 31, 1998................ 149,599 (71,669) -- 77,953
Sale of $.001 par value common stock,
$24.75 per share, net of expenses........ 78,133 -- -- 78,137
Issuance of warrants in connection with
sale of 14 1/2% Senior Secured Notes due
2009..................................... 31,382 -- -- 31,382
Exercise of stock options between $2.00
and $24.38 per share..................... 1,642 -- -- 1,642
Conversion of 10 1/2% Series C Convertible
Preferred Stock, including accrued
dividends, into $.001 par value common
stock.................................... 25,813 -- -- 25,814
Conversion of 8 3/4% Convertible
Subordinated Notes due 2009, including
accrued interest......................... 11,488 -- -- 11,489
Sale of $.001 par value common stock to
employee benefit plan.................... 200 -- -- 200
Compensation in connection with the
issuance of common stock options......... 752 -- -- 752
Issuance of $.001 common stock to employee
benefit plans............................ 454 -- -- 454
Value of premium on issuance of 9.2%
Series B Junior Cumulative Convertible
Preferred Stock.......................... (3,385) -- -- (3,385)
Amortization of option on 9.2% Series B
Junior Cumulative Convertible Preferred
Stock.................................... 6,419 -- -- 6,419
Accretion of deemed dividend.............. (3,535) -- -- (3,535)
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK
-----------------------------------------------------------------
CLASS A CLASS A CLASS B CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Dividends on preferred stock.............. -- $-- -- $-- -- $ --
Net loss.................................. -- -- -- -- -- --
---------- --- ---------- ----- ---------- -------
Balance, December 31, 1999................ 28,721,041 29 -- -- -- --
Exercise of stock options between $2.88
and $38.88 per share..................... 623,326 1 -- -- -- --
Exercise of warrants in connection with
the sale of 14 1/2% Senior Secured Notes
due 2009, $26.45 per share............... 43,344 -- -- -- -- --
Exercise of warrants to purchase 10 1/2%
Series C Convertible Preferred Stock..... -- -- -- -- -- --
Conversion of 10 1/2% Series C Convertible
Preferred Stock, including accrued
dividends, into $.001 par value common
stock.................................... 8,266,488 8 -- -- -- --
Conversion of 8 3/4% Convertible
Subordinated Notes due 2009, including
accrued interest......................... 2,134,582 2 -- -- -- --
Sale of $.001 par value common stock,
$43.66 per share, net of expenses........ 2,290,322 2 -- -- -- --
Sale of $.001 par value common stock to
employee benefit plan.................... 8,572 -- -- -- -- --
Compensation in connection with the
issuance of common stock options......... -- -- -- -- -- --
Issuance of common stock to employees and
employee benefit plans................... 20,282 -- -- -- -- --
Accretion of deemed dividend.............. -- -- -- -- -- --
Dividends on preferred stock.............. -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
---------- --- ---------- ----- ---------- -------
Balance, December 31, 2000................ 42,107,957 42 -- -- -- --
Exercise of stock options between $1.00
and $26.875 per share.................... 185,221 -- -- -- -- --
Issuance of warrants in connection with
Term Loan Facility....................... -- -- -- -- -- --
Conversion of 8 3/4% Convertible
Subordinated Notes due 2009, including
accrued interest......................... 2,283,979 2 -- -- -- --
Acquisition of 15% Senior Secured Discount
Notes due 2007........................... 948,565 1 -- -- -- --
Sale of $.001 par value common stock,
$21.00 per share, net of expenses........ 11,500,000 12 -- -- -- --
Sale of $.001 par value common stock to
employee benefit plan.................... 38,720 -- -- -- -- --
Compensation in connection with the
issuance of common stock options......... -- -- -- -- -- --
Issuance of common stock to employees and
employee benefit plans................... 391,489 -- -- -- -- --
Accretion of deemed dividend.............. -- -- -- -- -- --
Dividends on preferred stock.............. -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
---------- --- ---------- ----- ---------- -------
Balance, December 31, 2001................ 57,455,931 $57 -- $-- -- $ --
---------- --- ---------- ----- ---------- -------
---------- --- ---------- ----- ---------- -------
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
ADDITIONAL DURING ON STOCK
PAID-IN DEVELOPMENT OPTIONS
CAPITAL STAGE GRANTED TOTAL
------- ----- ------- -----
Dividends on preferred stock.............. $(30,321) $ -- $-- $ (30,321)
Net loss.................................. -- (62,822) -- (62,822)
-------- --------- ------- ---------
Balance, December 31, 1999................ 268,641 (134,491) -- 134,179
Exercise of stock options between $2.88
and $38.88 per share..................... 7,819 -- -- 7,820
Exercise of warrants in connection with
the sale of 14 1/2% Senior Secured Notes
due 2009, $26.45 per share............... 627 -- -- 627
Exercise of warrants to purchase 10 1/2%
Series C Convertible Preferred Stock..... (4,443) -- -- (4,443)
Conversion of 10 1/2% Series C Convertible
Preferred Stock, including accrued
dividends, into $.001 par value common
stock.................................... 164,361 -- -- 164,369
Conversion of 8 3/4% Convertible
Subordinated Notes due 2009, including
accrued interest......................... 63,265 -- -- 63,267
Sale of $.001 par value common stock,
$43.66 per share, net of expenses........ 99,958 -- -- 99,960
Sale of $.001 par value common stock to
employee benefit plan.................... 343 -- -- 343
Compensation in connection with the
issuance of common stock options......... 5,234 -- -- 5,234
Issuance of common stock to employees and
employee benefit plans................... 1,942 -- -- 1,942
Accretion of deemed dividend.............. (8,260) -- -- (8,260)
Dividends on preferred stock.............. (39,811) -- -- (39,811)
Net loss.................................. -- (134,744) -- (134,744)
-------- --------- ------- ---------
Balance, December 31, 2000................ 559,676 (269,235) -- 290,483
Exercise of stock options between $1.00
and $26.875 per share.................... 611 -- -- 611
Issuance of warrants in connection with
Term Loan Facility....................... 11,879 -- -- 11,879
Conversion of 8 3/4% Convertible
Subordinated Notes due 2009, including
accrued interest......................... 42,676 -- -- 42,678
Acquisition of 15% Senior Secured Discount
Notes due 2007........................... 8,588 -- -- 8,589
Sale of $.001 par value common stock,
$21.00 per share, net of expenses........ 229,288 -- -- 229,300
Sale of $.001 par value common stock to
employee benefit plan.................... 334 -- -- 334
Compensation in connection with the
issuance of common stock options......... 11,395 -- -- 11,395
Issuance of common stock to employees and
employee benefit plans................... 5,299 -- -- 5,299
Accretion of deemed dividend.............. (680) -- -- (680)
Dividends on preferred stock.............. (41,476) -- -- (41,476)
Net loss.................................. (235,763) -- (235,763)
-------- --------- ------- ---------
Balance, December 31, 2001................ $827,590 $(504,998) $-- $ 322,649
-------- --------- ------- ---------
-------- --------- ------- ---------
The accompanying notes are an integral part of these consolidated financial statements.
F-8
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
CUMULATIVE FOR THE
PERIOD MAY 17, 1990
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION)
--------------------------------- TO DECEMBER 31,
1999 2000 2001 2001
--------- --------- --------- -------------------
Cash flows from development stage activities:
Net loss.................................. $ (62,822) $(134,744) $(235,763) $ (504,998)
Adjustments to reconcile net loss to net
cash provided by (used in) development
stage activities:
Depreciation expense................... 861 2,352 8,997 12,513
Change in unrealized gain or loss on
marketable securities................ (3,396) 1,606 (1,111) (3,387)
Loss on disposal of assets............. 10 249 -- 364
Special charges........................ -- -- -- 25,557
Accretion of note payable charged as
interest expense..................... 56,199 76,739 94,289 255,093
Compensation expense in connection with
issuance of common stock and stock
options.............................. 1,206 7,176 14,044 25,762
Expense incurred in connection with
conversion of debt................... 1,776 12,655 8,259 22,690
Extraordinary gain on early
extinguishment of debt............... -- -- (5,313) (5,313)
Increase (decrease) in cash and cash
equivalents resulting from changes in
assets and liabilities:
Prepaid expense and other.............. (575) (12,547) 985 (12,303)
Other assets........................... (3,457) 1,065 11,020 6,029
Accounts payable and accrued
expenses............................. 4,019 (23,025) (44,233) (57,687)
Due to related party................... -- -- -- 351
Deferred income taxes.................. -- -- -- 2,237
--------- --------- --------- -----------
Net cash used in development stage
activities........................ (6,179) (68,474) (148,826) (233,092)
--------- --------- --------- -----------
Cash flows from investing activities:
Sales (purchases) of marketable securities
and restricted investments, net.......... (266,422) 212,380 (154,443) (323,432)
Purchases of property and equipment....... (309,059) (398,442) (81,345) (1,055,347)
Payments for FCC license.................. -- -- (286) (83,654)
Acquisition of Sky-Highway Radio Corp..... -- -- -- (2,000)
--------- --------- --------- -----------
Net cash used in investing
activities........................ (575,481) (186,062) (236,074) (1,464,433)
--------- --------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt,
net...................................... 180,399 1,883 145,000 398,145
Proceeds from issuance of common stock,
net...................................... 78,337 100,301 229,635 591,716
Proceeds from issuance of preferred stock,
net...................................... 62,900 192,450 -- 505,418
Proceeds from exercise of stock options
and warrants............................. 1,643 8,447 610 15,640
Principal payments under capital lease
obligations.............................. -- -- (16) (16)
Proceeds from issuance of promissory note
and units, net........................... 190,000 -- -- 306,535
Proceeds from issuance of promissory notes
to related parties....................... -- -- -- 2,965
Repayment of promissory notes............. -- -- -- (2,635)
Repayment of long-term debt............... -- (115,957) -- (115,957)
Loan from officer......................... -- -- -- 440
--------- --------- --------- -----------
Net cash provided by financing
activities........................ 513,279 187,124 375,229 1,702,251
--------- --------- --------- -----------
Net increase (decrease) in cash and cash
equivalents................................. (68,381) (67,412) (9,671) 4,726
Cash and cash equivalents at the beginning of
period...................................... 150,190 81,809 14,397 --
--------- --------- --------- -----------
Cash and cash equivalents at the end of
period...................................... $ 81,809 $ 14,397 $ 4,726 $ 4,726
--------- --------- --------- -----------
--------- --------- --------- -----------
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest................................. $ 22,825 $ 38,405 $ 47,160 $ 110,856
Cash paid during the period for income
taxes.................................... $ -- $ -- $ -- $ 58
Supplemental disclosure of non-cash investing
and financing activities:
Capitalized interest...................... $ 56,567 $ 63,728 $ 19,270 $ 155,808
Deferred satellite payments, including
accrued interest......................... $ 23,816 $ 5,741 $ 6,320 $ 67,201
Exchange of 8 3/4% Convertible
Subordinated Notes due 2009 and accrued
interest for common stock................ $ 11,489 $ 63,267 $ 42,678 $ 117,434
Exchange of 15% Senior Secured Discount
Notes due 2007........................... $ -- $ -- $ 8,589 $ 8,589
Exchange of 10 1/2% Series C Convertible
Preferred Stock and accrued dividends for
common stock............................. $ 25,814 $ 164,369 $ -- $ 227,839
Exchange of 5% Delayed Convertible
Preferred Stock for
10 1/2% Series C Convertible Preferred
Stock.................................... $ -- $ -- $ -- $ 173,687
Common stock issued in satisfaction of
notes payable and amounts due to related
parties.................................. $ -- $ -- $ -- $ 1,407
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
1. BUSINESS
Sirius Satellite Radio Inc., a Delaware corporation, has developed a service
for broadcasting digital quality music programming via satellites to
subscribers' vehicles. From our three orbiting satellites, we directly broadcast
100 channels of digital-quality radio to motorists throughout the continental
United States for a monthly subscription fee of $12.95. We deliver 60 channels
of commercial-free music in virtually every genre, and 40 channels of news,
sports, talk, comedy and children's programming. Our broad and deep range of
almost every music format as well as our news, sports and entertainment
programming is not available on conventional radio in any market in the United
States.
We launched our service on February 14, 2002 in Denver, Colorado; Houston,
Texas; Phoenix, Arizona; and Jackson, Mississippi. We plan to offer our service
in additional markets during the second and third quarters of 2002 and plan to
offer our service on a national basis during the third quarter of 2002. Our
primary source of revenue is subscription fees. In addition, we derive revenues
from selling limited advertising on our non-music channels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sirius
Satellite Radio Inc. and our wholly owned subsidiary. Intercompany transactions
are eliminated in consolidation. As of December 31, 2001, we had not yet
recognized any revenues; accordingly, our financial statements are presented as
those of a development stage enterprise, as prescribed by Statement of Financial
Accounting Standards ('SFAS') No. 7, 'Accounting and Reporting by Development
Stage Enterprises.'
RISKS AND UNCERTAINTIES
Our future operations are subject to the risks and uncertainties frequently
encountered by companies in new and rapidly evolving markets for satellite
products and services. Among the key factors that have a direct bearing on our
results of operations are our dependence upon third parties to manufacture,
distribute, market and sell Sirius radios and components for those radios; the
potential delay in implementing our business plan; the unproven market for our
service; our competitive position; and our need for additional financing.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and investments with
original maturities of three months or less. The carrying amount of cash and
cash equivalents approximates fair value because of the short maturity of these
investments.
MARKETABLE SECURITIES
Marketable securities are classified as trading securities and are stated at
market value. Marketable securities consist of obligations of U.S. government
agencies and commercial paper issued by major U.S. corporations with high credit
ratings. We recognized unrealized holding gains on marketable securities of
$3,882, $2,276 and $3,387 for the years ended December 31, 1999, 2000 and 2001,
respectively, and $3,387 for the period May 17, 1990 (date of inception) to
December 31, 2001. The carrying amount of marketable securities approximates
fair value because of the short maturity of these investments.
F-10
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
RESTRICTED INVESTMENTS
Restricted investments consist of fixed income securities and are stated at
amortized cost plus accrued interest. Included in restricted investments are
U.S. Treasury Notes of $41,510 and $14,209 as of December 31, 2000 and 2001,
respectively, which are restricted to provide for interest payments through
May 15, 2002 on our 14 1/2% Senior Secured Notes due 2009. Also included in
restricted investments are certificates of deposit of $7,291 and $7,789 as of
December 31, 2000 and 2001, respectively, which are pledged to secure our
reimbursement obligations under letters of credit required by lessors and other
creditors. The U.S. Treasury Notes are classified as held-to-maturity securities
and unrealized holding gains and losses are not reflected in earnings. The book
value and fair value of these held-to-maturity securities at December 31, 2000
and 2001 were:
DECEMBER 31, 2000 DECEMBER 31, 2001
------------------------------------- -------------------------------------
UNREALIZED UNREALIZED
BOOK VALUE GAIN/(LOSS) FAIR VALUE BOOK VALUE GAIN/(LOSS) FAIR VALUE
---------- ----------- ---------- ---------- ----------- ----------
Held-to-maturity
securities................ $41,510 $(16) $41,494 $14,209 $196 $14,405
PROPERTY AND EQUIPMENT
All costs incurred related to activities necessary to prepare our satellite
radio system for use were capitalized. Such costs consist of satellite
construction and launch, broadcast studio equipment, terrestrial repeater
equipment and capitalized interest. Depreciation of property and equipment is
calculated using the straight-line method over the following estimated useful
lives:
Leasehold improvements...................................... 15 years
Satellites.................................................. 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 and equipment........................... 3-7 years
We review our long-lived assets and identifiable intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset is not recoverable. For assets which are held and
used in operations, the asset would be impaired if the book value of the asset
exceeded the undiscounted future net cash flows related to the asset. For those
assets which are to be disposed of, the asset would be impaired to the extent
the fair value does not exceed the book value. We consider relevant cash flow,
estimated future operating results, trends and other available information in
assessing whether the carrying value of assets are recoverable. No material
impairment losses have been recognized to date.
FCC LICENSE
Our FCC license is recorded at cost. As of December 31, 2001, we had not
amortized any costs relating to our FCC license.
Effective January 1, 2002, we will be required to adopt SFAS No. 142,
'Goodwill and Other Intangible Assets,' which requires goodwill and intangible
assets with indefinite useful lives to no longer be amortized but to be tested
for impairment at least annually. Intangible assets that have estimable useful
lives will continue to be amortized over their estimated useful lives. The
amortization and non-amortization provisions of SFAS No. 142 will be applied to
all goodwill and intangible assets acquired after June 30, 2001. Effective
January 1, 2002, we are required to apply all other provisions of SFAS No. 142.
We are currently evaluating the potential impact, if any, the adoption of SFAS
No. 142 will have on our financial position and results of operations.
F-11
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
DEBT ISSUANCE COSTS
Costs associated with the issuance of debt are deferred and amortized to
interest expense over the term of the respective notes.
FAIR VALUE OF DEBT, DEFERRED SATELLITE PAYMENTS AND PREFERRED STOCK
We determined the estimated fair values of our debt, deferred satellite
payments and preferred stock using available market information and appropriate
valuation methods. Considerable judgment is necessary to develop estimates of
fair value and the estimates presented are not necessarily indicative of the
amounts that could be realized upon disposition of our debt, deferred satellite
payments or preferred stock.
We estimate fair value using the following methods and assumptions:
(1) quoted market prices are used to estimate the fair market value of our 15%
Senior Secured Discount Notes due 2007, 14 1/2% Senior Secured Notes due 2009
and 8 3/4% Convertible Subordinated Notes due 2009; (2) a discounted cash flow
analysis is used to estimate the fair market values of our term loan facility
and deferred satellite payments; (3) the fair value of our preferred stock is
estimated using the market price of our common stock on December 31, 2001, on an
as-converted basis.
The following table summarizes the book and fair values of our debt,
deferred satellite payments and preferred stock at December 31, 2000 and 2001:
DECEMBER 31, 2000 DECEMBER 31, 2001
---------------------- ------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
15% Senior Secured Discount Notes due 2007... 218,405 135,103 242,286 123,389
14 1/2% Senior Secured Notes due 2009........ 173,361 140,000 176,346 116,000
8 3/4% Convertible Subordinated Notes due
2009....................................... 80,836 98,717 45,936 26,643
Term loan facility........................... -- -- 140,422 97,970
Deferred satellite payments.................. 60,881 40,942 67,201 44,914
9.2% Series A Junior Cumulative Convertible
Preferred Stock............................ 162,380 159,238 177,120 67,551
9.2% Series B Junior Cumulative Convertible
Preferred Stock............................ 70,507 71,421 77,338 30,298
9.2% Series D Junior Cumulative Convertible
Preferred Stock............................ 210,125 188,931 230,710 80,147
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the sum of income tax payable for the period and the
change during the period in deferred tax assets and liabilities.
PREFERRED STOCK
We record preferred stock on the date of issuance by allocating, when
appropriate, a portion of the proceeds that represents a beneficial conversion
feature to additional paid-in capital. The beneficial conversion feature is
amortized using the effective interest method and is recognized as a deemed
dividend over the shortest period of conversion. The carrying value of the stock
accretes to its
F-12
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
liquidation value over the mandatory redemption period. The periodic accretion
increases the net loss applicable to common stockholders.
NET LOSS PER SHARE
Basic loss per share is based on the weighted average number of outstanding
shares of our common stock. Diluted 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. As of December 31, 1999, 2000 and
2001, approximately 21,127,000, 28,458,000 and 18,872,000 common stock
equivalents were outstanding, respectively, and were excluded from the
calculation of diluted loss per share as they were antidilutive.
ENGINEERING DESIGN AND DEVELOPMENT COSTS
Engineering design and development costs are expensed as incurred.
STOCK OPTIONS
We account for employee stock options in accordance with Accounting
Principles Board Opinion No. 25 ('APB No. 25'), 'Accounting for Stock Issued to
Employees.' Under APB No. 25, we do not recognize compensation expense related
to employee stock options granted at a price equal to the market value of our
common stock on the date of grant. As prescribed by APB No. 25, we use the
intrinsic value method to measure the compensation costs of stock-based awards
granted to employees as the excess of the market value of our common stock on
the date of grant over the amount which must be paid to acquire our common
stock. We record these compensation costs over the vesting period of the
stock-based award.
SFAS No. 123, 'Accounting for Stock-Based Compensation,' which prescribes
the recognition of compensation expense based on the fair value of options on
the date of grant, allows companies to continue applying APB No. 25 if certain
pro forma disclosures are made assuming hypothetical fair value application (See
Note 7 'Employee Benefit Plans,' for pro forma disclosures required by SFAS
No. 123 plus additional information related to employee stock options). We
account for stock-based awards granted to non-employees at fair value in
accordance with SFAS No. 123.
In April 2001, the Compensation Committee of our Board of Directors amended
the exercise price of approximately 3,982,000 employee stock options. In
accordance with Financial Accounting Standards Board ('FASB') Interpretation
No. 44, 'Accounting for Certain Transactions Involving Stock Compensation,'
repriced stock options are subject to variable accounting, which requires a
compensation charge or benefit to be recorded each period based on the market
value of our common stock until the repriced stock options are exercised,
forfeited or expire. We recognized a non-cash compensation charge of $9,929 for
the year ended December 31, 2001 in connection with these repriced stock
options. As of December 31, 2001, approximately 3,671,000 of the repriced stock
options were outstanding. We expect to record non-cash stock compensation
charges or benefits based on the market value of our common stock at the end of
future reporting periods.
INTEREST COST
We capitalize a portion of our interest on funds borrowed to finance our
construction in process. The following is a summary of our interest cost charged
to expense and interest cost capitalized for the
F-13
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
years ended December 31, 1999, 2000 and 2001 and for the period May 17, 1990
(date of inception) to December 31, 2001:
CUMULATIVE FOR
THE PERIOD
FOR THE YEARS ENDED MAY 17, 1990
DECEMBER 31, (DATE OF INCEPTION)
---------------------------- TO DECEMBER 31,
1999 2000 2001 2001
---- ---- ---- ----
Interest cost charged to expense......... $16,806 $33,595 $ 89,686 $156,471
Interest cost capitalized................ 56,567 63,728 19,270 155,808
------- ------- -------- --------
Total interest cost incurred......... $73,373 $97,323 $108,956 $312,279
------- ------- -------- --------
------- ------- -------- --------
Interest cost incurred for the years ended December 31, 1999, 2000 and 2001 and
for the period May 17, 1990 (date of inception) to December 31, 2001, includes
non-cash costs associated with the induced conversion of our 8 3/4% Convertible
Subordinated Notes due 2009 of $1,776, $12,655, $8,259 and $22,690,
respectively.
GAIN ON EARLY EXTINGUISHMENT OF DEBT
During 2001, we acquired $16,500 in principal amount at maturity of our 15%
Senior Secured Discount Notes due 2007 in exchange for shares of our common
stock. In connection with these transactions, we recorded an extraordinary gain
of $5,313, or $0.10 per share.
COMPREHENSIVE INCOME
SFAS No. 130, 'Reporting Comprehensive Income,' establishes a standard for
reporting and displaying comprehensive income and its components within
financial statements. We have evaluated the provisions of SFAS No. 130 and have
determined that no transactions have taken place during the years ended
December 31, 1999, 2000 and 2001 that would be considered other comprehensive
income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 expenses during the
reported period. The 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 years' financial statements have been
reclassified to conform to the current presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, 'Business Combinations,' which
we adopted on July 1, 2001. SFAS No. 141 requires the purchase method of
accounting for all business combinations initiated after June 30, 2001. The
application of SFAS No. 141 has not had a material impact on our financial
position or results of operations.
F-14
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
In July 2001, the FASB issued SFAS No. 142, 'Goodwill and Other Intangible
Assets,' which requires goodwill and intangible assets with indefinite useful
lives to no longer be amortized but to be tested for impairment at least
annually. Intangible assets that have estimable useful lives will continue to be
amortized over their estimated useful lives. The amortization and
non-amortization provisions of SFAS No. 142 will be applied to all goodwill and
intangible assets acquired after June 30, 2001. Effective January 1, 2002, we
are required to apply all other provisions of SFAS No. 142. We are currently
evaluating the potential impact, if any, the adoption of SFAS No. 142 will have
on our financial position and results of operations.
In July 2001, the FASB issued SFAS No. 143, 'Accounting for Asset Retirement
Obligations,' which requires the fair value for an asset retirement obligation
to be recorded in the period in which it is incurred. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002, with earlier adoption
encouraged. We do not expect that the adoption of SFAS No. 143 will have a
material impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, 'Accounting for the Impairment
or Disposal of Long-Lived Assets,' which is effective for fiscal periods
beginning after December 15, 2001. SFAS No. 144 establishes an accounting model
for impairment or disposal of long-lived assets to be disposed of by sale. We do
not expect that the adoption of SFAS No. 144 will have a material impact on our
financial position or results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
-----------------------
2000 2001
---- ----
Sirius-1.................................................... $ 258,379 $ 258,379
Sirius-2.................................................... 269,454 269,454
Sirius-3.................................................... 273,373 273,373
Leasehold improvements...................................... 20,257 24,767
Broadcast studio equipment.................................. 18,854 21,356
Satellite telemetry, tracking and control................... 15,484 16,269
Customer care, billing and conditional access............... 10,616 20,502
Furniture, fixtures and equipment........................... 9,747 13,710
Construction in process..................................... 140,406 197,207
---------- ----------
Total property and equipment............................ 1,016,570 1,095,017
Accumulated depreciation.................................... (3,105) (12,102)
---------- ----------
Property and equipment, net............................. $1,013,465 $1,082,915
---------- ----------
---------- ----------
Construction in process consists of the following:
DECEMBER 31,
-------------------
2000 2001
---- ----
Construction of satellite, Sirius-4......................... $115,141 $128,720
Construction of terrestrial repeater network................ 25,265 68,487
-------- --------
Construction in process................................. $140,406 $197,207
-------- --------
-------- --------
Our satellites were successfully launched on June 30, 2000, September 5,
2000 and November 30, 2000. We received title to our satellites on July 31,
2000, September 29, 2000 and December 20, 2000, following the completion of
in-orbit testing of each satellite. Our fourth, spare satellite is expected to
be
F-15
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
delivered to ground storage in the second quarter of 2002. Our three-satellite
constellation and terrestrial repeater network will be placed into service on
February 14, 2002.
4. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------------
MATURITY DATE 2000 2001
------------- ---- ----
15% Senior Secured Discount Notes due 2007......... 12/01/07 $218,405 $242,286
14 1/2% Senior Secured Notes due 2009.............. 5/15/09 173,361 176,346
8 3/4% Convertible Subordinated Notes due 2009..... 9/29/09 80,836 45,936
Term Loan Facility (current stated interest of
8.54% at December 31, 2001)...................... Various -- 140,422
-------- --------
Total debt..................................... 472,602 604,990
Less current portion....................... -- (15,000)
-------- --------
Total long-term debt........................... $472,602 $589,990
-------- --------
-------- --------
15% SENIOR SECURED DISCOUNT NOTES DUE 2007
In November 1997, we received net proceeds of $116,000 from the issuance of
12,910 units consisting of $20 principal amount at maturity of our 15% Senior
Secured Discount Notes due 2007 and a warrant to purchase additional 15% Senior
Secured Discount Notes due 2007 with an aggregate principal amount at maturity
of $3. Our 15% Senior Secured Discount Notes due 2007 will accrete to a
principal amount at maturity of $280,430 on December 1, 2002. Cash interest will
be payable semi-annually on each June 1 and December 1, beginning on June 1,
2003. For the years ended December 31, 1999, 2000 and 2001 and during the period
May 17, 1990 (date of inception) to December 31, 2001, we accreted interest of
$31,625, $33,893, $38,067 and $131,447, respectively, related to the discount on
our 15% Senior Secured Discount Notes due 2007 and the warrants issued in
conjunction with our 15% Senior Secured Discount Notes due 2007. Our 15% Senior
Secured Discount Notes due 2007 are redeemable, at our option, in whole or in
part, at any time on or after December 1, 2002, at specified redemption prices
plus accrued interest, if any, to the date of redemption. Our 15% Senior Secured
Discount Notes due 2007 are senior obligations and are secured by a pledge of
the stock of Satellite CD Radio, Inc., our subsidiary that holds our FCC
license, and a lien on our rights to our fourth, spare satellite. The indenture
governing our 15% Senior Secured Discount Notes due 2007 contains limitations on
our ability to incur additional indebtedness.
During 2001, we acquired $16,500 in principal amount at maturity of our 15%
Senior Secured Discount Notes due 2007 in exchange for shares of our common
stock.
14 1/2% SENIOR SECURED NOTES DUE 2009
In May 1999, we received net proceeds of approximately $190,000 from the
issuance of 200,000 units, each consisting of $1 principal amount of our 14 1/2%
Senior Secured Notes due 2009 and three warrants, each to purchase 3.65 shares
of our common stock. The warrants are exercisable through May 15, 2009 at an
exercise price of $28.60 per share. For the years ended December 31, 1999, 2000
and 2001 and for the period May 17, 1990 (date of inception) to December 31,
2001, we accreted interest of $1,810, $2,934, $2,985 and $7,728, respectively,
related to the warrants issued in conjunction with our 14 1/2% Senior Secured
Notes due 2009. Cash interest is payable semi-annually on each May 15 and
November 15 on our 14 1/2% Senior Secured Notes due 2009. We invested $79,300 of
the net proceeds of
F-16
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
our 14 1/2% Senior Secured Notes due 2009 in a portfolio of U.S. government
securities, which we pledged as security for the payment in full of interest on
our 14 1/2% Senior Secured Notes due 2009 through May 15, 2002. Our 14 1/2%
Senior Secured Notes due 2009 are redeemable, at our option, in whole or in
part, at any time on or after May 15, 2004 at a specified redemption price plus
accrued interest, if any, to the date of redemption. Our 14 1/2% Senior Secured
Notes due 2009 are senior secured obligations and are secured by a pledge of the
stock of Satellite CD Radio, Inc. and a lien on our rights to our fourth, spare
satellite. The indenture governing our 14 1/2% Senior Secured Notes due 2009
contains limitations on our ability to incur additional indebtedness.
As required by the terms of the warrants issued in conjunction with our
14 1/2% Senior Secured Notes due 2009, we may adjust the number of shares for
which each warrant may be exercised and the exercise price per share for
issuances of convertible debt, convertible preferred stock, common stock and
warrants. As of December 31, 2001, the warrants may be exercised to purchase
4.189 shares of our common stock at an exercise price of $24.92 per share.
8 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2009
In September 1999, we issued $125,000 in aggregate principal amount of our
8 3/4% Convertible Subordinated Notes due 2009 in an underwritten public
offering resulting in net proceeds of $119,000. In October 1999, we issued an
additional $18,750 in aggregate principal amount of our 8 3/4% Convertible
Subordinated Notes due 2009 to satisfy the underwriters' over-allotment option,
resulting in net proceeds of $18,000. Our 8 3/4% Convertible Subordinated Notes
due 2009 are convertible, at the option of the holder, unless previously
redeemed, into shares of our common stock at any time at a conversion rate of
35.134 shares of common stock per $1 principal amount, subject to certain
adjustments. We may redeem our 8 3/4% Convertible Subordinated Notes due 2009,
in whole or in part, at our option on or after September 29, 2002, contingent
upon certain circumstances. Cash interest is payable semi-annually on each
March 29 and September 29 on our 8 3/4% Convertible Subordinated Notes due 2009.
During the years ended December 31, 1999, 2000 and 2001 and during the
period May 17, 1990 (date of inception) to December 31, 2001, we acquired
$10,000, $52,914, $34,900 and $97,814 in principal amount of our 8 3/4%
Convertible Subordinated Notes due 2009, respectively, in exchange for shares of
our common stock.
TERM LOAN FACILITY
On June 1, 2000, we entered into a term loan agreement with Lehman
Commercial Paper Inc. ('LCPI') and Lehman Brothers Inc. On March 7, 2001, we
borrowed $150,000 from LCPI under this agreement. The term loan bears interest
at an annual rate equal to the eurodollar rate plus 5% or a base rate, typically
the prime rate, plus 4%. The term loan is secured by the stock of Satellite CD
Radio, Inc. and a lien on our rights to our fourth, spare satellite. On
March 26, 2002, we entered into an amendment to this term loan agreement
adjusting the financial covenants, accelerating the amortization schedule of the
term loan and reducing the exercise price of the warrants to $15.00 per share.
As amended, the term loan matures in installments, commencing on June 30,
2002, in the amounts described below:
F-17
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
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 each of 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 may prepay the term loan, in whole or in part, at any time or from time
to time. Prepayment prior to March 7, 2004 must be accompanied by a specified
prepayment premium. We must prepay the term loan:
with the net proceeds of certain incurrences of indebtedness;
with the proceeds of asset sales, subject to certain exceptions; and
commencing with the fiscal year ending December 31, 2002, with excess cash.
The term loan contains financial and operating covenants which, among others
covenants, include requirements that we:
achieve at least $2,300 in revenues from subscribers for the quarter ending
March 31, 2003, and achieve increasing revenues from subscribers each
quarter thereafter through the maturity of the term loan on December 31,
2005;
achieve a minimum negative cash flow, before subscriber acquisition costs,
of $65,000 for the quarter ending March 31, 2003, and have improving cash
flow, before subscriber acquisition costs, each quarter thereafter through
the maturity of the term loan;
achieve a minimum negative cash flow, before subscriber acquisition costs
and adjusted to give effect to subscribers who cancel or fail to renew
their subscriptions, of $58,400 for the quarter ending September 30, 2003,
and have improving adjusted cash flow, each quarter thereafter through the
maturity of the term loan; and
not permit our capital expenditures, other than the costs of constructing,
launching and insuring replacement satellites and installing terrestial
repreaters, to exceed $100,000 during the period from June 1, 2001 through
the period in which the term loan is outstanding.
In connection with the term loan, we granted LCPI 2,100,000 warrants, each
to purchase one share of our common stock. For the year ended December 31, 2001,
we recognized interest expense of $2,301 related to the accretion of these
warrants.
5. DEFERRED SATELLITE PAYMENTS
Under an amended and restated contract (the 'Loral Satellite Contract') with
Space Systems/Loral, Inc. ('Loral'), Loral has deferred certain amounts due
under the Loral Satellite Contract.
F-18
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
The amounts deferred bear interest at 10% per year and were originally due in
quarterly installments beginning in June 2002. However, the agreement governing
these deferred amounts provides that this date, and subsequent payment dates,
will be extended by the number of days that the achievement of any milestone
under the Loral Satellite Contract is delayed beyond the date set forth in the
Loral Satellite Contract. Our fourth, spare satellite is expected to be
delivered to ground storage in the second quarter of 2002 and was originally
expected to be delivered to ground storage in October 2000. As a result of
Loral's delay in delivering this satellite, we do not expect to make any
required payments with respect to these deferred amounts until September 2003,
at the earliest. We do, however, have the right to prepay any deferred payments
together with accrued interest, without penalty. As collateral security for
these deferred payments, we granted Loral a security interest in our terrestrial
repeater network.
6. CAPITAL STOCK
COMMON STOCK, PAR VALUE $.001 PER SHARE
On September 29, 1994, we completed our initial public offering by issuing
1,491,940 shares of our common stock for net proceeds of $4,800. On August 5,
1997, we sold 1,905,488 shares of our common stock to Loral Space &
Communications Ltd. for net proceeds of approximately $24,400. In November 1997,
we issued 2,800,000 shares of our common stock for net proceeds of $42,200 in a
public offering. In December 1997, we issued an additional 250,000 shares of our
common stock, in connection with the partial exercise of the option granted to
the underwriters of our November 1997 public offering solely to cover
over-allotments, for net proceeds of $4,200. In November 1998, we issued
5,000,000 shares of our common stock to Prime 66 Partners, L.P. for net proceeds
of $98,000. In September 1999, we issued 3,000,000 shares of our common stock in
an underwritten public offering for net proceeds of approximately $68,000. In
October 1999, we issued an additional 450,000 shares of our common stock, in
connection with the exercise of the option granted to the underwriters of our
September 1999 public offering solely to cover over-allotments, for net proceeds
of approximately $10,000. In February 2000, we sold 2,290,322 shares of our
common stock to DaimlerChrysler Corporation for an aggregate purchase price of
approximately $100,000. In February 2001, we sold 11,500,000 shares of our
common stock in a public offering for net proceeds of approximately $229,300.
As of December 31, 2001, approximately 44,000,000 shares of our common stock
were reserved for issuance in connection with outstanding shares of convertible
preferred stock, convertible debt, warrants and incentive stock plans.
PREFERRED STOCK
In April 1997, we completed a private placement of our 5% Delayed
Convertible Preferred Stock. We sold a total of 5,400,000 shares of our 5%
Delayed Convertible Preferred Stock for an aggregate sales price of $135,000.
The 5% Delayed Convertible Preferred Stock was immediately convertible at a
discount to the fair market value of our common stock and, accordingly, we
recorded approximately $52,000 as a deemed dividend in determining net loss
attributable to common stockholders.
In November 1997, we exchanged 1,846,799 shares of our 10 1/2% Series C
Convertible Preferred Stock for all outstanding shares of our 5% Delayed
Convertible Preferred Stock. On March 3, 2000, we notified the holders of our
10 1/2% Series C Convertible Preferred Stock and the holders of all outstanding
warrants to purchase our 10 1/2% Series C Convertible Preferred Stock that we
would redeem these securities. As of April 12, 2000, all of the outstanding
shares of our 10 1/2% Series C Convertible Preferred Stock had been converted
into shares of our common stock.
F-19
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
On December 23, 1998, we sold Apollo Investment Fund IV, L.P. and Apollo
Overseas Partners IV, L.P. (collectively, the 'Apollo Investors'), 1,350,000
shares of our 9.2% Series A Junior Cumulative Convertible Preferred Stock, par
value $.001 per share, for an aggregate purchase price of $135,000. Each share
of our 9.2% Series A Junior Cumulative Convertible Preferred Stock is
convertible into a number of shares of our common stock calculated by dividing
the $100.00 per share liquidation preference (the 'Series A Liquidation
Preference') by a conversion price of $30.00. This conversion price is subject
to adjustment for certain corporate events. Dividends on our 9.2% Series A
Junior Cumulative Convertible Preferred Stock are payable annually on each
November 15 with cash or additional shares of our 9.2% Series A Junior
Cumulative Convertible Preferred Stock, at our option. On November 15, 1999,
2000 and 2001, we issued 111,270, 134,437 and 146,805 shares of our 9.2%
Series A Junior Cumulative Preferred Stock, respectively, as payment of accrued
dividends. From and after November 15, 2001 and prior to November 15, 2003, we
may redeem our 9.2% Series A Junior Cumulative Convertible Preferred Stock at
the Series A Liquidation Preference, plus any unpaid dividends, provided the
price of our common stock is at least $60.00 per share for a period of twenty
consecutive trading days. From and after November 15, 2003, our right to redeem
our 9.2% Series A Junior Cumulative Convertible Preferred Stock is not
restricted by the market price of our common stock. We are required to redeem
all outstanding shares of our 9.2% Series A Junior Cumulative Convertible
Preferred Stock at a price equal to the Series A Liquidation Preference plus any
unpaid dividends on November 15, 2011. On the date of issuance, the 9.2%
Series A Junior Cumulative Convertible Preferred Stock was immediately
convertible at a discount to the then fair market value of our common stock and,
accordingly, we recorded approximately $11,000 as a deemed dividend in net loss
applicable to common stockholders. At December 31, 2001, accrued dividends
payable on our 9.2% Series A Junior Cumulative Convertible Preferred Stock was
$2,020.
On December 23, 1998, the Apollo Investors also granted to us an option to
sell to the Apollo Investors 650,000 shares of our 9.2% Series B Junior
Cumulative Convertible Preferred Stock, par value $.001 per share, for an
aggregate purchase price of $65,000. We recorded the value of our 9.2% Series B
Junior Cumulative Convertible Preferred Stock at fair value and recorded
approximately $3,101 of deemed dividends related primarily to the amortization
of the value of the option during 1999. We exercised the option to sell our 9.2%
Series B Junior Cumulative Convertible Preferred Stock to the Apollo Investors
on December 23, 1999. The terms of our 9.2% Series B Junior Cumulative
Convertible Preferred Stock are similar to those of our 9.2% Series A Junior
Cumulative Convertible Preferred Stock. On November 15, 1999, 2000 and 2001, we
issued 5,406, 60,297 and 65,845 shares of our 9.2% Series B Junior Cumulative
Preferred Stock, respectively, as payment for accrued dividends. At
December 31, 2001, accrued dividends payable on our 9.2% Series B Junior
Cumulative Convertible Preferred Stock was $906.
On January 31, 2000, we sold affiliates of The Blackstone Group, L.P.
('Blackstone'), 2,000,000 shares of our 9.2% Series D Junior Cumulative
Convertible Preferred Stock, par value $.001 per share, for an aggregate
purchase price of $200,000. Each share of our 9.2% Series D Junior Cumulative
Convertible Preferred Stock is convertible into a number of shares of our common
stock calculated by dividing the $100.00 per share liquidation preference (the
'Series D Liquidation Preference') by a conversion price of $34.00. This
conversion price is subject to adjustment for certain corporate events.
Dividends on our 9.2% Series D Junior Cumulative Convertible Preferred Stock are
payable annually with cash or additional shares of our 9.2% Series D Junior
Cumulative Convertible Preferred Stock, at our option. On November 15, 2000 and
2001, we issued 145,688 and 197,403 shares of our 9.2% Series D Junior
Cumulative Preferred Stock as payment for accrued dividends, respectively. From
and after December 23, 2002 and prior to December 23, 2004, we may redeem our
9.2% Series D Junior Cumulative Convertible Preferred Stock at the Series D
Liquidation Preference, plus any unpaid dividends, provided the price of our
common stock is at least $68.00 per share for a period of twenty
F-20
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
consecutive trading days. From and after December 23, 2004, our right to redeem
our 9.2% Series D Junior Cumulative Convertible Preferred Stock is not
restricted by the market price of our common stock. We are required to redeem
all outstanding shares of our 9.2% Series D Junior Cumulative Convertible
Preferred Stock at a price equal to the Series D Liquidation Preference plus
any unpaid dividends on November 15, 2011. At December 31, 2001, accrued
dividends payable on our 9.2% Series D Junior Cumulative Convertible Preferred
Stock was $2,658.
WARRANTS
We granted to an investor warrants to purchase 1,800,000 shares of our
common stock at $50.00 per share during the period from June 15, 1998 until
June 15, 2005, subject to certain conditions. After June 15, 2000, we may redeem
all of these warrants, provided that the price of our common stock is at least
$75.00 per share during a specified period.
In connection with the issuance of our 14 1/2% Senior Secured Notes due 2009
in May 1999, we issued 600,000 warrants, each to purchase 3.65 shares of our
common stock at an exercise price of $28.60 per share. As required by the terms
of these warrants, we may adjust the number of shares for which each warrant may
be exercised and the exercise price per share for issuances of convertible debt,
convertible preferred stock, common stock and warrants. As of December 31, 2001,
the warrants may be exercised to purchase 4.189 shares of our common stock at an
exercise of price $24.92 per share. As of December 31, 2001, 578,990 of these
warrants were outstanding.
As part of our agreement with Ford Motor Company ('Ford') on June 11, 1999,
we issued Ford 4,000,000 warrants, each to purchase one share of our common
stock at an exercise price of $30.00 per share. These warrants are exercisable
based upon the number of new Ford vehicles equipped to receive our broadcasts
Ford manufactures, and are fully exercisable after 4,000,000 new Ford vehicles
equipped to receive our broadcasts are manufactured. As of December 31, 2001, we
have not recorded any expense related to these warrants. We expect to record
non-cash expenses related to these warrants in the future, based on the number
of vehicles equipped to receive our service that Ford manufactures.
As part of our agreement with DaimlerChrysler on January 28, 2000, we issued
DaimlerChrysler 4,000,000 warrants, each to purchase one share of our common
stock at an exercise price of $60.00 per share. These warrants are exercisable
based upon the number of new DaimlerChrysler vehicles equipped to receive our
broadcasts DaimlerChrysler manufactures, and are fully exercisable after
4,000,000 new DaimlerChrysler vehicles equipped to receive our broadcasts are
manufactured. As of December 31, 2001, we have not recorded any expense related
to these warrants. We expect to record non-cash expenses related to these
warrants in the future, based upon the number of vehicles equipped to receive
our service that DaimlerChrysler manufactures.
In connection with the Lehman Term Loan Facility, we granted LCPI 2,100,000
warrants, each to purchase one share of our common stock, at an exercise price
of $29.00 per share. On March 26, 2002, we amended our Term Loan Facility and
reduced the exercise price of these warrants to $15.00 per share.
7. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
In February 1994, we adopted our 1994 Stock Option Plan (the '1994 Plan')
and our 1994 Directors' Nonqualified Stock Option Plan (the 'Directors' Plan').
In June 1999, we adopted our 1999 Long-Term Stock Incentive Plan (the '1999
Plan'). Generally, options granted under the plans vest over a three or
four-year period and are exercisable for ten years from the date of grant.
As of December 31, 2001, the aggregate number of shares of common stock
available for issuance and the
F-21
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
common stock available for grant pursuant to our stock option plans were
15,394,000 and 2,804,000, respectively.
The following table summarizes the option activity under all stock option
plans for the years ended December 31, 1999, 2000 and 2001:
1999 2000 2001
-------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at beginning of
year.......................... 2,453,525 $12.87 6,497,773 $24.56 7,509,975 $29.12
Granted......................... 4,569,250 $29.88 2,125,178 $38.41 4,233,200 $ 9.23
Exercised....................... (205,002) $ 8.02 (615,576) $12.55 (185,221) $ 3.30
Cancelled....................... (320,000) $21.38 (497,400) $30.06 (440,990) $17.35
Cancelled under repricing....... -- $-- -- $-- (3,981,979) $32.24
Issued under repricing.......... -- $-- -- $-- 3,981,979 $ 7.50
--------- --------- ----------
Outstanding at end of year...... 6,497,773 $24.56 7,509,975 $29.12 11,116,964 $13.58
--------- --------- ----------
--------- --------- ----------
Exercise prices for stock options outstanding as of December 31, 2001 ranged
from $2.29 to $57.00. The following table provides certain information with
respect to stock options outstanding and exercisable at December 31, 2001:
RANGE OF EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING
PRICE PER SHARE SHARES UNDER OPTION EXERCISE PRICE PER SHARE CONTRACTUAL LIFE IN YEARS
- --------------- ------------------- ------------------------ -------------------------
OUTSTANDING:
Under $5.00.................. 489,200 $ 3.79 9.5
$5.00 - $14.99............... 7,990,764 $ 8.24 8.1
$15.00 - $24.99.............. -- -- $ --
$25.00 - $34.99.............. 2,526,000 $31.01 7.3
Over $35.00.................. 111,000 $44.84 8.5
EXERCISABLE:
Under $5.00.................. 40,000 $ 4.53
$5.00 - $14.99............... 4,952,116 $ 8.65
$15.00 - $24.99.............. -- -- $
$25.00 - $34.99.............. 2,511,800 $31.03
Over $35.00.................. 41,750 $45.03
We have adopted the disclosure-only provisions of SFAS No. 123, 'Accounting
for Stock-Based Compensation,' in recognizing compensation expense attributable
to stock-based awards. If we had elected to recognize compensation cost for the
stock option grants in accordance with SFAS No. 123, our net loss and net loss
per share (basic and diluted) on a pro forma basis would have been:
1999 2000 2001
---- ---- ----
Net loss applicable to common stockholders -- as reported... $ (96,981) $(183,715) $(277,919)
Net loss applicable to common stockholders -- pro forma..... $(133,746) $(219,608) $(304,541)
Net loss per share applicable to common stockholders -- as
reported.................................................. $ (3.96) $ (4.72) $ (5.30)
Net loss per share applicable to common stockholders -- pro
forma..................................................... $ (5.47) $ (5.65) $ (5.81)
F-22
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
The pro forma expense related to stock options is recognized over the
vesting period. The fair value of each option grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions for each year:
1999 2000 2001
---- ---- ----
Risk-free interest rate..................................... 6.70% 4.89% 4.05%
Expected life of options -- years........................... 4.38 4.38 4.48
Expected stock price volatility............................. 70% 72% 78%
Expected dividend yield..................................... N/A N/A N/A
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price
characteristics, which may be significantly different from those of traded
options. Because changes in the subjective input assumptions can materially
affect the fair value estimated, it is our opinion that the existing models do
not necessarily provide a reliable single measure of the fair value of our
stock-based awards.
401(k) SAVINGS PLAN
We sponsor the Sirius Satellite Radio 401(k) Savings Plan (the '401(k)
Plan') for eligible employees. Effective December 1, 2001, CIGNA Retirement &
Investment Services was appointed the 401(k) Plan's trustee, recordkeeper and
investment manager. The 401(k) Plan allows eligible employees to voluntarily
contribute from 1% to 16% of their pre-tax salary subject to certain defined
limits. We currently match 75% of the voluntary employee contribution in the
form of our common stock. Our matching contribution vests at a rate of 33 1/3%
each year and is fully vested after three years of employment. Contribution
expense resulting from our matching contribution to the 401(k) Plan was $454,
$864, $1,224 and $2,646 for the years ended December 31, 1999, 2000 and 2001 and
for the period May 17, 1990 (date of inception) to December 31, 2001,
respectively.
8. INCOME TAXES
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax assets and deferred tax liability are as follows:
DECEMBER 31,
---------------------
2000 2001
---- ----
Deferred tax assets:
Start-up costs capitalized for tax purposes....... $ 65,586 $ 111,913
Net operating loss carryforwards.................. 23,433 50,369
Capitalized interest expense...................... 10,841 25,886
Other............................................. 3,784 2,476
--------- ---------
103,644 190,644
Deferred tax liabilities:
Other............................................. (2,586) (3,616)
--------- ---------
Net deferred tax asset........................ 101,058 187,028
Valuation allowance................................... (103,295) (189,265)
--------- ---------
Deferred tax liability, net of valuation
allowance....................................... $ (2,237) $ (2,237)
--------- ---------
--------- ---------
F-23
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
Realization of deferred tax assets at the balance sheet date is dependent
upon future earnings, which are uncertain. Accordingly, a full valuation
allowance was recorded against the assets.
At December 31, 2001, we had net operating loss carryforwards of
approximately $123,756 for federal and state income tax purposes available to
offset future taxable income. The net operating loss carryforwards expire at
various dates beginning in 2008. A significant portion of costs incurred to date
has been capitalized for tax purposes as a result of our status as a start-up
enterprise. Total start-up costs as of December 31, 2001 were $274,972. Once we
begin our active trade or business, these capitalized costs will be amortized
over 60 months. The total deferred tax asset related to capitalized start-up
costs of $111,913 includes approximately $8,202 which, when realized, would not
affect financial statement income but will be recorded directly to stockholders'
equity.
9. SPECIAL CHARGES
During 1998, we decided to enhance our satellite delivery system to include
a third in-orbit satellite and to terminate certain launch and orbit related
contracts. We recorded special charges totaling $25,682 related primarily to the
termination of such contracts.
10. RELATED PARTIES
Since inception, we have relied upon related parties for certain consulting,
legal and management services. Such transactions are in the ordinary course of
business at negotiated prices comparable to those of transactions with other
service providers. We have paid for these services with cash and common stock.
Total cash expenses incurred in transactions with related parties during the
years ended December 31, 1999, 2000 and 2001 and the period from May 17, 1990
(date of inception) to December 31, 2001 were $94, $24, $4 and $2,568,
respectively. There were no related party expenses settled with the issuance of
common stock during the years ended December 31, 1999, 2000 and 2001. Related
party expenses settled with the issuance of common stock for the period from
May 17, 1990 (date of inception) to December 31, 2000 were $1,311.
During the years ended December 31, 1999, 2000 and 2001 we made payments of
$9,379, $67 and $200, respectively, to a financial advisory firm, of which a
related party was a partner.
11. LEASES AND RENTALS
Total rent expense for the years ended December 31, 1999, 2000 and 2001 and
for the period May 17, 1990 (date of inception) to December 31, 2001 was $3,850,
$6,515, $10,972 and $24,805, respectively. Future minimum lease payments under
non-cancelable operating leases as of December 31, 2001 are payable as follows:
2002....................................................... $ 6,663
2003....................................................... 6,067
2004....................................................... 5,949
2005....................................................... 4,528
2006....................................................... 4,482
Thereafter................................................. 33,090
-------
Total.................................................. $60,779
-------
-------
F-24
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
12. COMMITMENTS AND CONTINGENCIES
SATELLITE CONSTRUCTION AND LAUNCH SERVICES
We entered into the Loral Satellite Contract to build and launch the
satellites necessary for our service. We are committed to make aggregate
payments of approximately $745,890 under the Loral Satellite Contract. As of
December 31, 2001, $683,390 of this obligation had been satisfied. Our future
payments due on the Loral Satellite Contract, excluding payments for interest
accrued on our deferred satellite payments, are as follows: $12,500 in 2002,
$8,333 in 2003, $25,001 in 2004 and $16,666 in 2005. The amount and timing of
these payments depends upon the delivery of our fourth, spare satellite.
RADIO COMMITMENTS
Matsushita Communication Industrial Corporation of USA ('Panasonic') has
constructed a dedicated facility in Peachtree City, Georgia, to manufacture
Sirius radios. During the first year of production of our radios at this
facility, we are obligated to purchase certain radios not purchased by other
customers. If Panasonic were unable to sell any of the applicable radios, our
cost to purchase these radios could approximate $70,000.
ENGINEERING DESIGN AND DEVELOPMENT
We have entered into agreements with Agere Systems, Inc. (the successor to
the microelectronics group of Lucent Technologies, Inc.) to develop and
manufacture integrated circuits ('chip sets') that are used in Sirius radios. In
addition, we have entered into agreements with Alpine Electronics Inc., Audiovox
Corporation, Clarion Co., Ltd., Delphi Corporation, Harman International
Industries, Incorporated, Kenwood Corporation, Panasonic, Pioneer Corporation,
Recoton Corporation, Sony Electronics Inc., Visteon Automotive Systems and
others to design, develop and produce Sirius radios and have agreed to pay
certain costs associated with these radios. We record expenses under these
agreements as work is performed. Total expenses related to these agreements were
$24,631, $50,050 and $37,735 for the years ended December 31, 1999, 2000 and
2001, respectively, and $112,416 for the period May 17, 1990 (date of inception)
to December 31, 2001.
PROGRAMMING AGREEMENTS
We have entered into agreements with providers of non-music programming. We
are obligated, in certain instances, to pay license fees, share advertising
revenue from this programming or purchase advertising on properties owned or
controlled by these providers. These obligations aggregate $7,037, $18,509,
$28,818, $22,507 and $588 for the years ending December 31, 2002, 2003, 2004,
2005 and 2006, respectively. We may enter into additional non-music programming
agreements that contain similar provisions.
F-25
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results of operations are summarized as follows:
FOR THE THREE MONTHS ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Year Ended December 31, 2001:
Revenue.................................... $ -- $ -- $ -- $ --
Operating expenses......................... (39,316) (46,652) (30,650) (51,838)
Extraordinary gain on early extinguishment
of debt.................................. -- -- -- 5,313
Net loss applicable to common
stockholders............................. (64,423) (72,461) (57,406) (83,629)
Net loss per share applicable to common
stockholders............................. $ (1.34) $ (1.35) $ (1.06) $ (1.52)
Year Ended December 31, 2000:
Revenue.................................... $ -- $ -- $ -- $ --
Operating expenses......................... (26,776) (28,868) (31,819) (38,171)
Net loss applicable to common
stockholders............................. (43,761) (44,982) (40,883) (54,089)
Net loss per share applicable to common
stockholders............................. $ (1.35) $ (1.11) $ (0.97) $ (1.28)
Year Ended December 31, 1999:
Revenue.................................... $ -- $ -- $ -- $ --
Operating expenses......................... (11,875) (13,887) (12,932) (24,824)
Net loss applicable to common
stockholders............................. (20,104) (22,475) (23,221) (31,181)
Net loss per share applicable to common
stockholders............................. $ (0.87) $ (0.97) $ (0.96) $ (1.15)
The sum of the quarterly per share net losses does not necessarily agree to
the net loss per share for the year due to the timing of our common stock
issuances.
14. SUBSEQUENT EVENTS
On January 3, 2002, we sold 16,000,000 shares of our common stock in an
underwritten public offering for net proceeds of approximately $147,500.
Subsequent to December 31, 2001, we acquired $28,475 in principal amount of
our 8 3/4% Convertible Subordinated Notes due 2009 in exchange for approximately
2,816,000 shares of our common stock.
On March 26, 2002, we entered into an amendment to the term loan agreement
with Lehman Commercial Paper Inc. adjusting the financial covenants,
accelerating the amortization schedule of the term loan and reducing the
exercise price of the warrants to $15.00 per share.
F-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).
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).
E-1
EXHIBIT DESCRIPTION
- ------- -----------
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')).
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 (filed herewith).
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 Note
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).
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 June 11, 1999 (incorporated by
reference to Exhibit 4.5.1 to the 1999 Units Registration
Statement).
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).
E-2
EXHIBIT DESCRIPTION
- ------- -----------
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 January 28, 2000
(incorporated by reference to Exhibit 4.23 to the 1999
Form 10-K).
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 -- 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)).
4.25 -- 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).
4.26 -- 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).
4.27 -- Amended and Restated Intercreditor Agreement, dated
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 (filed
herewith).
*10.2 -- Employment Agreement, dated as of March 28, 2000, between
the Company and Joseph S. Capobianco (incorporated by
reference to Exhibit 10.5 to the 1999 Form 10-K).
*10.3 -- 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).
*10.4 -- 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).
*10.5 -- Employment Agreement, dated as of August 29, 2001,
between the Company and Michael S. Ledford (incorporated
by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2001).
*10.6 -- Employment Agreement, dated as of November 26, 2001,
between the Company and Joseph P. Clayton (filed
herewith).
E-3
EXHIBIT DESCRIPTION
- ------- -----------
*10.7 -- Employment Agreement, dated as of January 7, 2002,
between the Company and Guy D. Johnson (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 -- 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).
10.14.1 -- 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).
10.14.2 -- 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).
10.14.3 -- 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).
10.15 -- 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).
10.16 -- 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).
10.17 -- 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'10.18 -- Agreement, dated as of June 11, 1999, between the Company
and Ford Motor Company (incorporated by reference to
Exhibit 10.33 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999).
'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).
21.1 -- List of Subsidiaries.
23.1 -- Consent of Arthur Andersen LLP.
99.1 -- Letter from the Company to the Securities and Exchange
Commission regarding representations of Arthur Andersen
LLP.
- ---------
* 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.
E-4