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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 Name of each exchange Title of each class: on which registered: Common Stock, par value $0.001 per share Nasdaq Global Select Market Securities registered pursuant to Section
12(g) of the Act: Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No o Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x 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 o Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. x Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule
12b-2). Large
Accelerated Filer x Accelerated Filer o
Non-Accelerated Filer o. Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). The
aggregate market value of the registrants common stock held by non-affiliates
of the registrant on June 30, 2006 was $6,152,448,426. All executive officers
and directors of the registrant have been deemed, solely for the purpose of the
foregoing calculation, to be affiliates of the registrant. The
number of shares of the registrants common stock outstanding as of February
27, 2007 was 1,459,922,870. Documents Incorporated by Reference Information
included in our definitive proxy statement for our 2007 annual meeting of
stockholders to be held on Thursday, May 24, 2007 is incorporated by reference
in Items 10, 11, 12, 13 and 14 of Part III of this report. SIRIUS SATELLITE RADIO INC. Item No. Description Page 2 17 22 23 23 24 25 25 Managements Discussion and Analysis of Financial Condition and
Results of Operations 26 45 46 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 46 46 46 46 47 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 47 Certain Relationships and Related Transactions, and Director Independence 47 47 47 48 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, intend, plan, projection and outlook. Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed throughout this Annual Report on Form 10-K and in other
reports and documents published by us from time to time, particularly the risk
factors described under BusinessRisk Factors in Item 1A of this Annual
Report on Form 10-K. Among
the significant factors that could cause our actual results to differ
materially from those expressed in the forward-looking statements are: our pending
merger with XM Satellite Radio Holdings Inc. (XM Radio), including related
uncertainties and risks and the impact on our business if the merger is not
completed; the useful life of our
satellites, which have experienced circuit failures on their solar arrays and
other component failures and are not insured; our dependence upon third
parties, including manufacturers of SIRIUS radios, retailers, automakers and
programming providers; and our competitive position
versus other forms of audio and video entertainment including terrestrial
radio, internet radio, cell phones, XM Radio and emerging next generation
networks and technologies. Because
the risk factors referred to above could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements made by us or
on our behalf, you should not place undue reliance on any of these
forward-looking statements. In addition, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which the statement is made, to reflect the
occurrence of unanticipated events or otherwise. New factors emerge from time
to time, and it is not possible for us to predict which will arise or to assess
with any precision the impact of each factor on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. On
February 19, 2007, we and XM Radio entered into an Agreement and Plan of
Merger (the Merger Agreement), pursuant to which we and XM Radio will combine
our businesses through a merger of XM Radio and a newly formed, wholly owned
subsidiary of us (the Merger). Our Board of Directors and the Board of
Directors of XM Radio have approved the
Merger and the Merger Agreement. The
completion of the Merger is subject to various closing conditions, including
obtaining the approval of our stockholders and XM Radios stockholders and
receiving certain regulatory and antitrust approvals (including from the
Federal Communications Commission and under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended). See Pending Merger with XM Radio for a
further description of the Merger. The
information presented in this Annual Report on Form 10-K does not give effect
to the Merger. We
are a satellite radio provider in the United States. We offer over 130 channels to our subscribers69 channels of 100%
commercial-free music and 65 channels of sports, news, talk, entertainment,
traffic, weather and 2 data content. The core of our enterprise is programming;
we are committed to creating the best programming in all of radio. Our
primary source of revenue is subscription fees, with most of our customers
subscribing to SIRIUS on an annual or a monthly basis. As of December 31, 2006, we had
6,024,555 subscribers. In addition, we
derive revenue from activation fees, the sale of advertising on some of our
non-music channels, and the direct sale of SIRIUS radios and accessories. Most
of our subscribers receive our service through SIRIUS radios, which are sold
primarily by automakers, consumer electronics retailers and mobile audio
dealers and through our website. Various brands of SIRIUS radios are available
in more than 25,000 retail locations, including Best Buy, Circuit City,
Crutchfield, Costco, Target, Wal-Mart and through RadioShack on an exclusive
basis. As
of December 31, 2006, SIRIUS radios were available as a factory and
dealer-installed option in 132 vehicle models and as a dealer only-installed
option in 17 vehicle models. We have
agreements with DaimlerChrysler, Ford, Mitsubishi, BMW, Volkswagen, Kia,
Bentley and Rolls-Royce to offer SIRIUS radios as factory or dealer-installed
equipment in their vehicles, including Chrysler, Dodge, Jeep, Mercedes, Ford,
Lincoln, Mercury, Volvo, Mazda, Jaguar, Volkswagen, Audi, Kia, Land Rover,
Mitsubishi, BMW, MINI, Bentley and Rolls-Royce vehicles and Freightliner and
Sterling heavy trucks. We also have
relationships with Nissan, Infiniti, Toyota, Lexus, Scion and Subaru to offer
SIRIUS radios as factory or dealer-installed equipment. In 2006, we signed new agreements with
Volkswagen/Audi, Kia, Bentley and Rolls-Royce.
SIRIUS radios are also offered to renters of Hertz vehicles at airport
locations nationwide. We
offer our programming over multiple platforms in addition to our satellite and
terrestrial repeater network. In 2006, we launched SIRIUS Internet Radio, which
we refer to as SIR. SIR is an internet
service offering a CD-quality, Internet-only version of our service. SIR delivers a simulcast of more than 75
channels of our talk, entertainment, sports and music programming. Our music channels are also available to certain
DISH satellite television subscribers, and a select number of our music channels
are available to certain subscribers to the Nationwide Sprint PCS Network. We
also offer, or are developing, ancillary services. In 2006, we introduced a service that provides graphic
information as to road closings, traffic flow and incident data to consumers
with in-vehicle navigation systems and a marine weather service that provides a
range of information, including sea surface temperatures, wave heights and
extended forecasts, to recreational boaters. In 2007, we plan to introduce a video
service that will offer premium video content designed primarily for children
in the backseat of vehicles. In
2005, SIRIUS Canada Inc., a Canadian corporation owned by us, Canadian
Broadcasting Corporation, and Standard Radio Inc., launched service in
Canada. SIRIUS Canada currently offers
110 channels of commercial-free music and news, sports, talk and entertainment
programming, including 11 channels of Canadian content. As of February 13, 2007, SIRIUS Canada had
over 300,000 subscribers. Pending Merger with XM Radio On
February 19, 2007, we entered into an Agreement and Plan of Merger (the Merger
Agreement) with newly XM Satellite Radio Holdings Inc. Pursuant to the Merger
Agreement we and XM Radio will combine our businesses through a merger of XM
Radio and a newly formed, wholly owned subsidiary of ours (the Merger). Each
of SIRIUS and XM has made customary representations and warranties and
covenants in the Merger Agreement. The
completion of the Merger is subject to various closing conditions, including
obtaining the approval of our and XM Radios stockholders and receiving certain
regulatory and antitrust approvals (including from the Federal Communications
Commission and under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended). The Merger is intended to
qualify as a reorganization for federal income tax purposes. At
the effective time of the Merger (the Effective Time), by virtue of the
Merger and without any action on the part of any stockholder, each share of
common stock of XM Radio (the XM Common Stock) issued and outstanding
immediately prior to the Effective Time will generally be converted into the
right to receive 4.6 shares 3 of our common
stock. Each share of Series A Convertible Preferred Stock of XM Radio issued
and outstanding immediately prior to the Effective Time will be similarly
converted at the Effective Time into the right to receive 4.6 shares of a
newly-designated series of our preferred stock having substantially the same
powers, designations, preferences, rights and qualifications, limitations and
restrictions as the stock so converted. Mel
Karmazin, currently our chief executive officer, will become chief executive
officer of the combined company and Gary M. Parsons, currently chairman of the
board of directors of XM Radio, will become chairman of the board of directors
of the combined company. The combined companys board of directors will consist
of 12 directors, including Messrs. Karmazin and Parsons, four independent
members designated by each of SIRIUS and XM Radio, as well as one
representatives of each of General Motors and American Honda. The
Merger Agreement contains certain termination rights for both us and XM Radio.
If the Merger Agreement is terminated under certain circumstances specified in
the Merger Agreement, we or XM Radio, as the case may be, will be required to
pay the other a termination fee of $175,000,000. Our
Board of Directors and the Board of Directors of XM Radio has approved the
Merger and the Merger Agreement. This
description of the Merger Agreement does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, which is filed
as Exhibit 2.1 to the Current Report on Form 8-K dated February 21, 2007, and
is incorporated herein by reference. The
Merger Agreement contains representations and warranties that SIRIUS and XM
Radio made to each other as of specific dates. The assertions embodied in those
representations and warranties were made solely for purposes of the Merger
Agreement between SIRIUS and XM Radio and may be subject to important
qualifications and limitations agreed to by SIRIUS and XM Radio in connection
with negotiating its terms. Moreover, the representations and warranties may be
subject to a contractual standard of materiality that may be different from
what may be viewed as material to stockholders, or may have been used for the
purpose of allocating risk between SIRIUS and XM Radio rather than establishing
matters as facts. For the foregoing reasons, no person should rely on the
representations and warranties as statements of factual information at the time
they were made or otherwise. Programming We
offer a dynamic programming lineup of 69 channels of 100% commercial-free
music; 54 channels of sports, news, talk, and entertainment; 11 channels of
traffic and weather; and informational data services. Our programming lineup
changes from time to time as we strive to attract new subscribers, to create
content that appeals to a broad range of audiences and to satisfy our existing
subscribers. Music Programming Our
music channels offer an extensive selection of music genresfrom rock, pop and
hip-hop to country, dance, jazz, Latin and classical. Within each genre we
offer a range of formats, styles and recordings, many of which are not
available on terrestrial radio. All
of our music channels are broadcast commercial-free. Our channels are produced,
programmed and hosted by a team of experts in their fields, including musical
performers such as Eminem, Jimmy Buffett, Little Steven Van Zandt, and other
unique personalities such as Cousin Brucie, Tony Hawk, and the original MTV
veejays. Each channel is operated as an individual radio station, with a
distinct format and branding. In
2006, we launched Metropolitan
Opera Radio, consisting of live and archived operas from the famed
Metropolitan Opera in New York City; we broadcasted concerts
from Jimmy Buffetts Party at The End of the World tour exclusively on our
Radio Margaritaville channel; we broadcasted the final
performance at New Yorks legendary CBGBs Club; and 4 we broadcasted numerous
live performances originating from our broadcast facility in Rockefeller
Center. In
addition to our regular channels, we offer channels focused on the works of
specific artists. During 2006, such special feature channels were dedicated to
the music of Elvis Presley, Bruce Springsteen, Pink Floyd, The Rolling Stones,
The Who and George Strait. Some of these feature channels are available only
for a limited time. In
January 2007, we announced a partnership with Frank Sinatra Enterprises to
create a new radio channel dedicated to the music, time and spirit of Frank
Sinatra. Sports
Programming Live
play-by-play sports is an important part of our programming strategy. We are
the Official Satellite Radio Partner of the National Football League, with
exclusive satellite radio rights to use the NFL logo and collective NFL team
trademarks. We carry all NFL regular season, pre-season and post-season games.
In most cases, we carry both the home and visiting team game broadcasts, as
well as Spanish language broadcasts of select games. We also carry the Super
Bowl, which we broadcasted in 2007 in seven languages. We also produce and
broadcast SIRIUS NFL Radio, an around-the-clock exclusive channel of NFL
content for our subscribers. Our agreement with the NFL expires at the end of
the 2010-2011 NFL season. Starting
in 2007, we broadcast live all NASCAR Nextel Cup Series, NASCAR Busch Series
and NASCAR Craftsman Truck Series races over a five-year period. We have
created SIRIUS NASCAR Radio, a new around-the-clock channel of exclusive
NASCAR-related programming, including Tony Stewart Live and race coverage. In
addition to the live race broadcasts, we take fans into the cars and pits by
devoting additional Driver2Crew Chatter channels that carry the driver-to-crew
communications of up to 10 different race teams during NASCAR Nextel Cup Series
races. We are the Official Satellite Radio Partner of NASCAR with exclusive
trademark and marketing rights and the right to sell advertising time on the
NASCAR channel and during races. We
are the exclusive Official Satellite Radio Partner of the NBA and carry NBA
Radio, a talk channel devoted to the NBA. We transmit live play-by-play
broadcasts of more than 1,000 NBA games during each season, including the NBA
playoffs and the NBA finals. We
also broadcast live play-by-play broadcasts of up to 1,000 NHL games each
season, as well as the Stanley Cup playoffs and finals through the 2006-2007
season. We are the Official Satellite Radio Partner of the NHL through the
2006-2007 season. We
expanded our international soccer offerings in 2006. As the official satellite
radio broadcaster of Barclays English Premier League soccer, we have the right
to air matches of the top 20 clubs in the United Kingdom, including Manchester
United. We are also the exclusive satellite radio provider of the Leagues
Chelsea football club. Every Chelsea match features an exclusive pre-game show
co-hosted by soccer giant Giorgio Chinaglia. Our soccer coverage also includes
live matches from the UEFA Champions League. We
carry extensive live play-by-play coverage of college football and basketball
games. Our broadcasts include football, basketball and other sports from
schools in 20 NCAA Division I conferences. We also have the right to broadcast
all games of the NCAA Division I mens basketball tournament through 2009. Our
sports channels include ESPN Radio, ESPN News and ESPNs Spanish language
programming, ESPN Deportes. Talk and
Entertainment Programming We
offer 30 talk and entertainment channels for a variety of audiences. In
January 2006, Howard Stern moved his radio show to SIRIUS from terrestrial
radio as part of two channels being programmed by Howard Stern and us. Our
agreement with Stern expires on December 31, 2010. Our 5 talk radio offerings also
feature dozens of popular talk personalities, most creating radio shows that
air exclusively on SIRIUS, including Senator Bill Bradley, Deepak Chopra,
Richard Simmons, Martha Stewart and Barbara Walters. Our diverse spectrum of
talk programming is a significant differentiator from terrestrial radio. Our
comedy channels present a range of humor on the channels Laugh Break, Blue
Collar Comedy and Raw Dog Comedy and our other entertainment channels include
Cosmo Radio, MAXIM Radio, Road Dog Trucking Radio, Playboy Radio and Radio
Disney all exclusively broadcast on SIRIUS. In January 2007, we announced
plans to launch The Foxxhole, an exclusive urban comedy, entertainment and
lifestyle channel with Jamie Foxx. We
also broadcast the Catholic Channel which is programmed with the assistance of
the Archdiocese of New York. News and
Information Programming We
offer 25 news and information channels. These channels present a range of
national, international and financial news, including news from BBC World News,
Bloomberg Radio, CNBC, CNN, FOX News, NPR and the World Radio Network. We
offer continuous, local traffic reports for 20 metropolitan markets throughout
the United States. We broadcast these reports, together with local weather
reports from The Weather Channel, on 11 of our channels. We
broadcast national weather reports produced by The Weather Channel on our
weather and emergency channel, which also alerts listeners to key information
during civil and natural emergencies. In addition, we insert appropriate
emergency announcements and broadcasts into some or all of our channels and
participate in the national Emergency Alert System. Distribution of SIRIUS Radios Retail SIRIUS
radios are marketed and distributed through major national and regional
retailers, including Best Buy, Circuit City, Crutchfield, Costco, Target and
Wal-Mart. SIRIUS radios are also distributed on an exclusive basis by
RadioShack. We develop in-store merchandising materials and provide sales force
training for several retailers. SIRIUS radios are also available nationwide at
various truck stops. We also sell SIRIUS radios directly to consumers through
our website. Automakers Various
automakers factory-install and dealer-install SIRIUS radios in their vehicles.
As of December 31, 2006, SIRIUS radios were available as a factory or
dealer-installed option in 132 vehicle models and as a dealer only-installed
option in 17 vehicle models. Many automakers include a subscription to our
radio service in the sale or lease price of their vehicles. In many cases, we
receive subscription payments from automakers in advance of the activation of
our service. We share with various automakers a portion of the revenues we
derive from subscribers using vehicles equipped to receive our service. We also
reimburse various automakers for certain costs associated with the SIRIUS
radios installed in their vehicles, including hardware costs, tooling expenses
and promotional and advertising expenses. Automakers
have begun to incorporate SIRIUS into their national and regional advertising.
In 2006, DaimlerChrysler and Ford each implemented a national advertising
campaign with prominent references to SIRIUS. We expect advertising by
automakers to increase as SIRIUS radios become available in a wider array of
vehicle models. DaimlerChrysler. We have an agreement with
DaimlerChrysler
Corporation, Mercedes-Benz USA, Inc. and Freightliner LLC, which continues
until September 2012. This agreement covers the distribution of our service on
an exclusive basis in all cars and light trucks manufactured by DaimlerChrysler
and Mercedes-Benz as well as Freightliner and Sterling heavy trucks. We expect
DaimlerChrysler to include SIRIUS radios as a factory-installed feature in
approximately 40% of its vehicles during the 2007 model year. In addition,
Mercedes-Benz has agreed to 6 include SIRIUS radios as
standard equipment in all 2007 model year Mercedes SL Class, CL Class, AMG
branded and V12 engine vehicles. Ford. Our agreement with Ford Motor Company and
certain of its affiliates provides for an exclusive relationship until
September 2011 or, at Fords option, until September 2013. Beginning in January
2009, Ford may elect to become nonexclusive under the agreement, in which case
Ford would forfeit its significant future economic benefits. This agreement
covers all Ford brands, including Ford, Lincoln, Mercury, Jaguar, Volvo, Land
Rover, Aston Martin and Mazda. At the end of 2006, SIRIUS radios were available
as a factory-installed option in 19 Ford, Lincoln and Mercury vehicle lines. BMW. We have an agreement with BMW of North
America which provides for an exclusive relationship until August 2008. This
agreement covers all BMW and MINI vehicles. Volkswagen
and Audi. In March
2006, we entered into a new exclusive agreement with Volkswagen of America,
Inc. through July 2012 or, at Volkswagens option, through July 2015. This
agreement covers all Volkswagen and Audi vehicles. Other
Automakers. In April
2006, we entered into an exclusive agreement with Kia Motors America, Inc. Kia
has agreed to include SIRIUS radios as standard, factory-installed equipment in
all of its vehicles commencing in the 2009 model year. Our agreement with Kia
extends through 2014 or, at Kias option, through 2017. We
have an agreement with Mitsubishi Motors North America which provides for an
exclusive relationship through February 2010. In
October 2006, we entered into an agreement with Bentley Motors Inc. Bentley
will begin including SIRIUS radios as standard, factory-installed equipment in
its vehicles commencing in the 2008 model year and continuing through 2012.
Each Bentley vehicle equipped with a SIRIUS radio will be sold with a lifetime
subscription included in the price of the car. We
also have an agreement with Rolls-Royce Motor Cars. Rolls-Royce has agreed to
include SIRIUS radios as standard, factory-installed equipment in all of its
vehicles through 2008. Each Rolls-Royce vehicle will be sold with a lifetime
subscription included in the price of the car. SIRIUS
radios are also available as a factory or dealer-installed option in various
vehicle models offered by Nissan, Infiniti, Toyota, Lexus, Scion and Subaru. Special Markets Trucks. SIRIUS radios are available nationwide at
various truck stops, including Travel Centers of America, Flying J, Petro, Pilot
Travel Centers and Interstate Connections locations. Freightliner, Sterling,
Peterbilt, Kenworth, Volvo and International offer SIRIUS radios as a
factory-installed option on the trucks they manufacture. Boats. Various recreational boat builders,
including Sea Ray, Four Winns, Chaparral, Larson, Glastron, Ranger and Formula,
offer SIRIUS radios and a prepaid subscription to our service as a standard or
optional feature on their boats. Recreational
Vehicles. Several
leading manufacturers of recreational vehicles, including Fleetwood, Monaco, Winnebago, National, Tiffin and Alfa Leisure, offer
SIRIUS radios as a factory-installed
option. Hertz We
have an agreement with Hertz Corporation to make SIRIUS radios available as an option
to its rental car customers. In some cases, our service is included as part of
the rental price of Hertz vehicles. In other cases, our service is offered as a
premium feature to Hertz customers for a daily fee. As of December 31, 2006,
approximately 24,000 vehicles with SIRIUS radios were available to renters of
55 of Hertzs vehicle models. Hertz offers SIRIUS radios at airport locations
nationwide. The SIRIUS System Our
satellite radio system is designed to provide clear reception in most areas
despite variations in terrain, buildings and other obstructions. Subscribers
can receive our transmissions in all outdoor locations where the 7 satellite radio receiver has
an unobstructed line-of-sight with one of our satellites or is within range of
one of our terrestrial repeaters. The
FCC has allocated the portion of the S-band located between 2320 MHz and
2345 MHz exclusively for satellite radio. We use 12.5 MHz of
bandwidth in the 2320.0-2332.5 MHz frequency to transmit our signals from our
satellites to our subscribers. Uplink transmissions (from the ground to our
satellites) use 12.5 MHz of bandwidth in the 7060-7072.5 MHz band. Our
satellite radio system consists of three principal components: satellites, terrestrial
repeaters and other satellite facilities; our studios; and SIRIUS radios. We
continually monitor our infrastructure and regularly evaluate improvements in
technology. For example, a technology known as hierarchical modulation will
allow us to offer additional audio channels, as well as advanced services such
as data and video, without noticeably affecting our broadcasts. We expect to
begin offering services using this technology in 2007. This increase in network
capacity will be available through select new SIRIUS radios and will not be
available to SIRIUS radios sold prior to the implementation of this technology.
Satellites, Terrestrial Repeaters and Other
Satellite Facilities Satellites. Space Systems/Loral, the manufacturer
of our
satellites, delivered our three operating satellites to us in 2000, following
the completion of in-orbit testing of each satellite. Our fourth, spare
satellite was delivered to ground storage in April 2002. Our
existing satellites are of the Loral FS-1300 model series. This family of
satellites has a history of reliability with a total of more than 350 years of
in-orbit operation time. Each
operating 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 time, two of our three satellites operate north of the equator
while the third satellite does not transmit as it traverses the portion of the
orbit south of the equator. This orbital configuration yields high signal
elevation angles, reducing service interruptions from signal blockage. In
June 2006, we entered into an agreement with Space Systems/Loral to design and
construct a new satellite. The new satellite is expected to be completed in the
fourth quarter of 2008, and launched shortly thereafter. This new satellite
will complement our existing in-orbit satellites and will be launched into a
geostationary orbit. The redundancy of the resulting constellation configuration
is expected to provide enhanced coverage and performance. We
expect to further augment or replace our satellite constellation by 2012. We
may elect to augment our operating satellites with our spare satellite or with
new satellites that we may purchase to meet our business needs. Decisions
regarding our satellite constellation may affect the estimated useful life of
our existing satellites, and we may modify the depreciable life accordingly.
The cost of replacing our satellites will be substantial. Our
existing satellites have experienced circuit failures on their solar arrays.
The circuit failures our satellites have experienced to date do not limit the
power of our broadcast signal or affect our current operations. Additional
circuit failures could reduce the estimated useful life of our existing
in-orbit satellites. We
do not maintain in-orbit insurance policies covering our satellites. We
discontinued our in-orbit insurance policies covering our satellites following
a review of the health of our satellite constellation, the exclusions from
coverage contained in the available insurance, the costs of the available
insurance, and the practices of other satellite companies as to in-orbit
insurance. If
we are required to launch our spare satellite due to the in-orbit failure of
one of our orbiting satellites, our operations would be impaired until such
time as we successfully launch and commission our spare satellite, which could
take six months or more. If two or more of our satellites fail in orbit in
close proximity in time, our operations 8 could be suspended for at
least 24 months. In such event, our business would be materially impacted
and we could default on our commitments. Terrestrial
Repeaters. In some
areas with high concentrations of tall buildings, such as urban centers, 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 127 terrestrial repeaters in 95 urban areas. We plan to
deploy a significant number of additional terrestrial repeaters in the future. Other
Satellite Facilities.
We control and communicate with our satellites from our uplink facility in New
Jersey. These activities include routine satellite orbital maneuvers and
monitoring of the satellites. We also maintain earth stations in Panama and
Ecuador to control and communicate with our satellites. Studios Our
programming originates from our national broadcast studio in New York City and
smaller studios in Houston, Texas; Memphis, Tennessee; Nashville, Tennessee;
Cleveland, Ohio; Los Angeles, California; and other locations. The national
broadcast studio houses our corporate headquarters, facilities for programming
origination, programming personnel and facilities to transmit programming to
our orbiting satellites. Our
studios and transmission facilities are 100% digital, resulting in no
cumulative distortion to degrade the sound of our music and entertainment
programming. Our studios contain state-of-the-art production facilities. SIRIUS Radios We
do not manufacture, import or distribute SIRIUS radios. We do design, establish
specifications for, source parts and components for, and manage various aspects
of the logistics and production of SIRIUS radios. We have authorized select
manufacturers to produce SIRIUS radios. These radios are distributed under
various consumer brands, including the SIRIUS brand. Over time we expect to
introduce SIRIUS radios with new features, functionality and form factors. To
facilitate the sale of SIRIUS radios, we subsidize chip sets and a portion of
radio manufacturing costs to effectively reduce the price of SIRIUS radios to
our subscribers. We expect these subsidies to decrease over time. In-dash
Radios. In-dash
radios are integrated into vehicles and allow the user to listen to AM, FM or
SIRIUS with the push of a button. The SIRIUS receiver can be built into the
radio or connected as a hidden external unit. In
the auto sound aftermarket, in-dash radios are available at retailers
nationally. In-dash radios are also available to automakers for factory or
dealer installation. When factory-installed, the cost of the SIRIUS radio is
generally included in the sticker price of the vehicle and may include a
prepaid SIRIUS subscription. Plug
& Play Radios.
Plug & Play radios enable subscribers to transport a radio easily to and
from their cars, trucks, homes, offices, boats or other locations with
available adapter kits. Plug & Play radios adapt to existing audio systems
through FM modulation or direct connection and can be easily installed by a
retailer or the purchaser. In addition, satellite radio Plug & Play systems
designed for commercial truckers are available through participating truck
manufacturers, truck dealers and truck stops. A
boom box, which enables our subscribers to use their SIRIUS radios virtually
anywhere, is available for various models of Plug & Play radios. Portable
Units. In 2006, we
introduced the Stiletto 100, our first satellite radio to provide live
reception in portable mode and the first portable satellite radio with WiFi
capabilities. The Stiletto 100 allows users to capture, store and
replay up to 100 hours of live SIRIUS content or a mix of SIRIUS content and
MP3/WMA files. The Stiletto 100 also allows the user to record favorite SIRIUS
music content and bookmark and purchase songs through compatible music download
and subscription services, providing easy access to SIRIUS music and other
content. 9 FM
Modulated Radios. FM
modulated radios enable our service to be received in all vehicles with FM
radios. Home
and Commercial Units. SIRIUS home units that connect to most home stereo
systems are available nationally. In addition, various multi-tuner and
multi-zone units are available through commercial dealers and custom
installation dealers. These units allow the user to listen to the SIRIUS
service from multiple locations within a home or business. We
have also specially-designed SIRIUS home units to interface with multiple audio
and video components. In 2006, we introduced the SIRIUS Conductor home system
with a wireless controller that displays SIRIUS programming information and
controls 12 components in addition to the included receiver from up to 150 feet
away. Similarly, the SiriusConnect Home tuner provides a one-cable connection
to easily add our service to SIRIUS-ready home systems manufactured by
companies such as Eton, Thomson and Rotel. Many
SIRIUS radios include a replay feature, allowing listeners to pause, rewind
and fast forward music, sports or talk programs. A number of SIRIUS radios also
include SIRIUS-Seek, which alerts listeners when selected artists or songs are
playing; Game Alert, which prompts listeners when their favorite teams begin a
game or when scores change; Game Zone, which lists a listeners favorite team
scores on one screen; and one-touch access to traffic and weather reports for
select cities. We
signed an agreement with XM Radio to develop a unified standard for satellite
radios to enable consumers to purchase one radio capable of receiving both
SIRIUS and XM Radios services The technology relating to this unified
standard is being developed, funded and will be owned jointly by the two
companies. This unified standard is also intended to meet FCC rules that
require interoperability of both licensed satellite radio systems. International Canada. In December 2005, SIRIUS Canada launched
its
service in Canada and currently offers 110 channels of commercial-free music
and news, sports, talk and entertainment programming, including
11 channels of Canadian content and the Howard Stern 100 channel, for Cdn.
$14.99 per month. As of February 13, 2007, SIRIUS Canada had over 300,000
subscribers. Subscribers to the SIRIUS Canada service are not included in our
subscriber counts. SIRIUS
Canada is a Canadian corporation owned by us, Canadian Broadcasting Corporation
and Standard Radio Inc. Canadian Broadcasting Corporation is Canadas national
public broadcaster and one of its largest cultural institutions, and Standard
Radio Inc. is the largest privately held owner of radio stations in Canada.
SIRIUS Canadas license to operate a satellite radio service in Canada is
subject to a number of conditions, including the requirement that SIRIUS Canada
offer a number of qualifying Canadian music and talk channels. Other
regions. We are in
discussions with various parties regarding joint ventures in other countries. Other Opportunities Traffic
and Weather. In 2006,
we introduced a service that provides graphic information as to road closings,
traffic flow and incident data to consumers with in-vehicle navigation systems.
The service reports information for 45 cities that we source from a provider of
mapping and traffic data. Additional markets are expected to be introduced as
they become available. In
2006, we launched a marine weather service, featuring on-demand access to
detailed information ranging from weather and wave heights to sea surface
temperatures, for recreational boaters. The service integrates data information
directly into certain marine electronics products. This marine weather service
covers the 48 contiguous states and waters extending hundreds of miles into the
Atlantic and Pacific Oceans, Gulf of Mexico and Caribbean. 10 SIRIUS
Via Mobile Phones. In
September 2005, Sprint began offering a SIRIUS music service to its subscribers
through a built-in media player on Sprint PCS Vision SM Multimedia Phones for $6.95 per month, a portion of which we
receive.
This service includes access to 20 commercial-free SIRIUS music channels, plus
a channel devoted to artist interviews and performances. Subscribers to the
Sprint service are not included in our subscriber counts. Internet
Radio. We offer
SIRIUS subscribers the ability to listen to our music channels and select
non-music channels over the Internet as part of our base subscription price. In
2006, we launched SIRIUS Internet Radio, which we refer to as SIR. SIR is a
subscription-based internet service offering a CD-quality, Internet-only
version of our service. SIR delivers a simulcast of more than 75 channels of
our talk, entertainment, sports and music programming. We plan to add
additional content to our internet offerings in the future. Subscribers
to SIR are included in our subscriber counts. DISH
Network. We offer our
music channels to subscribers as part of certain programming packages of the
DISH Network satellite television service. Video. In 2007, we plan to introduce a video
service that will offer premium video content designed primarily for children
in the backseat of vehicles. Introduction of the service will be dependent upon
several factors, including the development and implementation of new technology
and the timing of new product introductions by distributors. We cannot predict
with certainty when this service will be introduced. Competition We
face competition for listeners, consumer electronics and audio spending, and
advertising dollars. In addition to pre-recorded entertainment purchased or
playing in cars, homes and using portable players, we compete most directly
with the following services: Traditional
AM/FM Radio. Unlike SIRIUS radio, traditional AM/FM
radio has had a well established market for its services for many years and
offers free broadcast reception paid for by commercial advertising rather than
by a subscription fee. Also, many radio stations offer information programming
of a local nature, such as local news and sports, which we do not offer as
effectively as local radio. The AM/FM radio broadcasting industry is highly
competitive with respect to listeners and advertising revenues. Some radio
stations also have begun reducing the number of commercials per hour, expanding
the range of music played on the air and experimenting with new formats in
order to compete with us. Several major radio companies have launched
advertising campaigns designed to assert the benefits of traditional local
AM/FM radio. Radio comes as a standard feature in every vehicle manufactured
without an additional cost to the consumer. Digital,
or HD, Radio. While most traditional AM/FM radio
stations broadcast by means of analog signals, the radio industry has made
significant strides in rolling out advanced digital transmission technology.
Digital broadcasting offers higher sound quality than traditional analog
signals and the multicast of as many as five stations per frequency,
significantly increasing the quality and quantity of content available to
consumers. Digital radio broadcast services have been expanding, and an
increasing number of radio stations in the U.S. have begun digital broadcasting
or are in the process of converting to digital broadcasting. Over 1,150 radio
stations in the United States currently broadcast digitally. Like with
traditional radio, digital radio is generally offered to subscribers without a
service charge. BMW recently became the first automaker to offer
factory-installed HD digital radio receivers as an option across all of its
2007 model year vehicles, and retail HD digital radios are available nationwide
at many large retailers. A
number of leading radio broadcasters have joined together to form the HD
Digital Radio Alliance to accelerate the successful rollout of digital radio.
The HD Digital Radio Alliance has announced a $250 million on-air advertising
campaign to spur the adoption of digital radio. XM
Radio. XM Radio is the other FCC licensee for
satellite radio service in the United States. XM Radio has announced that it
had 7,628,552 subscribers as of December 31, 2006. XM Radio broadcasts
certain programming that we do not offer and is offered on various car model
brands which do not also offer SIRIUS radios. 11 Digital
Music Services and Other Consumer Electronic Devices. We
face vigorous competition from various services offering digital music products
and services, including subscription music services, free peer-to-peer music
services and free streaming of digital content via the Internet. Internet
radio broadcasts have no geographic limitations and can provide listeners with
radio programming from around the country and the world. We expect that
improvements from higher bandwidths, faster modems and wider programming
selections may make Internet radio an even more significant competitor for
listening in the home and office. Technologies like WiMax will also make
internet radio more pervasive. In addition to the many free Internet streams
offered by radio companies like Clear Channel, CBS Radio or other smaller
companies, subscription Internet music services, such as Yahoo Music and
Napster, offer unlimited and fully-customizable play lists for a small fixed
fee per month. These services may be used for listening at PCs or home media
centers. The
Apple iPod ®, a portable digital music player, allows users to convert music on
compact discs to digital files and to download and purchase music and video
through Apples iTunes ® Music Store, which features over 2 million songs.
Apple sold 46.4 million iPods ® during the last four quarters. iPods ® are
compatible with many car stereos and home speaker systems. Apple has reached
agreement with automobile manufacturers to preinstall equipment in vehicles
which will allow users to play music from their iPod through the automobile
sound system. Wireless
Phone Providers. Several of the largest wireless
providers currently offer music to cellular phones. Additionally, many phones
now contain FM radio receivers. Sprint Nextel currently offers streaming music
from a variety of providers plus a music store for purchase. Verizon Wireless
offers the V Cast music service that can be played directly on a phone.
AT&T offers a variety of streaming content and has also partnered with
Apple to offer the upcoming iPhone. Next
Generation Wireless. Next generation wireless
protocols will offer unprecedented broadband coverage with enhanced data rates,
reliability, and broadcast capabilities. Sprint Nextel announced in August 2006
its plans to develop the first fourth generation nationwide mobile broadband
network, which will use the WiMAX standard, and deploy it in some markets
during 2007. The company has targeted a national rollout for 2008 and will use
Sprints extensive holdings, which cover 85 percent of the households in the
top 100 U.S. markets. When these or other services achieve ubiquitous mobile
broadband capability, the relative competitiveness of our product offering may
suffer. Direct
Broadcast Satellite and Cable Audio. A number of
companies provide specialized audio services through either direct broadcast
satellite or cable audio systems. These services are targeted to fixed
locations, mostly in-home. The radio service offered by direct broadcast satellite
and cable audio is often included as part of a package of digital services with
video service, and video customers therefore generally do not pay an additional
monthly charge for the audio service. Other
Advanced Digital Media Services. We may face
competition from businesses that have announced plans to deliver entertainment
and media content through cell phones and other wireless devices. In December
2005, Verizon Wireless announced an agreement with MediaFLO USA, a subsidiary
of QUALCOMM, to offer interactive wireless multimedia services over
MediaFLOs nationwide 700 MHz network. Verizon intends to launch commercial
service through MediaFLO during 2007 under the VCast Mobile TV brand. Modeo LLC, a
subsidiary of Crown Castle International Corp., owns nationwide spectrum in
the 1670-1675 MHz band and has developed a mobile device-based multimedia
service, which it plans to launch commercially. HiWire, an
affiliate of Aloha Partners, announced in March 2006 that it intends to
develop a nationwide mobile device-based multimedia service over Alohas
footprint of 700 MHz spectrum. In 2005,
Sprint Nextel, Comcast, Time Warner Cable, Cox Communications and
Advance/Newhouse Communications announced their formation of a joint venture
to provide 12 customers
throughout the United States access to advanced integrated entertainment
products and services, including streaming television programming, music,
video clips, games and pre-recorded DVR programs, communications and wireless
products. During 2006, the joint venture acquired wireless telecommunications
spectrum through the United States governments Advanced Wireless Services
auction, through which it intends to offer wireless communications services. 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. Any
assignment or transfer of control of our FCC license must be approved by the
FCC. Similarly, our merger with XM Radio is conditioned upon approval of
the transaction by the FCC. In
1997, we were one of two winning bidders for an FCC license to operate a
satellite digital audio radio service and provide other ancillary services. Our
FCC license expires in 2010. Prior to the expiration, we will be required to
apply for a renewal of our FCC license. We anticipate that, absent significant
misconduct on our part, the FCC will renew our license to permit operation of
our satellites for their useful lives, and grant a license for any replacement
satellites. In
some areas with high concentrations of tall buildings, such as urban centers,
signals from our satellites may be blocked and reception can be adversely
affected. In many of these areas, we have installed terrestrial repeaters to
supplement our satellite signal coverage. The FCC has not yet established rules
governing terrestrial repeaters. A rulemaking on the subject was initiated by
the FCC in March 1997 and is still pending. Many comments have been filed as
part of this rulemaking, including comments from the National Association 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 terrestrial repeaters, require us to reduce the
power of our existing terrestrial repeaters or fail to protect us from
interference by adjoining spectrum holders. In the interim, the FCC has granted
us special temporary authority to operate over 200 terrestrial repeaters and
offer our service on a non-harmful interference basis to other wireless
services. We
design, establish specifications for, source parts and components for, and
manage various aspects of the logistic and production of SIRIUS radios,
including SIRIUS radios that include FM modulators. Part 15 of the FCCs rules
establish a number of requirements relating to FM modulators, including
emissions and frequency rules. The FCC is reviewing whether the FM transmitters
in certain SIRIUS radios comply with the Commissions emissions and frequency
rules. We are cooperating with the FCC in its on-going inquiry, and have
discovered that certain SIRIUS personnel requested manufacturers to produce
SIRIUS radios that were not consistent with these rules. We are taking
significant steps to ensure that this situation does not happen again,
including the adoption of a comprehensive compliance plan, approved by our
board of directors, to ensure that our products comply with all applicable FCC
rules. We have directed manufacturers of SIRIUS radios with FM transmitters to
make the necessary changes in production to bring the radios into compliance.
We believe our radios that are currently in production comply with applicable
FCC rules. The FCCs inquiry may result in fines, additional license conditions
or other FCC actions that are detrimental to our business. In
2006, we entered into an agreement with Space Systems/Loral to design and
construct a new satellite. In September 2006, we filed an application with the
FCC to amend our license to add this satellite to our existing satellite
constellation. No one has filed comments on our application with the FCC. We
cannot predict when the FCC will act on our application, and we cannot be sure
that the modification we have requested will be granted. 13 Our
FCC license is conditioned on us certifying that our system includes a receiver
design that will permit end users to access XM Radios system. We have signed
an agreement with XM Radio to develop jointly a unified standard for satellite
radios to facilitate the ability of consumers to purchase one radio capable of
receiving both our and XM Radios services. We believe that this agreement, and
our efforts with XM Radio to develop this unified standard for satellite
radios, satisfies the interoperability condition contained in our FCC license. 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 subscription-based, non-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. As a private carrier,
we are free to set our own prices and serve customers according to our own
business judgment without economic regulation. Changes
in law or regulations relating to communications policy or to matters affecting
our service could adversely affect our ability to retain our FCC license or the
manner in which we operate. The SIRIUS Trademark We
have several registrations and approved applications in the U.S. Patent and
Trademark Office for the SIRIUS trademark and the Dog Design logo used in
connection with our products and service. We intend to maintain our trademarks
and the applications and registrations therefor. We are not aware of any
material claims of infringement or other challenges to our right to use the
SIRIUS trademark or the Dog Design logo in the United States in connection
with our products or service. Copyrights in Programming In
connection with our music programming, we must negotiate and enter into royalty
arrangements with two sets of rights holders: holders of copyrights in musical
works, or songs, and holders of copyrights in sound recordingsrecords,
cassettes, compact discs and audio files. Musical
works rights holders, generally songwriters and music publishers, are
represented by performing rights organizations such as the American Society of
Composers, Authors and Publishers, or ASCAP, Broadcast Music, Inc., or BMI, and
SESAC, Inc. These organizations negotiate fees with copyright users, collect
royalties and distribute them to the rights holders. Our public performance
license agreements with ASCAP and SESAC expired at the end of 2006. We have
entered into an interim license agreement with ASCAP and BMI to pay royalties
for our public performances of musical works by our satellite radio service,
and are in discussions regarding final licenses. If we are unable to reach
final agreements with ASCAP, BMI and SESAC, a royalty rate may ultimately be
established through litigation. Sound
recording rights holders, typically large record companies, are primarily
represented by SoundExchange, an organization which negotiates licenses and
collects and distributes royalties on behalf of record companies and performing
artists. Our agreement with SoundExchange to pay royalties for our public
performances of sound recordings by our satellite radio service expired at the
end of 2006. A proceeding has commenced before the Copyright Royalty Board of
the Library of Congress to establish the royalty rate and terms for the sound
recordings we use on our satellite radio service for 2007 through 2012. In
October 2006, we and XM Radio filed our direct case in this proceeding with the
Copyright Royalty Board and proposed a royalty rate for our satellite radio
subscription revenue. SoundExchange also submitted its direct case in this
proceeding and proposed a substantially higher royalty rate than we proposed.
The submission of direct cases is the beginning of a twelve to eighteen month
process which, absent an agreement among the parties, will result in a
determination by the Copyright Royalty Board of an applicable royalty rate. We
cannot assure that our royalty fees will remain at current levels or that
additional litigation will not arise in connection with royalty arrangements,
and we cannot predict what the costs to us of a proceeding or a settlement of
such a dispute or disputes might be. 14 Personnel As
of December 31, 2006, we had 772 employees. In addition, we rely upon a number
of consultants, other advisors and outsourced relationships. None of our
employees is represented by a labor union, and we believe that our relationship
with our employees is good. Corporate Information Sirius
Satellite Radio Inc. was incorporated in the State of Delaware as Satellite CD
Radio, Inc. on May 17, 1990. On December 7, 1992, we changed our name to CD
Radio Inc., and we formed a wholly owned subsidiary, Satellite CD Radio, Inc.,
that is the holder of our FCC license. On November 18, 1999, we changed our
name to Sirius Satellite Radio Inc. Our executive offices are located at 1221
Avenue of the Americas, 36th floor, New York, New York 10020 and our telephone
number is (212) 584-5100. Our internet address is SIRIUS.com. Our annual,
quarterly and current reports, and amendments to those reports, filed or
furnished pursuant to Section 14(a) or 15(d) of the Securities Exchange Act of
1934 may be accessed free of charge through our website after we have
electronically filed such material with, or furnished it to, the SEC.
SIRIUS.com is an inactive textual reference only, meaning that the information
contained on the website is not part of this Annual Report on Form 10-K and is
not incorporated in this report by reference. Executive Officers of the Registrant Certain
information regarding our executive officers is provided below: Name Age Position Mel Karmazin 63 Chief Executive Officer Scott A. Greenstein 47 President, Entertainment
and Sports James E. Meyer 52 President, Sales and
Operations Patrick L. Donnelly 45 Executive Vice President,
General Counsel and Secretary David J. Frear 50 Executive Vice President
and Chief Financial Officer Mel Karmazin has served as our Chief
Executive Officer and a member of our board of directors since November 2004.
Prior to joining us, Mr. Karmazin was President and Chief Operating Officer and
a member of the board of directors of Viacom Inc. from May 2000 until June
2004. Prior to joining Viacom, Mr. Karmazin was President and Chief Executive
Officer of CBS Corporation from January 1999 and a director of CBS Corporation
from 1997 until its merger with Viacom in May 2000. He was President and Chief
Operating Officer of CBS Corporation from April 1998 through December 1998. Mr.
Karmazin joined CBS Corporation in December 1996 as Chairman and Chief
Executive Officer of CBS Radio and served as Chairman and Chief Executive
Officer of the CBS Station Group (Radio and Television) from May 1997 to April
1998. Prior to joining CBS Corporation, Mr. Karmazin served as President and
Chief Executive Officer of Infinity Broadcasting Corporation from 1981 until
its acquisition by CBS Corporation in December 1996. Mr. Karmazin served as
Chairman, President and Chief Executive Officer of Infinity from December 1998
until the merger of Infinity Broadcasting Corporation with Viacom in February
2001. Scott A. Greenstein has served as our
President, Entertainment and Sports, since May 2004. Prior to May 2004, Mr.
Greenstein was Chief Executive Officer of The Greenstein Group, a media and
entertainment consulting firm. From 1999 until 2002, he was Chairman of USA
Films, a motion picture production, marketing and distribution company. From
1997 until 1999, Mr. Greenstein was Co-President of October Films, a motion
picture production, marketing and distribution company. Prior to joining
October Films, Mr. Greenstein was Senior Vice President of Motion Pictures,
Music, New Media and Publishing at Miramax Films, and held senior positions at
Viacom Inc., a diversified media and entertainment company. James E. Meyer has served as our President,
Sales and Operations, since May 2004. Prior to May 2004, Mr. Meyer was
President of Aegis Ventures Incorporated, a consulting firm that provides
general management services. From December 2001 until 2002, Mr. Meyer served as
special advisor to the Chairman of Thomson S.A., a leading consumer electronics
company. From January 1997 until December 2001, Mr. Meyer served as the Senior
Executive Vice President for Thomson as well as the Chief Operating Officer for
Thomson Consumer Electronics. 15 From 1992 until 1996, Mr.
Meyer served as Thomsons Senior Vice President of Product Management. Mr.
Meyer is a director of Gemstar-TV Guide International, Inc. Patrick L. Donnelly has served as our
Executive Vice President, General Counsel and Secretary since May 1998. From
June 1997 to May 1998, he was Vice President and deputy general counsel of ITT
Corporation, a hotel, gaming and entertainment company that was acquired by Starwood
Hotels & Resorts Worldwide, Inc. in February 1998. From October 1995 to
June 1997, he was assistant general counsel of ITT Corporation. Prior to
October 1995, Mr. Donnelly was an associate at the law firm of Simpson Thacher
& Bartlett LLP. David J. Frear has served as our Executive
Vice President and Chief Financial Officer since June 2003. From July 1999
through February 2003, Mr. Frear was Executive Vice President and Chief
Financial Officer of Savvis Communications Corporation, a global managed
service provider, delivering internet protocol applications for business
customers. From October 1999 through February 2003, Mr. Frear also served as a
director of Savvis. Mr. Frear was an independent consultant in the
telecommunications industry from August 1998 until June 1999. From October 1993
to July 1998, Mr. Frear was Senior Vice President and Chief Financial Officer
of Orion Network Systems Inc., an international satellite communications
company that was acquired by Loral Space & Communications Ltd. in March
1998. From 1990 to 1993, Mr. Frear was Chief Financial Officer of Millicom
Incorporated, a cellular paging and cable television company. Prior to joining
Millicom, he was an investment banker at Bear, Stearns & Co., Inc. and
Credit Suisse. Employment Agreements We
have entered into an employment agreement with each of our executive officers,
and these agreements are described below. Mel Karmazin. In November 2004, we entered
into a five-year
agreement with Mel Karmazin to serve as our Chief Executive Officer. We pay Mr.
Karmazin a base salary of $1,250,000 per year, and annual bonuses in an amount
determined each year by the Compensation Committee of our board of directors. Pursuant
to our agreement with Mr. Karmazin, his stock options and shares of restricted
stock will vest upon his termination of employment for good reason, upon his
death or disability and in the event of a change in control. In the event Mr.
Karmazins employment is terminated by us without cause, his unvested stock
options and shares of restricted stock will vest and become exercisable, and he
will receive his current base salary for the remainder of the term and any
earned but unpaid annual bonus. In
the event that any payment we make, or benefit we provide, to Mr. Karmazin
would require him to pay an excise tax under Section 280G of the United States
Internal Revenue Code, we have agreed to pay Mr. Karmazin the amount of such
tax and such additional amount as may be necessary to place him in the exact
same financial position that he would have been in if the excise tax was not
imposed. Scott A. Greenstein. Mr. Greenstein has
agreed to serve as our
President, Entertainment and Sports, through July 2009, and we pay Mr. Greenstein
an annual salary of $800,000. If
Mr. Greensteins employment is terminated without cause or he terminates his
employment for good reason, he is entitled to receive a lump sum payment equal
to (1) his base salary in effect from the termination date through July 2009
and (2) any annual bonuses, at a level equal to 60% of his base salary, that
would have been customarily paid during the period from the termination date
through July 2009. In the event Mr. Greensteins employment is terminated without
cause or he terminates his employment for good reason, we are also obligated to
continue his medical, disability and life insurance benefits for eighteen
months following his termination. If,
following the occurrence of a change in control, Mr. Greenstein is terminated
without cause or he terminates his employment for good reason, we are obligated
to pay Mr. Greenstein the lesser of (1) four times his base salary and (2) 80%
of the multiple of base salary, if any, that our chief executive officer would
be entitled to receive under his or her employment agreement if he or she was
terminated without cause or terminated for good reason following such change in
control. We are also obligated to continue Mr. Greensteins medical, disability
and life insurance benefits, or pay him an amount sufficient to replace these
benefits, until the third anniversary of his termination date. 16 In
the event that any payment we make, or benefit we provide, to Mr. Greenstein
would require him to pay an excise tax under Section 280G of the United States
Internal Revenue Code, we have agreed to pay Mr. Greenstein the amount of such
tax and such additional amount as may be necessary to place him in the exact
same financial position that he would have been in if the excise tax was not
imposed. James E. Meyer. Mr. Meyer has agreed to
serve as our
President, Sales and Operations, until April 2007 and we pay Mr. Meyer an
annual salary of $900,000. If,
following the occurrence of a change in control, Mr. Meyer is terminated
without cause or he terminates his employment for good reason, we are obligated
to pay Mr. Meyer the lesser of (1) four times his base salary, and (2) 80% of
the multiple of base salary, if any, that our chief executive officer would be
entitled to receive under his or her employment agreement if he or she was
terminated without cause or terminated for good reason following such change of
control. We are also obligated to continue Mr. Meyers medical, disability and
life insurance benefits, or pay him an amount sufficient to replace these
benefits, until the third anniversary of his termination date. In
the event that any payment we make, or benefit we provide, to Mr. Meyer would
require him to pay an excise tax under Section 280G of the United States
Internal Revenue Code, we have agreed to pay Mr. Meyer the amount of such tax
and such additional amount as may be necessary to place him in the exact same
financial position that he would have been in if the excise tax were not
imposed. Upon
the expiration of Mr. Meyers employment agreement in April 2007, we have
agreed to offer Mr. Meyer a one-year consulting agreement. We expect to
reimburse Mr. Meyer for all of his reasonable out-of-pocket expenses associated
with the performance of his obligations under this consulting agreement, but do
not expect to pay him any cash compensation. Mr. Meyers stock options will
continue to vest and will be exercisable during the term of this consulting
agreement. Patrick L. Donnelly. Mr. Donnelly has
agreed to serve as our Executive
Vice President, General Counsel and Secretary, through April 2007, and we pay
Mr. Donnelly an annual base salary of $450,000. If
Mr. Donnellys employment is terminated without cause or he terminates his
employment for good reason, we are obligated to pay Mr. Donnelly his annual
salary and the annual bonus last paid to him and to continue his medical,
disability and life insurance benefits for one year. In
the event that any payment we make, or benefit we provide, to Mr. Donnelly
would require him to pay an excise tax under Section 280G of the United States
Internal Revenue Code, we have agreed to pay Mr. Donnelly the amount of such
tax and such additional amount as may be necessary to place him in the exact
same financial position that he would have been in if the excise tax was not
imposed. David J. Frear. Mr. Frear has agreed to
serve as our
Executive Vice President and Chief Financial Officer through July 2008, and we
pay Mr. Frear an annual salary of $525,000. If
Mr. Frears employment is terminated without cause or he terminates his
employment for good reason, we are obligated to pay Mr. Frear his annual salary
and the annual bonus last paid to him. In
the event that any payment we make, or benefit we provide, to Mr. Frear would
require him to pay an excise tax under Section 280G of the United States
Internal Revenue Code, we have agreed to pay Mr. Frear the amount of such tax
and such additional amount as may be necessary to place him in the exact same
financial position that he would have been in if the excise tax was not
imposed. Additional
information regarding the compensation for Messrs. Karmazin, Greenstein, Meyer,
Donnelly and Frear will be included in our definitive proxy statement for our
2007 annual meeting of stockholders to be held on Thursday, May 24, 2007. In
addition to the other information in this Annual Report on Form 10-K, including
the information under the caption Competition, the following risk factors
should be considered carefully in evaluating us and our business. This Annual
Report on Form 10-K contains forward-looking statements within the meaning of
the federal securities laws. Actual results and the timing of events could
differ materially from those projected in forward- 17 looking statements due to a number of factors, including
those set forth below and elsewhere in this Annual Report on Form 10-K. See
Special Note Regarding Forward-Looking Statements. Failure of our satellites would significantly
damage our business. Our
three satellites were launched in 2000. We do not maintain in-orbit insurance
policies covering our satellites. We estimate that two of our in-orbit
satellites will have a 13 year useful life and our third in-orbit satellite
will have a 15 year useful life from the time of launch. In 2006, we adjusted
the useful lives of two of our in-orbit satellites from 15 years to 13 years to
reflect the way we intend to operate the constellation. Our operating results
would be materially adversely affected if the useful life of our satellites is
significantly shorter than we expect, whether as a result of a satellite
failure or technical obsolescence, and we fail to launch replacement satellites
in a timely manner. The
useful lives of our satellites will vary and depend on a number of factors,
including: degradation and durability
of solar panels; quality of construction; random failure of
satellite components, which could result in significant damage to or loss of
a satellite; amount of fuel our
satellites consume; and damage or destruction by
electrostatic storms or collisions with other objects in space, which occur
only in rare cases. Our
satellites have experienced circuit failures on their solar arrays. The circuit
failures our satellites have experienced do not affect our current operations.
Additional circuit failures could reduce the estimated useful life of our
existing in-orbit satellites. In
the ordinary course of operation, satellites experience failures of component
parts and operational and performance anomalies. Components on our in-orbit
satellites have failed, and from time to time we have experienced anomalies in
the operation and performance of our satellites. These failures and anomalies
are expected to continue in the ordinary course, and it is impossible to
predict if any of these future events will have a material adverse effect on
our operations or the useful life of our existing in-orbit satellites. If
one of our three satellites fails in orbit, our service would be impaired until
such time as we successfully launch and commission our spare satellite, which
would take six months or more. If two or more of our satellites fail in orbit
in close proximity in time, our service could be suspended for at least 24
months. In such event, our business would be materially impacted and we could
default on our commitments. In
June 2006, we entered into an agreement with Space Systems/Loral to design and
construct a new satellite. The new satellite is expected to be completed in the
fourth quarter of 2008, and launched shortly thereafter. Satellite launches
have significant risks, including launch failure, damage or destruction of the
satellite during launch and failure to achieve a proper orbit or operate as
planned. Our agreement with Space Systems/Loral does not protect us against the
risks inherent in a satellite launch or in-orbit operations. Failure to comply with FCC requirements could
damage our business. As
the holder of an FCC license to operate a satellite radio service in the United
States, we are subject to FCC rules and regulations. The terms of our license
require us to meet certain conditions, including designing a receiver that will
permit end users to access XM Radios system; coordination of our satellite
radio service with radio systems operating in the same range of frequencies in
neighboring countries; and coordination of our communications links to our
satellites with other systems that operate in the same frequency band.
Non-compliance by us with these conditions could result in fines, additional
license conditions, license revocation or other detrimental FCC actions. 18 The
FCC is reviewing whether the FM transmitters in certain SIRIUS radios comply
with the Commissions emissions and frequency rules. We are cooperating with
the FCC in its on-going inquiry, and have discovered that certain SIRIUS
personnel requested manufacturers to produce SIRIUS radios that were not
consistent with these rules. We are taking significant steps to ensure that
this situation does not happen again, including the adoption of a comprehensive
compliance plan, approved by our board of directors, to ensure that in the
future our products comply with all applicable FCC rules. We have directed
manufacturers of SIRIUS radios with FM transmitters to make the necessary
changes in production to bring the radios into compliance. We believe our
radios that are currently in production comply with applicable FCC rules.
SIRIUS radios that include compliant FM transmitters may be subject to some
transmission noise, which may result in us encouraging professional
installation in some cases. We continue to study methods to improve the
customer experience for our subscribers using SIRIUS radios that rely on FM
transmissions. The FCCs inquiry may result in fines, additional license
conditions or other FCC actions that are detrimental to our business. The
FCC has not yet issued final rules permitting us to operate and deploy
terrestrial repeaters to fill gaps in our satellite coverage. We are operating
our terrestrial repeaters on a non-interference basis pursuant to a grant of
special temporary authority from the FCC. The FCCs final terrestrial repeater
rules may require us to reduce the power of our terrestrial repeaters and limit
our ability to deploy additional repeaters. If the FCC requires us to reduce
significantly the power of our terrestrial repeaters, this would have an
adverse effect on the quality of our service in certain markets and/or cause us
to alter our terrestrial repeater infrastructure at a substantial cost. If the
FCC limits our ability to deploy additional terrestrial repeaters, our ability
to improve any deficiencies in our service quality that may be identified in
the future would be adversely affected. In
October 2006, we ceased operating 11 of our terrestrial repeaters which we
discovered had been operating at variance to the specifications and applied to
the FCC for new authority to resume operating these repeaters. Our failure to
comply with the initial special temporary authority could result in disciplinary
action by the FCC, although we do not believe such action would have a material
adverse effect on our business or operations. We may from time to time modify our business plan, and these
changes could adversely affect us and our financial condition. We
regularly evaluate our plans and strategy. These evaluations often result in
changes to our plans and strategy, some of which may be material and
significantly change our cash requirements or cause us to achieve cash flow
breakeven at a later date. These changes in our plans or strategy may include:
the acquisition of unique or compelling programming; the introduction of new
features or services; significant new or enhanced distribution arrangements;
investments in infrastructure, such as satellites, equipment or radio spectrum;
and acquisitions of third parties that own programming, distribution,
infrastructure, assets, or any combination of the foregoing. To
fund incremental cash requirements, or as market opportunities arise, we may
choose to raise additional funds through the sale of additional debt
securities, equity securities or a combination of debt and equity securities.
The incurrence of indebtedness would result in increased fiscal obligations and
could contain additional restrictive covenants. The sale of additional equity
or convertible debt securities would result in dilution to our stockholders.
These additional sources of funds may not be available or, if available, may
not be available on terms favorable to us. Our business might never become profitable. As
of December 31, 2006, we had an accumulated deficit of approximately $3.8
billion. We expect our cumulative net losses to grow as we make payments under
various contracts, incur marketing and subscriber acquisition costs and make
interest payments on our debt. If we are unable ultimately to generate
sufficient revenues to become profitable, we could default on our commitments
and may have to discontinue operations or seek a purchaser for our business or
assets. Programming is an important part of our service, and the
costs to renew our programming arrangements may be more than anticipated. Third-party
content is an important part of our service, and we compete with many parties
for content. We have entered into a number of important content arrangements,
including agreements with the NFL, Howard Stern and NASCAR, which require us to
pay substantial sums. Our agreement with the NFL expires at the end of the 19 2010-2011 NFL season; our
agreement with Howard Stern expires in December 2010; and our agreement with
NASCAR expires in 2011. As these agreements expire, we may not be able to
negotiate renewals of one or more of these agreements, or renew such agreements
at costs we believe are attractive. In
addition, we may not be able to obtain additional third-party content within
the costs contemplated by our business plan. We must negotiate and enter into
music programming royalty arrangements with BMI, ASCAP, SESAC and
SoundExchange. We are currently party to a proceeding before the Copyright
Royalty Board of the Library of Congress to establish the royalty rate and
terms for the sound recordings we use on our satellite radio service for the
period for 2007 through 2012. Such royalty arrangements may be more costly than
anticipated. We cannot assure that our royalty fees will remain at current
levels or that additional arbitration or litigation will not arise in
connection with royalty arrangements, and we cannot predict what the costs to
us of a proceeding or a settlement of such a dispute or disputes might be. Higher than expected costs of attracting new subscribers and
retaining current subscribers could adversely affect our financial performance
and operating results. We
are spending substantial funds on advertising and marketing and in transactions
with automakers, radio manufacturers, retailers and others to obtain and
attract subscribers. If the costs of attracting and retaining subscribers are
greater than expected, our financial performance and operating results could be
adversely affected. Higher subscriber turnover could adversely affect our
financial performance and operating results. We
are experiencing, and expect to continue to experience in the future,
subscriber turnover, or churn. High subscriber turnover, or our inability to
attract customers to our service, would adversely affect our financial
performance and operating results. Weaker than expected market and advertiser acceptance of our
service could adversely affect our advertising revenue and results of
operations. Our
ability to generate advertising revenues is directly affected by the number of
subscribers to our service and the amount of time subscribers spend listening
to our talk and entertainment channels or our traffic and weather service. Our
ability to generate advertising revenues also depends on several factors,
including the level and type of market penetration of our service, competition
for advertising dollars from other media, and changes in the advertising
industry and economy generally. We directly compete for audiences and
advertising revenues with traditional AM/FM radio stations, some of which
maintain longstanding relationships with advertisers and possess greater
resources than we do. We attract a substantial number of our new subscribers during
the fourth quarter and our inability to deliver competitive products during the
fourth quarter could have a material adverse affect on our operations. We
attract a disproportionate share of our new subscribers each year during the
fourth quarter because of the holiday season. For example, in 2006 we attracted
approximately 33% of our new subscribers during the fourth quarter. As a
result, our failure to properly manage radio inventory, respond to changing
technology and competitive pressures or deliver a competitive product during
the fourth quarter could significantly reduce our number of new subscribers and
have an adverse affect on our operations. We also depend on third parties to manufacture,
distribute, market and sell SIRIUS radios, and their failure to perform during
the fourth quarter could have an adverse affect on our operations. Failure of third parties to perform could adversely affect
our business. Our
business depends in part on the efforts of third parties, especially the
efforts of: automakers that
manufacture, market and sell vehicles capable of receiving our service, but
in many cases have no obligations to do so; consumer electronics
manufacturers that manufacture and distribute SIRIUS radios; companies that manufacture
and sell integrated circuits for SIRIUS radios; programming providers and
on-air talent, including Howard Stern; retailers that market and
sell SIRIUS radios and promote subscriptions to our service; and third party vendors that
have designed, built, support or operate important elements of our system,
such 20 as our customer service
facilities. If
one or more of these third parties does not perform in a sufficient or timely
manner, our business will be adversely affected and we could be placed at a
long-term disadvantage. The
sale of vehicles with SIRIUS radios is an important source of subscribers for
us. To the extent sales of vehicles by automakers slow, our subscriber growth
could be adversely impacted. In addition, we do not manufacture satellite
radios or accessories, and we depend on manufacturers and others for the
production of SIRIUS radios and their component parts. If one or more
manufacturers does not produce radios in a sufficient quantity to meet demand,
or if such radios were not to perform as advertised or were to be defective,
sales of our service and our reputation could be adversely affected. We may be exposed to liabilities associated with the design,
manufacture and distribution of SIRIUS radios. We
do not manufacture, import, or distribute SIRIUS radios. We do design,
establish specifications for, source parts and components for, and manage
various aspects of the logistics and production of SIRIUS radios. As a result
of these activities, we may be exposed to liabilities associated with the
design, manufacture and distribution of SIRIUS radios that the providers of an
entertainment service would not customarily be subject to, such as liabilities
for design defects, patent infringement and compliance with applicable laws. 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 or less competitive in the marketplace. Our substantial indebtedness could adversely affect our
financial health. As
of December 31, 2006, we had approximately $1.1 billion of indebtedness. We may
incur more debt if we believe we can raise money on favorable terms. A
significant portion of our indebtedness contains restrictive covenants. Our
indebtedness could: limit our flexibility in
planning for, or reacting to, changes in our business and industry; limit our ability to
borrow additional funds; 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, possibly reducing the availability of our cash flow to fund
working capital, capital expenditures, and other general corporate purposes;
and place us at a competitive
disadvantage compared to competitors that have less debt. Failure
to comply with the covenants contained in the indentures governing our debt
could result in an event of default, which, if not cured or waived, could cause
us to discontinue operations or seek a purchaser for our business or assets. Our national broadcast studio, terrestrial repeater network,
satellite uplink facility or other ground facilities could be damaged by
natural catastrophes or terrorist activities. An
earthquake, tornado, flood, terrorist attack or other catastrophic event could
damage our national broadcast studio, terrestrial repeater network or satellite
uplink facility, interrupt our service and harm our business. We do not have
replacement or redundant facilities that can be used to assume the functions of
our terrestrial repeater network, national broadcast studio or satellite uplink
facility in the event of a catastrophic event. Any
damage to the satellite that transmits to our terrestrial repeater network
would likely result in degradation of our service for some subscribers and
could result in complete loss of service in certain areas. Damage to our
national broadcast studio would restrict our programming production and require
us to obtain programming from third parties to continue our service. Damage to
our satellite uplink facility could result in a complete loss of service until
we could identify a suitable replacement facility and transfer our operations
to that site. 21 Consumers could pirate our service. Individuals
who engage in piracy may be able to obtain or rebroadcast our satellite radio
service without paying the subscription fee. Although we use encryption
technology to mitigate the risk of signal theft, such technology may not be
adequate to prevent theft of our signal. If signal theft becomes widespread, it
could harm our business. Risks
Relating to the Pending Merger with XM Radio Uncertainty
about the merger and diversion of management could harm us or the combined
company, whether or not the merger is completed. In
response to the announcement of the merger, existing or prospective
subscribers, retailers, radio manufacturers, automakers and programming
providers of ours may delay or defer their purchasing or other decisions
concerning us or they may seek to change their existing business relationships
with us. In addition, as a result of the merger, current and prospective
employees could experience uncertainty about their future with us or the combined
company. These uncertainties may impair our ability to retain, recruit or
motivate key personnel. Completion of the merger will also require a
significant amount of time and attention from our management. The diversion of
management attention away from ongoing operations could adversely affect our
business relationships. If the merger is not completed by the end of 2007 as
currently anticipated, the adverse effects of these uncertainties and the
diversion of management could be exacerbated by the delay. Failure to
complete the merger for
regulatory or other reasons could adversely affect our stock price and our
future business and financial results. Completion
of the merger is conditioned upon, among other things, the receipt of certain
regulatory and antitrust approvals, including from the FCC and under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval
of our and XM Radios stockholders. There is no assurance that we will receive
the necessary approvals or satisfy the other conditions necessary for
completion of the merger. Failure to complete the pending merger would prevent
us from realizing the anticipated benefits of the merger. We will also remain
liable for significant transaction costs, including legal and accounting fees,
whether or not the merger is completed. In addition, the current market price
of our common stock may reflect a market assumption that the merger will occur,
and a failure to complete the merger could result in a negative perception by the
market of us generally and a resulting decline in the market price of our
common stock. The anticipated benefits of the merger may
not be realized fully or at all or may take longer to realize than expected. The
merger involves the integration of two companies that have previously operated
independently. Due to legal restrictions, we have not conducted any integration
planning for the two companies. The combined company will be required to devote
significant management attention and resources to integrating the two
companies. Delays in this process could adversely affect the combined companys
business, financial results, financial condition and stock price. Even if we
are able to integrate our business operations successfully, there can be no
assurance that this integration will result in the realization of the full
benefits of synergies, cost savings, innovation and operational efficiencies
that we currently expect from this integration or that these benefits will be
achieved within the anticipated time frame. Additionally,
as a condition to their approval of the merger, regulatory agencies may impose
requirements, limitations or costs or require divestitures or place
restrictions on the conduct of the combined companys business. If we agree to
these requirements, limitations, costs, divestitures or restrictions, our
ability to realize the anticipated benefits of the merger may be impaired. Item 1B. Unresolved
Staff Comments None. 22 We
lease space in office buildings in New York, New York, to house our
headquarters and national broadcast studios. We also lease office or studio
space in Lawrenceville, New Jersey; Farmington Hills, Michigan; Nashville,
Tennessee; Memphis, Tennessee; Los Angeles, California; and Houston, Texas. The
aggregate annual rent for these properties was approximately $7,191,000 for the
year ended December 31, 2006. We
own property that we use for technical and engineering facilities in Vernon,
New Jersey. We also lease properties in Panama and Ecuador that we use as earth
stations to command and control our satellites. FCC
Matters. In April
2006, we learned that two manufacturers of SIRIUS radios and XM Radio had
received inquiries from the Federal Communications Commission as to whether the
FM transmitters in their products complied with the FCCs emissions and
frequency rules. We promptly began an internal review of the compliance of the
FM transmitters in a number of our radios. In June 2006, we learned that a
third manufacturer of SIRIUS radios had received an inquiry from the Federal
Communications Commission as to whether the FM transmitters in its products
complied with the FCCs emissions and frequency rules. In June 2006, we
received a letter from the FCC making similar inquiries. In July 2006, we
responded to the letter from the FCC in respect of the preliminary results of
our review. In August 2006, we received a follow-up letter of inquiry from the
FCC and responded to the FCCs further inquiry. We continue to cooperate with
the FCCs inquiry. During
our internal review, we determined that certain of our radios with FM
transmitters were not compliant with FCC rules. We have taken a series of
actions to correct the problem. In
connection with our internal review, we discovered that certain SIRIUS
personnel requested manufacturers to produce SIRIUS radios that were not
consistent with the FCCs rules. As a result of this review, we are taking
significant steps to ensure that this situation does not happen again,
including the adoption of a comprehensive compliance plan, approved by our
board of directors, to ensure that in the future our products comply with all
applicable FCC rules. The
FCC is continuing its review of our products. The FCCs laboratory has tested a
number of our products and found them to be compliant with the FCCs rules. We
believe our radios that are currently in production comply with applicable
FCCs rules. No health or safety issues are involved with these SIRIUS radios
and radios which are factory-installed in new vehicles are not affected. We
have retained the services of an engineering compliance officer to report to
our Vice President of Internal Audit, who then reports to our Audit Committee. In
October 2006, we ceased operating 11 of our terrestrial repeaters which we
discovered had been operating at variance to the specifications and applied to
the FCC for new authority to resume operating these repeaters. Copyright
Royalty Board Proceeding.
We are a party to a proceeding before the Copyright Royalty Board of the
Library of Congress to establish the royalty rate and terms for the sound
recordings we use on our satellite radio service for the period for 2007
through 2012. In October 2006, we and XM filed our direct case in this
proceeding with the Copyright Royalty Board and proposed a royalty rate for our
satellite radio subscription revenue. The
Copyright Royalty Board must set a rate that is calculated to achieve four
statutory objectives: to maximize the
availability of creative works to the public; to afford the copyright
owner a fair return for his creative work and the copyright user a fair
income under existing economic conditions; to reflect the relative
roles of the copyright owner and the copyright user in the product made
available to the public with respect to relative creative contribution,
technological contribution, capital investment, cost, risk and contribution
to the opening of new markets for creative expression and media for their 23 communication; and to minimize any disruptive
impact on the structure of the industries involved and on generally
prevailing industry practices. We
believe that the fee we proposed achieves these objectives and is consistent in
principle with the fee established under the same standard for digital cable
audio. SoundExchange,
the organization that collects and distributes royalties from various digital
music services on behalf of artists and music labels, simultaneously submitted
its direct case in this proceeding and proposed a substantially higher royalty
rate than we proposed. This submission of direct cases is the beginning of a
twelve to eighteen month process which, absent an agreement among the parties,
will result in a determination by the Copyright Royalty Board of an applicable
royalty rate. U.S.
Electronics Arbitration.
U.S. Electronics Inc., a licensed manufacturer and distributor of SIRIUS
radios, has commenced an arbitration proceeding against us. U.S. Electronics
alleges that we breached our contract, failed to pay monies owed under the
contract, interfered with U.S. Electronics relationships with retailers and
manufacturers, and withheld information relating to the FCCs inquiring into
SIRIUS radios that include FM modulators. U.S. Electronics is seeking $48
million in damages. We believe that approximately $41 million of these damages
are barred by the limitation of liability provisions contained in the contract
between us and U.S. Electronics. We are vigorously defending this action. Other
Matters. In the
ordinary course of business, we are a defendant in various lawsuits and
arbitration proceedings, including actions filed by former employees, parties
to contracts or leases and owners of patents, trademarks, copyrights or other
intellectual property. None of these actions are, in our opinion, likely to
have a material adverse effect on our business or financial results. Item
4. Submission of Matters to a Vote of Security Holders No
matters were submitted to a vote of security holders during the fourth quarter
of 2006. 24 Market For Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities Our
common stock is traded on the Nasdaq Global Select Market under the symbol
SIRI. The following table sets forth the high and low closing bid price for
our common stock, as reported by Nasdaq, for the periods indicated below: High Low Year ended December 31, 2005 First Quarter $ 7.64 $ 5.15 Second Quarter 6.58 4.67 Third Quarter 7.39 6.39 Fourth Quarter 7.87 5.86 Year ended December 31, 2006 First Quarter $ 6.57 $ 4.45 Second Quarter 5.41 3.68 Third Quarter 4.61 3.65 Fourth Quarter 4.29 3.54 On
February 26, 2007, the closing bid price of our common stock on the Nasdaq
Global Select Market was $3.74 per share. On February 26, 2007, there were
approximately 950,000 beneficial holders of our common stock. We have never
paid cash dividends on our common stock. We currently intend to retain
earnings, if any, for use in our business and do not anticipate paying any cash
dividends in the foreseeable future. Item 6. Selected
Financial Data Our
selected financial data set forth below with respect to the consolidated
statements of operations for the years ended December 31, 2006, 2005 and
2004, and with respect to the consolidated balance sheets at December 31,
2006 and 2005, are derived from our consolidated financial statements audited
by Ernst & Young LLP, independent registered public accounting firm,
included in Item 8 of this Annual Report on Form 10-K. Our selected financial
data set forth below with respect to the consolidated statements of operations
for the years ended December 31, 2003 and 2002, and with respect to the
consolidated balance sheets at December 31, 2004, 2003 and 2002 are
derived from our consolidated financial statements audited by Ernst & Young
LLP, which are not included in this Annual Report. This selected financial data
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included in Item 8 of this Annual Report and
Managements Discussion and Analysis of Financial Condition and Results of
Operations. 25 For the Years Ended December 31, 2006 2005 2004 2003 2002 (In thousands, except per share amounts) Statements of Operations Data: Total revenue $ 637,235 $ 242,245 $ 66,854 $ 12,872 $ 805 Loss from operations (1,067,724 ) (829,140 ) (678,304 ) (437,530 ) (313,127 ) Net loss(1) (1,104,867 ) (862,997 ) (712,162 ) (226,215 ) (422,481 ) Net loss applicable to common stockholders(1) (1,104,867 ) (862,997 ) (712,162 ) (314,423 ) (468,466 ) Net loss per share applicable to common
stockholders (basic and diluted) $ (0.79 ) $ (0.65 ) $ (0.57 ) $ (0.38 ) $ (6.13 ) Weighted average common shares outstanding
(basic and diluted) 1,402,619 1,325,739 1,238,585 827,186 76,394 Balance Sheet Data: Cash and cash equivalents $ 393,421 $ 762,007 $ 753,891 $ 520,979 $ 18,375 Marketable securities 15,500 117,250 5,277 28,904 155,327 Restricted investments 77,850 107,615 97,321 8,747 7,200 Total assets 1,658,528 2,085,362 1,957,613 1,617,317 1,340,940 Long-term debt, net of current portion 1,068,249 1,084,437 656,274 194,803 670,357 Accrued interest, net of current portion 46,914 Preferred stock 531,153 Accumulated deficit (3,833,720 ) (2,728,853 ) (1,865,856 ) (1,153,694 ) (927,479 ) Stockholders (deficit) equity(2) (389,071 ) 324,968 1,000,633 1,325,194 36,846 (1) Net loss and net loss
applicable to common stockholders for the year ended December 31, 2003
included other income of $256,538 related to our debt restructuring. (2) No cash dividends were
declared or paid in any of the periods presented. Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of events
could differ materially from those projected in forward-looking statements due
to a number of factors, including those described under Item 1ARisk Factors
and elsewhere in this Annual Report. See Special Note Regarding
Forward-Looking Statements. (All dollar amounts referenced in this Item 7 are
in thousands, unless otherwise stated) Executive Summary Overview: We
are a satellite radio provider in the United States. We currently broadcast
over 130 channels of programming to listeners across the country. We offer 69 channels
of 100% commercial-free music and 65 channels of sports, news, talk,
entertainment, traffic and weather for a monthly subscription fee of $12.95. We
broadcast through our proprietary satellite radio system, which currently
consists of three orbiting satellites, 127 terrestrial repeaters that receive
and retransmit our signal, a satellite uplink facility and our studios.
Subscribers receive our service through SIRIUS radios, which are sold by
automakers, consumer electronics retailers, mobile audio dealers and through
our website. Subscribers can also receive our music channels and certain other
channels over the Internet. Our
music channels are available to DISH satellite television subscribers and
certain of our music channels are offered to Sprint subscribers over
multi-media handsets. We also offer traffic and weather data services for a
separate fee. Subscribers to DISH satellite television, Sprint and our traffic
and weather data services are not included in our subscriber count. In
2005, SIRIUS Canada Inc., a Canadian corporation owned by us, Canadian
Broadcasting Corporation and Standard Radio Inc., received a license from the
Canadian Radio-television and Telecommunications Commission to offer a
satellite radio service in Canada.
SIRIUS Canada offers 110 channels of commercial-free 26 music and
news, sports, talk and entertainment programming, including 11 channels of
Canadian content. Subscribers to the SIRIUS Canada service are not included in
our subscriber count. SIRIUS
radios are primarily distributed through retailers; automakers, or OEMs; and
through our website. SIRIUS radios can be purchased at major retailers,
including Best Buy; Circuit City; Crutchfield; Costco; Target; Wal-Mart; and on
an exclusive basis through RadioShack. On December 31, 2006, SIRIUS radios were
available at more than 25,000 retail locations. We have exclusive agreements
with DaimlerChrysler, Ford, Kia, Mitsubishi, BMW, Rolls-Royce, Volkswagen and
Bentley to offer SIRIUS radios as factory or dealer-installed equipment. We
also have relationships with Nissan, Infiniti, Toyota, Lexus, Scion and Subaru
to offer SIRIUS radios as factory or dealer-installed equipment. As of December
31, 2006, SIRIUS radios were available as a factory-installed option in 132
vehicle models and as a dealer-installed option in 17 vehicle models. SIRIUS
radios are also offered to renters of Hertz vehicles at airport locations
nationwide. As
of December 31, 2006, we had 6,024,555 subscribers compared with 3,316,560
subscribers as of December 31, 2005. Our subscriber totals include subscribers
under our regular pricing plans; subscribers that have prepaid, including
payments received from automakers for prepaid subscriptions included in the sale
or lease price of a new vehicle; active SIRIUS radios under our agreement with
Hertz; and subscribers to SIRIUS Internet Radio, our Internet service. We
believe our ability to attract and retain subscribers depends in large part on
creating and sustaining distribution channels for SIRIUS radios, the strength
of the SIRIUS brand, and on the quality and entertainment value of our
programming. We expect to concentrate our future efforts on enhancing and
refining our programming, whether through additional agreements with third
parties or our own creative efforts; introducing SIRIUS radios with new
features and functions; and expanding the distribution of SIRIUS radios through
arrangements with automakers and through additional retail points-of-sale. Our
primary source of revenue is subscription fees, with most of our customers
subscribing to SIRIUS on either an annual or a monthly basis. We offer
discounts for pre-paid and long-term subscriptions as well as discounts for
multiple subscriptions. Currently we receive an average of approximately eight
months of prepaid revenue per subscriber upon activation. We also derive
revenue from activation fees, the sale of advertising on some of our non-music
channels and the direct sale of SIRIUS radios and accessories. In
certain cases, automakers include a subscription to our radio service in the
sale or lease price of vehicles. The length of these prepaid subscriptions
vary, but is typically six months to one year.
In many cases, we receive subscription payments from automakers in
advance of the activation of our service. We also reimburse various automakers
for certain costs associated with SIRIUS radios installed in their vehicles. Costs
associated with acquiring subscribers are generally incurred and expensed in
advance of acquiring a subscriber and are recognized as subscriber acquisition
costs. A disproportionate percentage of our annual gross subscriber additions
are acquired in the fourth quarter in connection with holiday sales. As a
result, our SAC, as adjusted, per gross subscriber addition, a key operating
metric for our business, is generally higher in the first three quarters of our
fiscal year and declines in the fourth quarter as we experience higher
activation rates. During
2006, we achieved significant financial and operational milestones, including: capturing 67% share of total satellite radio net additions in the
fourth quarter and 62% for the year, and more than doubled our OEM
subscribers; entered into new agreements with Volkswagen, Audi, Kia, Rolls-Royce
and Bentley; introduced the Stiletto 100, the first portable satellite radio with
WiFi capabilities; achieved positive free cash flow in the fourth quarter 2006 - four
years after adding our first subscriber; and added new programming, including Howard Stern, Playboy Radio, Cosmo
Radio, Blue Collar Radio, FOX News Channels, the Catholic Channel, Jerry
Rice, Tony Stewart, Chelsea Football Club, Metropolitan Opera Radio and Jane
Pratt. In
June 2006, we entered into an agreement with Space Systems/Loral to design and
construct a new satellite that will be one of the most advanced and powerful
communications satellites ever built. Construction of the 27 satellite is
expected to be completed in the fourth quarter of 2008. The satellite will be
launched on a Proton rocket acquired by us under a previously announced launch
contract. The aggregate cost of designing, building and launching the satellite
and insuring its launch will be approximately $260,000. Critical Accounting Policies and Estimates Our
consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods. We have disclosed all significant
accounting policies in Note 2 to the consolidated financial statements included
in this report. We have identified the following policies, which were discussed
with the audit committee of our board of directors, as critical to our business
and understanding our results of operations. Revenue
Recognition. Revenue from subscribers consists of
subscription fees; revenue derived from our agreement with Hertz;
non-refundable activation fees; and the effects of mail-in rebates. We
recognize subscription fees as our service is provided to a subscriber. We
record deferred revenue for prepaid subscription fees and amortize these
prepayments to revenue ratably over the term of the respective subscription
plan. At
the time of sale, vehicle owners purchasing or leasing a vehicle with a
subscription to our service typically receive between a six month and one year
prepaid subscription. We receive payment from automakers for these
subscriptions in advance of our service being activated. Such prepayments are
recorded to deferred revenue and amortized ratably over the service period upon
activation and sale to a customer. We also reimburse automakers for certain
costs associated with the SIRIUS radio installed in the applicable vehicle at
the time the vehicle is manufactured. The associated payments to the automakers
are included in subscriber acquisition costs. Although we receive payments from
the automakers, they do not resell our service; rather, automakers facilitate
the sale of our service to our customers, acting similar to an agent. We
believe this is the appropriate characterization of our relationship since we
are responsible for providing service to our customers including being
obligated to the customer if there was interruption of service. Activation
fees are recognized ratably over the estimated term of a subscriber
relationship, currently estimated to be 3.5 years. The estimated term of a
subscriber relationship is based on market research and managements judgment
and, if necessary, will be refined in the future as historical data becomes
available. As
required by Emerging Issues Task Force (EITF) No. 01-09, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products), an estimate of mail-in rebates that are paid by us
directly to subscribers is recorded as a reduction to revenue in the period the
subscriber activates our service. For certain mail-in rebate promotions, a
subscriber must remain active for a specified period of time to be considered eligible. In those instances, such estimate is
recorded as a reduction to revenue over the required activation period. We estimate the effects of mail-in rebates
based on actual take-rates for rebate incentives offered in prior periods,
adjusted as deemed necessary based on current take-rate data available at the
time. In subsequent periods, estimates are adjusted when necessary. We
recognize revenues from the sale of advertising on some of our non-music
channels as the advertising is broadcast. Agency fees are calculated based on a
stated percentage applied to gross billing revenue for our advertising
inventory and are reported as a reduction of advertising revenue. We pay
certain third parties a percentage of advertising revenue. Advertising revenue
is recorded gross of such revenue share payments in accordance with EITF No.
99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, as we
are the primary obligor in the transaction. Advertising revenue share payments
are recorded to programming and content expense during the period in which the
advertising is broadcast. Equipment
revenue from the direct sale of SIRIUS radios and accessories is recognized
upon shipment. Shipping and handling costs billed to customers are recorded as
revenue. Shipping and handling costs associated with shipping goods to
customers are recorded to cost of equipment. EITF
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables,
provides guidance on how and when to recognize revenues for arrangements that
may involve the delivery or performance of multiple products, services and/or
rights to use assets. Revenue arrangements with multiple deliverables are
required to be 28 divided into
separate units of accounting if the deliverables in the arrangement meet
certain criteria. Arrangement consideration must be allocated among the
separate units of accounting based on their relative fair values. We
determined that the sale of our service through our direct to consumer channel
with accompanying equipment constitutes a revenue arrangement with multiple
deliverables. In these types of arrangements, amounts received for equipment
are recognized as equipment revenue; amounts received for service are
recognized as subscription revenue; and amounts received for the
non-refundable, up-front activation fee that are not contingent on the delivery
of the service are allocated to equipment revenue. Activation fees are recorded
to equipment revenue only to the extent that the aggregate equipment and
activation fee proceeds do not exceed the fair value of the equipment. Any
activation fees not allocated to the equipment are deferred upon activation and
recognized as subscriber revenue on a straight-line basis over the estimated
term of a subscriber relationship.
Stock-Based Compensation.
Effective January 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standard (SFAS) No. 123 (revised 2004), Share-Based Payment,
using the modified prospective transition method. Prior periods are not
restated under this transition method. The stock-based compensation cost
recognized beginning January 1, 2006 includes compensation cost for all
stock-based awards granted to employees and members of our board of directors
(i) prior to, but not vested as of, January 1, 2006 based on the grant date
fair value originally estimated in accordance with the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, and (ii) subsequent to December
31, 2005 based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123R. Compensation cost under SFAS No. 123R is
recognized ratably using the straight-line attribution method over the expected
vesting period. SFAS No. 123R requires forfeitures to be estimated on the grant
date and revised in subsequent periods if actual forfeitures differ from those
estimates. Effective
January 1, 2006, we account for such awards at fair value in accordance with
SFAS No. 123R and SEC guidance contained in Staff Accounting Bulletin (SAB)
No. 107. The fair value of equity instruments granted to non-employees is
measured in accordance with EITF No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. The final measurement date of equity instruments
with performance criteria is the date that each performance commitment for such
equity instrument is satisfied or there is a significant disincentive for
non-performance. Upon
adoption of SFAS No. 123R, we continued to estimate the fair value of
stock-based awards using the Black-Scholes option valuation model
(Black-Scholes). Black-Scholes was developed to estimate the fair market
value of traded options, which have no vesting restrictions and are fully
transferable. Option valuation models require the input of highly subjective
assumptions. Because our stock-based awards have characteristics significantly
different from those of traded options and because changes in the subjective
assumptions can materially affect the fair market value estimate, the existing
option valuation models do not necessarily provide a reliable single measure of
the fair value of our stock-based awards. Fair
value determined using Black-Scholes varies based on assumptions used for the
expected life, expected stock price volatility and risk-free interest rates.
For the years ended December 31, 2005 and 2004, we used historical volatility
of our stock over a period equal to the expected life of stock-based awards to
estimate fair value. We estimated the fair value of awards granted during the
year ended December 31, 2006 using the implied volatility of actively traded
options on our stock. We believe that implied volatility is more representative
of future stock price trends than historical volatility. The expected life
assumption represents the weighted-average period stock-based awards are
expected to remain outstanding. These expected life assumptions are established
through a review of historical exercise behavior of stock-based award grants
with similar vesting periods. Where historical patterns do not exist,
contractual terms are used. The risk-free interest rate represents the daily
treasury yield curve rate at the reporting date based on the closing market bid
yields on actively traded U.S. treasury securities in the over-the-counter
market for the expected term. Our assumptions may change in future periods. Subscriber
Acquisition Costs. Subscriber acquisition costs
include hardware subsidies paid to radio manufacturers, distributors and
automakers, including subsidies paid to automakers who include a SIRIUS radio
and a prepaid subscription to our service in the sale or lease price of a new vehicle;
subsidies paid for chip sets and certain other components used in manufacturing
radios; commissions paid to retailers and automakers as incentives to purchase,
install and activate SIRIUS radios; product warranty obligations; and
compensation costs associated with stock-based awards granted in connection
with certain distribution agreements. The majority of subscriber acquisition
costs are incurred and expensed in advance of acquiring a subscriber.
Subscriber acquisition costs do not 29 include advertising,
loyalty payments to distributors and dealers of SIRIUS radios and revenue share
payments to automakers and retailers of SIRIUS radios, which are included in
sales and marketing expense. Subscriber acquisition costs also do not include
amounts capitalized in connection with our agreement with Hertz, as we retain
ownership of certain SIRIUS radios used by Hertz. Subsidies
paid to radio manufacturers and automakers are expensed upon shipment or
installation. Commissions paid to retailers and automakers are expensed either
upon activation or sale of the SIRIUS radio. Chip sets that are shipped to
radio manufacturers and held on consignment are recorded as inventory and
expensed as subscriber acquisition costs when placed into production by radio
manufacturers. Costs for chip sets not held on consignment are expensed as
subscriber acquisition costs when the chip sets are shipped to radio
manufacturers. We
record product warranty obligations in accordance with Financial Accounting Standards Board Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34. FIN No. 45 requires a guarantor to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken by issuing the guarantee. We warrant that certain products sold through our retail and
direct to consumer distribution channels will perform in all material respects
in accordance with standard published specifications in effect at the time of
the purchase of the products by the customer.
We provide a 12-month warranty on our products from purchase date for
repair or replacement of components and/or products that contain defects of
material or workmanship. Customers may
exchange products directly to the retailer within 30 days of purchase. We record a liability for an estimate of
costs that we expect to incur under our warranty guarantee when the product is
shipped from the manufacturer. Factors affecting our warranty liability
include the number of units sold and historical and anticipated rates of claims
and costs per claim. We periodically assess the adequacy of our warranty
liability based on changes in these factors. Long-Lived
Assets. We carry our long-lived assets at cost less
accumulated depreciation. In accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, we review our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset is not
recoverable. At the time an impairment in value of a long-lived asset is
identified, the impairment is measured as the amount by which the carrying amount
of a long-lived asset exceeds its fair value. To determine fair value, we
employ an expected present value technique, which utilizes multiple cash flow
scenarios that reflect the range of possible outcomes and an appropriate
discount rate. In
connection with our new satellite agreement, in June 2006 we wrote-off $10,917
for the net book value of certain satellite long-lead time parts purchased in
1999 that we will no longer need. Useful
Life of Satellite System. Our satellite system includes
the costs of our satellite construction, launch vehicles, launch insurance,
capitalized interest, spare satellite, terrestrial repeater network and
satellite uplink facility. In accordance with SFAS No. 144, we monitor our
satellites for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset is not recoverable. The expected useful
lives of our three in-orbit satellites were originally 15 years from the date
they were placed into orbit. In June 2006, we entered into an agreement with
Space Systems/Loral to design and construct a new satellite. In connection with
this agreement, we adjusted the useful lives of two of our in-orbit satellites
to 13 years to reflect the way we intend to operate the constellation. We
continue to expect our spare satellite to operate effectively for 15 years from
the date of launch. Our
satellites have experienced circuit failures on their solar arrays. We continue
to monitor the operating condition of our satellites. If events or
circumstances indicate that the useful lives of our satellites have changed, we
will modify the depreciable life accordingly. FCC
License. In 1997, the FCC granted us a license to
operate a commercial satellite radio service in the United States. While the
FCC license has a renewable eight-year term, we expect to renew our license as
there are no legal, regulatory, contractual, competitive, economic or other
factors that limit its useful life. As a result, we treat the FCC license as an
indefinite-lived intangible asset under the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. We re-evaluate the useful life
determination for our FCC license each reporting period to determine whether
events and circumstances continue to support an indefinite useful life. To
date, we have not recorded any amortization expense related to our FCC license. 30 We
test our FCC license for impairment at least annually or more frequently if
indicators of impairment exist. We use a direct approach in performing our
annual impairment test for this asset, which requires estimates of future cash
flows and other factors. If these estimates or projections change in the
future, we may be required to record an impairment charge related to this
asset. We began using the direct approach in 2005. Use of the direct approach
is in accordance with a September 29, 2004 Staff Announcement from the staff of
the Securities and Exchange Commission, Use of the Residual Method to Value
Acquired Assets Other Than Goodwill. Under the direct method, if the fair
value of our license is less than the aggregate carrying amount of the license,
an impairment loss is recognized. Income
Taxes. We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Our operating losses have
generated significant state and federal tax net operating losses, or NOL
carryforwards. We are required to record a valuation allowance against the
deferred tax asset associated with these NOL carryforwards if it is more
likely than not that we will not be able to utilize it to offset future taxes.
Due to our history of unprofitable operations and our expected future losses,
we have recorded a valuation allowance equal to 100% of these deferred tax
assets. We could be profitable in the future at levels which would cause
management to conclude that it is more likely than not that we will realize all
or a portion of these NOL carryforwards. Upon reaching such a conclusion, we
would record the estimated net realizable value of the deferred tax asset at
that time and would then provide for income taxes at a rate equal to our
combined federal and state effective tax rates. Subsequent revisions to the
estimated net realizable value of the deferred tax asset could cause our
provision for income taxes to vary significantly from period to period,
although our cash tax payments would remain unaffected until the benefit of
these NOL carryforwards is utilized. Results of Operation Our
discussion of our results of operations, along with the selected financial
information in the tables that follow, includes the following non-GAAP
financial measures: average monthly churn; SAC, as adjusted, per gross
subscriber addition; customer service and billing expenses, as adjusted, per
average subscriber; average monthly revenue per subscriber, or ARPU; free cash
flow; and adjusted loss from operations. We believe these non-GAAP financial
measures provide meaningful supplemental information regarding our operating performance
and are used for internal management purposes, when publicly providing the
business outlook, and as a means to evaluate period-to-period comparisons.
Refer to the footnotes following our discussion of results of operations for
the definitions and usefulness of such non-GAAP financial measures. Subscribers and Key
Operating Metrics: The
following table contains a breakdown of our subscribers for the past three
years: As of December 31, 2006 2005 2004 Beginning
subscribers 3,316,560 1,143,258 261,061 Net
additions 2,707,995 2,173,302 882,197 Ending
subscribers 6,024,555 3,316,560 1,143,258 Retail 4,041,826 2,465,363 911,255 OEM 1,959,009 823,693 203,469 Hertz 23,720 27,504 28,534 Ending
subscribers 6,024,555 3,316,560 1,143,258 Retail 1,576,463 1,554,108 696,028 OEM 1,135,316 620,224 181,646 Hertz (3,784 ) (1,030 ) 4,523 Net
additions 2,707,995 2,173,302 882,197 Subscribers.
We ended 2006 with 6,024,555 subscribers, an increase
of 82% from the 3,316,560 subscribers as of December 31, 2005. Since December
31, 2005, we added 1,576,463 net subscribers from our retail 31 channel and
1,135,316 net subscribers from our OEM channel, resulting in a 64% and 138%
increase in our retail and OEM subscriber base, respectively. Strong
contributions by DaimlerChrysler and Ford fueled this growth. The
following table presents our key operating metrics for the past three years: For the Years Ended December 31, 2006 2005 2004 Gross subscriber additions 3,758,163 2,519,301 986,556 Deactivated subscribers 1,050,168 345,999 104,359 Average monthly churn(1)(6) 1.9 % 1.5 % 1.6 % ARPU(2)(6) $ 11.01 $ 10.34 $ 10.16 SAC, as adjusted, per gross subscriber
addition (3)(6) $ 114 $ 139 $ 177 Customer service and billing expenses, as
adjusted, per average $ 1.24 $ 2.10 $ 3.56 Total revenue $ 637,235 $ 242,245 $ 66,854 Free cash flow (5)(6) $ (500,715 ) $ (333,922 ) $ (452,758 ) Adjusted loss from operations(7) $ (513,140 ) $ (567,507 ) $ (456,209 ) Net loss $ (1,104,867 ) $ (862,997 ) $ (712,162 ) ARPU.
Total ARPU for the year ended December 31, 2006 was
$11.01, up from $10.34 for the year ended December 31, 2005. This increase in
ARPU was driven by higher net advertising revenue; the effects of mail-in
rebates resulting from lower eligible activations and lower overall take rates;
and the timing of the commencement of revenue recognition for prepaid
subscriptions; offset by the impact of plan mix due in part to the increase in
subscribers under multi-unit subscription plans. At December 31, 2006,
approximately two-thirds of our subscribers were on a one-year or longer
subscription plan, and approximately 16% were paying $6.99 per month under a
multi-unit subscription plan. We
expect ARPU to fluctuate based on the growth of our subscriber base,
promotions, mail-in rebates offered to subscribers and corresponding
take-rates, plan mix, subscription prices and the identification of additional
revenue streams from subscribers. SAC,
As Adjusted, Per Gross Subscriber Addition. SAC, as
adjusted, per gross subscriber addition was $114 and $139 for the years ended
December 31, 2006 and 2005, respectively. The decline was primarily
attributable to lower average commission rates and decreased aftermarket and
OEM average subsidy rates as we continued to reduce manufacturing and chip set
costs, offset by the per subscriber effect of costs related to FM transmitter
compliance with FCC rules. We
expect SAC, as adjusted, per gross subscriber addition to decline as the costs
of subsidized components of SIRIUS radios decrease in the future. If
competitive forces and changes in retailer promotional strategies, including
the elimination of mail-in rebates by certain consumer electronics retailers,
require us to increase hardware subsidies or promotions, SAC, as adjusted, per
gross subscriber addition may increase. Our SAC, as adjusted, per gross
subscriber addition is generally higher in the first three quarters of our
fiscal year and declines in the fourth quarter as we experience higher
activation rates. Customer
Service and Billing Expenses, As Adjusted, Per Average Subscriber Per Month.
Customer service and billing expenses, as adjusted, per average subscriber per
month declined 41% to $1.24 for the year ended December 31, 2006 compared with
$2.10 for the year ended December 31, 2005. We
expect our costs per subscriber to decrease on an annual basis as our
subscriber base grows due to scale efficiencies in call center and other
customer care and billing operations. Adjusted
Loss from Operations. For the year ended December 31,
2006 and 2005, adjusted loss from operations was $513,140 and $567,507,
respectively, a decrease of $54,367. The decrease was primarily driven by an
increase in total revenue of $394,990, which more than offset increases in
operating expenses of $340,623. Net
Loss. For the years ended December 31, 2006 and 2005,
net loss was $1,104,867 and $862,997, respectively,
an increase of $241,870. The increase was driven by an increase in our
operating expenses to support the growth of our business, offset by an increase
in total revenue of $394,990. 32 Year
Ended December 31, 2006 Compared with Year Ended December 31, 2005 and Year
Ended December 31, 2005 Compared with Year Ended December 31, 2004 Revenue Subscriber
Revenue. Subscriber revenue includes subscription
fees, activation fees and the effects of mail-in rebates. 2006 vs 2005: For the years ended December
31, 2006 and 2005, subscriber revenue was $575,404 and $223,615,
respectively, an increase of 157% or $351,789. The increase was attributable
to the growth of subscribers to our service. 2005 vs 2004: For the years ended December
31, 2005 and 2004, subscriber revenue was $223,615 and $62,881, respectively,
an increase of 256% or $160,734. The increase was attributable to the growth
of subscribers to our service. The
following table contains a breakdown of our subscriber revenue: For the Years Ended December 31, 2006 2005 2004 Subscription
fees $ 572,386 $ 233,635 $ 65,201 Activation
fees 15,612 6,790 2,102 Effects of
mail-in rebates (12,594 ) (16,810 ) (4,422 ) Total subscriber revenue $ 575,404 $ 223,615 $ 62,881 Future
subscriber revenue will be dependent upon, among other things, the growth of
our subscriber base, promotions, mail-in rebates offered to subscribers and
corresponding take-rates, churn, plan mix, subscription prices and the
identification of additional revenue streams from subscribers. Advertising
Revenue. Advertising revenue includes the sale of
advertising on some of our non-music channels, net of agency fees. Agency fees
are based on a stated percentage per the advertising agreements applied to
gross billing revenue. 2006 vs 2005: For the years ended December
31, 2006 and 2005, net advertising revenue was $31,044 and $6,131,
respectively, an increase of $24,913. More attractive programming and
increased advertiser interest resulted in an increase in spots sold. 2005 vs 2004: For the years ended December
31, 2005 and 2004, net advertising revenue was $6,131 and $906, respectively,
an increase of $5,225. More attractive programming and increased advertiser
interest resulted in an increase in spots sold. We
expect advertising revenue to grow as our subscribers increase, as we continue
to improve brand awareness and content, and as we increase the size and
effectiveness of our advertising sales force. Equipment
Revenue. Equipment revenue includes revenue from the
direct sale of SIRIUS radios and accessories through our direct to consumer distribution
channel. 2006 vs 2005: For the years ended December
31, 2006 and 2005, equipment revenue was $26,798 and $12,271, respectively,
an increase of $14,527. The increase was the result of higher sales through
our direct to consumer distribution channel, offset by the effects of
promotional discounts. 2005 vs 2004: For the years ended December
31, 2005 and 2004, equipment revenue was $12,271 and $2,898, respectively, an
increase of $9,373. The increase was the result of higher sales through our
direct to consumer distribution channel. We
expect equipment revenue to increase as we continue to introduce new products
and as sales through our direct to consumer distribution channel grow. 33 Operating
Expenses Satellite and Transmission. Satellite and
transmission
expenses consist of costs associated with the operation and maintenance of our
satellites; satellite telemetry, tracking and control system; terrestrial
repeater network; satellite uplink facility; and broadcast studios. 2006 vs
2005: For the years
ended December 31, 2006 and 2005, satellite and transmission expenses were
$41,797 and $29,798, respectively, an increase of $11,999. Excluding
stock-based compensation expense of $2,568 and $1,942 for the years ended
December 31, 2006 and 2005, respectively, satellite and transmission expenses
increased $11,373 from $27,856 to $39,229. This increase of $11,373 was
primarily attributable to an impairment charge associated with certain
satellite long-lead time parts we purchased in 1999 that we will no longer
need as a result of our new satellite contract. As of December 31, 2006 and
2005, we had 127 and 140 terrestrial repeaters, respectively, in operation. 2005 vs
2004: For the years
ended December 31, 2005 and 2004, satellite and transmission expenses were
$29,798 and $33,198, respectively, a decrease of $3,400. Excluding
stock-based compensation expense of $1,942 and $2,041 for the years ended
December 31, 2005 and 2004, respectively, satellite and transmission expenses
decreased $3,301 from $31,157 to $27,856. This decrease of $3,301 was
primarily attributable to a reduction in satellite insurance costs. Effective
August 2004, we discontinued our in-orbit satellite insurance. Such decrease
was offset by increased compensation related costs for additions to
headcount. As of December 31, 2005 and 2004, we had 140 and 137 terrestrial
repeaters, respectively, in operation. Future
increases in satellite and transmission expenses will primarily be attributable
to the launch of new satellites, the addition of new terrestrial repeaters and
maintenance costs of existing terrestrial repeaters. We expect to deploy
additional terrestrial repeaters in 2007 and 2008. Such expenses may also increase
in future periods if we decide to reinstate our in-orbit satellite insurance. Programming
and Content. Programming and content expenses include
costs to acquire, create and produce content; on-air talent costs; and
broadcast and webstreaming royalties. We have entered into various agreements
with third parties for music and non-music programming. These agreements
require us to pay license fees, share advertising revenue, purchase advertising
on media properties owned or controlled by the licensor and pay other
guaranteed amounts. Purchased advertising is recorded as a sales and marketing
expense in the period the advertising is broadcast. 2006 vs 2005: For the years ended December
31, 2006 and 2005, programming and content expenses were $551,989 and
$118,076, respectively, an increase of $433,913. Excluding stock-based
compensation expense of $321,774 and $19,469
for the years ended December 31, 2006 and 2005, respectively, programming and
content expenses increased $131,608 from $98,607 to $230,215. This increase
of $131,608 was primarily attributable to talent and license fees associated
with new programming; broadcast and webstreaming royalties as a result of the
increase in subscribers; and compensation related costs for additions to
headcount. Stock-based compensation expense increased $302,305 primarily due
to $224,813 associated with 34,375,000 shares of our common stock delivered
to Howard Stern and his agent in January 2006. In addition, in 2006 we recorded expense associated with common
stock earned upon the satisfaction of performance targets for which shares of
our common stock were delivered in the first quarter of 2007. 2005 vs 2004: For the years ended December
31, 2005 and 2004, programming and content expenses were $118,076 and
$87,252, respectively, an increase of $30,824. Excluding stock-based
compensation expense of $19,469 and
$23,899 for the years ended December 31, 2005 and 2004, respectively,
programming and content expenses increased $35,254 from $63,353 to $98,607.
This increase of $35,254 was primarily attributable to license fees
associated with new programming; compensation related costs for additions to
headcount; broadcast royalties as a result of the increase in our
subscribers; and additional on-air talent costs due to the expansion of the
programming lineup. Stock-based compensation expense decreased $4,430
primarily due to the timing of third parties achieving milestones. 34 Our
programming and content expenses, excluding stock-based compensation expense,
will increase as we continue to develop and enhance our channels. Beginning in
February 2007, our agreement with NASCAR will increase our programming and
content expenses. We regularly evaluate programming opportunities and may choose
to acquire and develop new content or renew current programming agreements in
the future at substantial costs. In addition, we expect total broadcast and
webstreaming royalties, which are typically variable in nature, to increase as
our subscriber base grows. We are currently a party to a proceeding before the
Copyright Royalty Board of the Library of Congress to establish the royalty
rate and terms for the sound recordings we use on our satellite radio service
for the period 2007 through 2012. Future
expense associated with stock-based compensation is contingent upon a variety
of factors, including the number of stock-based awards granted, the price of
our common stock, assumptions used in estimating the fair value of stock-based
awards, estimates for forfeitures, vesting provisions and the timing as to when
certain performance criteria are met, and could materially change. Customer
Service and Billing. Customer service and billing
expenses include costs associated with the operation of our customer service
centers and subscriber management system. 2006 vs 2005: For the years ended December
31, 2006 and 2005, customer service and billing expenses were $68,949 and
$47,202, respectively, an increase of $21,747. Excluding stock-based
compensation expense of $812 and $549 for the years ended December 31, 2006
and 2005, respectively, customer service and billing expenses increased
$21,484 from $46,653 to $68,137. This increase of $21,484 was primarily due
to call center operating costs necessary to accommodate our subscriber base
and transaction fees due to the addition of new subscribers. Customer service
and billing expenses, excluding stock-based compensation expense, increased
46% compared with an increase in our end of period subscribers of 82% year
over year. 2005 vs 2004: For the years ended December
31, 2005 and 2004, customer service and billing expenses were $47,202 and
$22,780, respectively, an increase of $24,422. Excluding stock-based
compensation expense of $549 and $439 for the years ended December 31, 2005
and 2004, respectively, customer service and billing expenses increased
$24,312 from $22,341 to $46,653. This increase of $24,312 was primarily due
to call center operating costs necessary to accommodate our subscriber base
and transaction fees due to the addition of new subscribers. Customer service
and billing expenses, excluding stock-based compensation expense, increased
109% compared with an increase in our end of period subscribers of 190% year
over year. We
expect our customer care and billing expenses, excluding stock-based
compensation expense, to increase as our subscriber base grows due to increased
call center operating costs and transaction fees necessary to serve a larger
subscriber base. Cost
of Equipment. Cost of equipment includes costs for
SIRIUS radios and accessories sold through our direct to consumer distribution
channel. 2006 vs 2005: For the years ended December
31, 2006 and 2005, cost of equipment was $35,233 and $11,827, respectively,
an increase of $23,406. The increase was primarily attributable to higher
sales volume and per unit costs as we continued to introduce new products
through our direct to consumer distribution channel. 2005 vs 2004: For the years ended December
31, 2005 and 2004, cost of equipment was $11,827 and $3,467, respectively, an
increase of $8,360. The increase was primarily attributable to higher sales
volume through our direct to consumer distribution channel. We
expect cost of equipment to increase in the future as we introduce new products
and as sales through our direct to consumer distribution channel grow. Sales
and Marketing. Sales and marketing expenses include
costs for advertising, media and production, including promotional events and
sponsorships; residuals; cooperative marketing; revenue share; customer
retention and compensation. Residuals are monthly fees paid based upon the
number of subscribers using a SIRIUS radio 35 purchased from
a retailer. Cooperative marketing costs include fixed and variable payments to
reimburse retailers and automakers for the cost of advertising and other
product awareness activities. 2006 vs 2005: For the years ended December
31, 2006 and 2005, sales and marketing expenses were $242,035 and $212,741,
respectively, an increase of $29,294. Excluding stock-based compensation
expense of $19,543 and $42,149 for the years ended December
31, 2006 and 2005, respectively, sales and marketing expenses increased
$51,900 from $170,592 to $222,492. This increase of $51,900 was primarily due
to increased residuals; OEM revenue share as a result of a 138% increase in
our OEM subscriber base; cooperative marketing and advertising costs; and
compensation related costs. This 30% increase in sales and marketing
expenses, excluding stock-based compensation expense, compared with a 163%
increase in total revenue from $242,245 for the year ended December 31, 2005
to $637,235 for the year ended December 31, 2006. Stock-based compensation
expense decreased $22,606 primarily due to the timing of third parties
achieving milestones and changes in the fair market value of such awards. 2005 vs 2004: For the years ended December
31, 2005 and 2004, sales and marketing expenses were $212,741 and $202,848,
respectively, an increase of $9,893. Excluding stock-based compensation expense of $42,149 and $48,353 for the
years ended December 31, 2005 and 2004, respectively, sales and marketing
expenses increased $16,097 from $154,495 to $170,592. This increase of
$16,097 was primarily due to increased residuals; OEM revenue share as a
result of the increase in our subscriber base; cooperative marketing and
advertising for both the holiday season and the rollout of new products in
the retail distribution channel; and compensation related costs. These
increases were offset in part by reductions in costs for the expiration of
certain sponsorships in 2004 and certain retail costs associated with sales
efforts for the RadioShack rollout in 2004.
Stock-based compensation expense decreased $6,204 primarily due to the
timing of third parties achieving milestones and changes in the fair market
value of such awards. We
expect sales and marketing expenses, excluding stock-based compensation expense,
to increase as we continue to build brand awareness through national
advertising and promotional activities, expand OEM distribution of SIRIUS
radios resulting in increased revenue share payments to automakers, and expand
our subscriber retention efforts. Beginning in 2007, our agreement with NASCAR
will increase sponsorship costs that are included in our sales and marketing
expense. Future
expense associated with stock-based compensation is contingent upon a variety
of factors, including the number of stock-based awards granted, the price of
our common stock, assumptions used in estimating the fair value of stock-based
awards, estimates for forfeitures, vesting provisions and the timing as to when
certain performance criteria are met, and could materially change. Subscriber
Acquisition Costs. Subscriber acquisition costs
include hardware subsidies paid to radio manufacturers, distributors and
automakers, including subsidies paid to automakers who include a SIRIUS radio
and a prepaid subscription to our service in the sale or lease price of a new
vehicle; subsidies paid for chip sets and certain other components used in
manufacturing radios; commissions paid to retailers and automakers as
incentives to purchase, install and activate SIRIUS radios; product warranty
obligations; and compensation costs associated with stock-based awards granted
in connection with certain distribution agreements. The majority of subscriber
acquisition costs are incurred and expensed in advance of acquiring a
subscriber. Subscriber acquisition costs do not include advertising, loyalty
payments to distributors and dealers of SIRIUS radios and revenue share
payments to automakers and retailers of SIRIUS radios, which are included in
sales and marketing expense. Subscriber acquisition costs also do not include
amounts capitalized in connection with our agreement with Hertz, as we retain
ownership of certain SIRIUS radios used by Hertz. 2006 vs 2005: For the years ended December
31, 2006 and 2005, subscriber acquisition costs were $451,614 and $399,350,
respectively, an increase of 13% or $52,264. Excluding stock-based
compensation expense of $31,898 and $49,709
for the years ended December 31, 2006 and 2005, respectively, subscriber
acquisition costs increased 20%, or $70,075, from $349,641 to $419,716. This
increase of $70,075 was primarily attributable to increased OEM hardware
subsidies due to higher production volume and costs related to FM transmitter
compliance with FCC rules, offset by decreased aftermarket hardware subsidies
as we continued to reduce manufacturing and chip set costs. Stock-based
compensation expense decreased $17,811 primarily due to the timing of third
parties achieving milestones and changes in the fair market value of such
awards. 36 2005 vs 2004: For the years ended December
31, 2005 and 2004, subscriber acquisition costs were $399,350 and $206,851,
respectively, an increase of 93% or $192,499. Excluding stock-based
compensation expense of $49,709 and
$33,149 for the years ended December 31, 2005 and 2004, respectively,
subscriber acquisition costs increased 101%, or $175,939, from $173,702 to
$349,641. This increase of $175,939 was attributable to higher shipments of
SIRIUS radios and chip sets and increases in commissions to support a 155%
increase in gross subscriber additions from 986,556 for the year ended
December 31, 2004 to 2,519,301 for the year ended December 31, 2005, offset
by reductions in average subsidy rates as we continued to reduce
manufacturing and chip set costs. Stock-based compensation expense increased
$16,560 primarily due to the timing of third parties achieving milestones and
changes in the fair market value of such awards. We
expect total subscriber acquisition costs, excluding stock-based compensation
expense, to decrease in 2007 as increases in our gross subscriber additions are
offset by continuing declines in the costs of subsidized components of SIRIUS
radios. We intend to continue to offer subsidies, commissions and other incentives
to acquire subscribers. Future
expense associated with stock-based compensation is contingent upon a variety
of factors, including the number of stock-based awards granted, the price of
our common stock, assumptions used in estimating the fair value of stock-based
awards, estimates for forfeitures, vesting provisions and the timing as to when
certain performance criteria are met, and could materially change. General
and Administrative. General and administrative
expenses include rent and occupancy, finance, legal, human resources,
information technology and investor relations costs and bad debt expense. 2006 vs 2005: For the years ended December
31, 2006 and 2005, general and administrative expenses were $137,466 and
$87,555, respectively, an increase of $49,911. Excluding stock-based
compensation expense of $49,928 and $27,724
for the years ended December 31, 2006 and 2005, respectively, general and
administrative expenses increased $27,707 from $59,831 to $87,538. This
increase of $27,707 was primarily a result of legal fees, employment-related
costs and bad debt expense to support the growth of our business. Stock-based
compensation expense increased $22,204 primarily as a result of the adoption
of SFAS No. 123R, offset by a decrease in expense for restricted stock units
that vested in the first quarter of 2006. 2005 vs 2004: For the years ended December
31, 2005 and 2004, general and administrative expenses were $87,555 and
$57,905, respectively, an increase of $29,650. Excluding stock-based
compensation expense of $27,724 and
$13,877 for the years ended December 31, 2005 and 2004, respectively,
general and administrative expenses increased $15,803 from $44,028 to
$59,831. This increase of $15,803 was primarily a result of additional
employment-related costs and rent and occupancy costs to support the growth
of our business and bad debt expense. Stock-based compensation expense
increased $13,847 primarily due to expense associated with grants of
restricted stock and restricted stock units and modifications of existing
stock-based awards. We
expect our general and administrative expenses, excluding stock-based
compensation expense, to increase in future periods as a result of higher
personnel, information technology, and facilities costs, as well as increased
legal fees and bad debt expenses to support the growth of our business. Future
expense associated with stock-based compensation is contingent upon a variety
of factors, including the number of stock-based awards granted, the price of
our common stock, assumptions used in estimating the fair value of stock-based
awards, estimates for forfeitures, vesting provisions and the timing as to when
certain performance criteria are met, and could materially change. Engineering,
Design and Development. Engineering, design and
development expenses include costs to develop our future generation of chip
sets and new products and costs associated with the incorporation of SIRIUS
radios into vehicles manufactured by automakers. 2006 vs 2005: For the years ended December
31, 2006 and 2005, engineering, design and development expenses were $70,127
and $66,281, respectively, an increase of $3,846. Excluding stock-based
compensation expense of $11,395 and $21,536
for the years ended December 31, 2006 and 2005, respectively, engineering,
design and development expenses increased $13,987 37 from $44,745
to $58,732. This increase of $13,987 was primarily attributable to OEM
tooling and manufacturing upgrades and receiver integration for factory
installations of SIRIUS radios, development costs associated with the
manufacturing of SIRIUS radios and additional personnel-related costs to
support research and development efforts. Stock-based compensation expense
decreased $10,141 primarily due to the timing of third parties achieving
certain production milestones. 2005 vs 2004: For the years ended December
31, 2005 and 2004, engineering, design and development expenses were $66,281
and $35,487, respectively, an increase of $30,794. Excluding stock-based
compensation expense of $21,536 and
$4,967 for the years ended December 31, 2005 and 2004, respectively,
engineering, design and development expenses increased $14,225 from $30,520
to $44,745. This increase of $14,225 was primarily attributable to additional
personnel-related costs to support research and development efforts, costs
associated with OEM tooling and manufacturing upgrades to support factory
installations of SIRIUS radios and development costs for our next generation
of radios. These increases were offset by decreases in chip set development
costs. Stock-based compensation expense increased $16,569 primarily due to
the timing of third parties achieving certain production milestones. We
expect engineering, design and development expenses, excluding stock-based
compensation expense, to decrease in 2007, as we incorporated SIRIUS radios and
accessories in a significant number of additional vehicle models in 2006 and
incurred related non-recurring engineering expenses in that year. We
expect expense associated with stock-based compensation to decrease in 2007 as
performance milestones pursuant to a certain third party agreement were
achieved in 2006. Other
Income (Expense) Interest
and Investment Income. Interest and investment income
includes realized gains and losses, dividends and interest income, including
amortization of the premium and discount arising at purchase. 2006 vs 2005: For the years ended December
31, 2006 and 2005, interest and investment income was $33,320 and $26,878,
respectively, an increase of $6,442. The increase was primarily attributable
to a combination of higher overall interest rates and our decision to invest
in financial instruments bearing higher interest rates. 2005 vs 2004: For the years ended December
31, 2005 and 2004, interest and investment income was $26,878 and $9,713,
respectively, an increase of $17,165. The increase was attributable to higher
interest rates and the increase in our average cash, cash equivalents and
marketable securities balance as a result of funds raised through offerings
of debt securities. Interest
Expense. Interest expense includes interest on
outstanding debt, offset by interest capitalized in connection with the
construction of our new satellite and launch vehicle. 2006 vs 2005: For the years ended December
31, 2006 and 2005, interest expense was $64,032 and $45,361, respectively, an
increase of $18,671. The increase was primarily the result of a full year of
interest expense for our 9 5/8% Senior Notes due 2013 issued in August
2005, offset by a decrease in interest expense both as a result of the 2005
redemption of our 15% Senior Secured Discount Notes due 2007 and our 14½% Senior
Secured Notes due 2009 and $4,205 of interest capitalized for the
construction and launch of our new satellite. 2005 vs 2004: For the years ended December
31, 2005 and 2004, interest expense was $45,361 and $41,386, respectively, an
increase of $3,975. The increase was primarily due to interest expense
resulting from the issuance of our 9 5/8% Senior Notes due 2013 in August
2005 and a full year of interest expense from our 3¼% Convertible Notes due
2011 issued in October 2004 and our 2 ½% Convertible Notes due 2009 issued in
the first quarter of 2004. This increase was offset by debt conversion costs
in 2004 of $19,592 as a result of the issuance of 56,409,853 shares of our
common stock in exchange for $69,000 in aggregate principal amount of our 3½%
Convertible Notes due 2008, including accrued interest, and a decrease in
interest expense resulting from the 38 redemption
of our 15% Senior Secured Discount Notes due 2007 and our 14½% Senior Secured
Notes due 2009 in the third quarter of 2005. Loss from Redemption of Debt. For the year
ended December 31, 2005, a loss from redemption of debt of $6,214 was
recognized in connection with the redemption of our 15% Senior Secured
Discount Notes due 2007 and our 14½% Senior Secured Notes due 2009, including
a redemption premium of $5,502 and the write-off of unamortized debt issuance
costs of $712. Equity in Net Loss of Affiliate. Equity in
net loss of affiliate includes our share of SIRIUS Canadas net loss. We
recorded $4,445 and $6,938 for the years ended December 31, 2006 and 2005,
respectively, for our share of SIRIUS Canadas net loss. As of December
31, 2006, our investment in SIRIUS Canada is $0 as we have fully recognized
our share of SIRIUS Canadas net loss to the extent we have funded it. We do
not expect to recognize future net losses unless we commit to additional
funding. Income Taxes Income Tax Expense. Income tax expense
represents the recognition of a deferred tax liability related to the
difference in accounting for our FCC license, which is amortized over 15
years for tax purposes but not amortized for book purposes in accordance with
U.S. generally accepted accounting principles. 2006 vs 2005: We recorded income tax expense
of $2,065 and $2,311 for the years ended December 31, 2006 and 2005,
respectively. 2005 vs 2004: We recorded income tax expense
of $2,311 and $4,201 for the years ended December 31, 2005 and 2004,
respectively. (1) Average monthly churn represents the number of
deactivated subscribers divided by average quarterly subscribers. (2) ARPU is derived from total earned subscriber revenue
and net advertising revenue divided by the daily weighted average number of
subscribers for the period. ARPU is calculated as follows: For the Years Ended December 31, 2006 2005 2004 Subscriber revenue $ 575,404 $ 223,615 $ 62,881 Net advertising revenue 31,044 6,131 906 Total subscriber and net advertising revenue $ 606,448 $ 229,746 $ 63,787 Daily weighted average number of subscribers 4,591,693 1,851,149 523,219 ARPU $ 11.01 $ 10.34 $ 10.16 (3) SAC, as adjusted, per gross subscriber addition is
derived from subscriber acquisition costs, excluding stock-based
compensation, and margins from the direct sale of SIRIUS radios and
accessories divided by the number of gross subscriber additions for the
period. SAC, as adjusted, per gross subscriber addition is calculated as
follows: For the
Years Ended December 31, 2006 2005 2004 Subscriber acquisition costs $ 451,614 $ 399,350 $ 206,851 Less: stock-based compensation (31,898 ) (49,709 ) (33,149 ) Add: margin from direct sale of SIRIUS radios and
accessories 8,435 (444 ) 569 SAC, as adjusted $ 428,151 $ 349,197 $ 174,271 Gross subscriber additions 3,758,163 2,519,301 986,556 SAC, as adjusted, per gross subscriber addition $ 114 $ 139 $ 177 (4) Customer service and billing expenses, as adjusted,
per average subscriber is derived from total customer service and billing
expenses, excluding stock-based compensation, divided by the daily weighted
average number of subscribers for the period. Customer service and billing
expenses, as adjusted, per average subscriber is calculated as follows: 39 For the
Years Ended December 31, 2006 2005 2004 Customer service and billing expenses $ 68,949 $ 47,202 $ 22,780 Less: stock-based compensation (812 ) (549 ) (439 ) Customer service and billing expenses, as adjusted $ 68,137 $ 46,653 $ 22,341 Daily weighted average number of subscribers 4,591,693 1,851,149 523,219 Customer service and billing expenses, as adjusted,
per average subscriber $ 1.24 $ 2.10 $ 3.56 (5) Free cash flow is derived from cash flow used in
operating activities, capital expenditures and restricted and other
investment activity. Free cash flow is calculated as follows: For the
Years Ended December 31, 2006 2005 2004 Net cash used in operating activities $ (414,549 ) $ (269,994 ) $ (334,463 ) Additions to property and equipment (99,827 ) (49,888 ) (28,589 ) Restricted and other investment activity 13,661 (14,040 ) (89,706 ) Free cash flow $ (500,715 ) $ (333,922 ) $ (452,758 ) (6) Average monthly churn; ARPU; SAC, as adjusted, per
gross subscriber addition; customer service and billing expenses, as
adjusted, per average subscriber; and free cash flow are not measures of
financial performance under U.S. generally accepted accounting principles
(GAAP). We believe these non-GAAP financial measures provide meaningful
supplemental information regarding our operating performance and are used by
us for budgetary and planning purposes; when publicly providing our business
outlook; as a means to evaluate period-to-period comparisons; and to compare
our performance to that of our competitors. We also believe that investors
also use our current and projected metrics to monitor the performance of our
business and make investment decisions. We believe the exclusion of stock-based compensation
expense in our calculations of SAC, as adjusted, per gross subscriber
addition and customer service and billing expenses, as adjusted, per average
subscriber is useful given the significant variation in expense that can
result from changes in the fair market value of our common stock, the effect
of which is unrelated to the operational conditions that give rise to
variations in the components of our subscriber acquisition costs and customer
service and billing expenses. Specifically, the exclusion of stock-based
compensation expense in our calculation of SAC, as adjusted, per gross
subscriber addition is critical in being able to understand the economic
impact of the direct costs incurred to acquire a subscriber and the effect
over time as economies of scale are reached. These non-GAAP financial measures are used in
addition to and in conjunction with results presented in accordance with
GAAP. These non-GAAP financial measures may be susceptible to varying
calculations; may not be comparable to other similarly titled measures of
other companies; and should not be considered in isolation, as a substitute
for, or superior to measures of financial performance prepared in accordance
with GAAP. (7) We refer to net loss before taxes; other income
(expense) - including interest and investment income, interest expense, loss
from redemption of debt and equity in net loss of affiliate; depreciation;
impairment charges; and stock-based compensation expense as adjusted loss
from operations. Adjusted loss from operations is not a measure of financial
performance under generally accepted accounting principles. We believe
adjusted loss from operations is a useful measure of our operating
performance. We use adjusted loss from operations for budgetary and planning
purposes; to assess the relative profitability and on-going performance of
our consolidated operations; to compare our performance from period to
period; and to compare our performance to that of our competitors. We also
believe adjusted loss from operations is useful to investors to compare our
operating performance to the performance of other communications,
entertainment and media companies. We believe that investors use current and
projected adjusted loss from operations to estimate our current or
prospective enterprise value and make investment decisions. Because we fund and build-out our satellite radio
system through the periodic raising and expenditure of large amounts of
capital, our results of operations reflect significant charges for interest
and depreciation expense. We believe adjusted loss from operations provides
useful information about the operating performance of our business apart from
the costs associated with our capital structure and physical plant. The
exclusion of interest and depreciation expense is useful given fluctuations
in interest rates and significant variation in depreciation expense that can
result from the amount and timing of capital expenditures and potential
variations in estimated useful lives, all of which can vary widely across
different industries or among companies within the same industry. We believe
the exclusion of taxes is appropriate for comparability purposes as the tax
positions of companies can vary because of their differing abilities to take
advantage of tax benefits and because of the tax policies of the various
jurisdictions in which they operate. We also believe the exclusion of
stock-based compensation expense is useful given the significant variation in
expense that can result from changes in the fair market value of our common
stock. Finally, we believe that the exclusion of our equity in net loss of
affiliate (SIRIUS Canada Inc.) is useful to assess the performance of our
core consolidated operations in the continental United States. To compensate
for the exclusion of taxes, other income (expense), depreciation, impairment
charges and stock-based compensation expense, we separately measure and
budget for these items. There are material limitations associated with the
use of adjusted loss from operations in evaluating our company compared with
net loss, which reflects overall financial performance, including the effects
of taxes, other income (expense), depreciation, impairment charges and
stock-based compensation expense. We use adjusted loss from operations to
supplement GAAP results to provide a more 40 complete understanding of the factors and trends
affecting the business than GAAP results alone. Investors that wish to
compare and evaluate our operating results after giving effect for these
costs, should refer to net loss as disclosed in our consolidated statements
of operations. Since adjusted loss from operations is a non-GAAP financial
measure, our calculation of adjusted loss from operations may be susceptible
to varying calculations; may not be comparable to other similarly titled
measures of other companies; and should not be considered in isolation, as a
substitute for, or superior to measures of financial performance prepared in
accordance with GAAP. Adjusted loss from operations is calculated as
follows: For the Years Ended December 31, 2006 2005 2004 Net loss $ (1,104,867 ) $ (862,997 ) $ (712,162 ) Impairment loss 10,917 Depreciation 105,749 98,555 95,370 Stock-based compensation 437,918 163,078 126,725 Other income (expense) 35,078 31,546 29,657 Income tax expense 2,065 2,311 4,201 Adjusted loss from operations $ (513,140 ) $ (567,507 ) $ (456,209 ) Liquidity and Capital Resources Cash Flows for the
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005 and for
the Year Ended December 31, 2005 Compared with Year Ended December 31, 2004 As
of December 31, 2006, 2005 and 2004, we had $393,421, $762,007 and $753,891,
respectively, in cash and cash equivalents. For the Years ended December 31, Variances 2006 2005 2004 2006 vs 2005 vs Net cash used in operating activities $ (414,549 ) $ (269,994 ) $ (334,463 ) $ (144,555 ) $ 64,469 Net cash provided by (used in) investing
activities 20,176 (175,821 ) (92,852 ) 195,997 (82,969 ) Net cash provided by financing activities 25,787 453,931 660,227 (428,144 ) (206,296 ) Net (decrease) increase in cash and cash
equivalents (368,586 ) 8,116 232,912 (376,702 ) (224,796 ) Cash and cash equivalents at beginning of
period 762,007 753,891 520,979 8,116 232,912 Cash and cash equivalents at end of period $ 393,421 $ 762,007 $ 753,891 $ (368,586 ) $ 8,116 Net Cash Used in Operating Activities. 2006 vs 2005: Net cash used in operating
activities increased $144,555 to $414,549 for the year ended December 31,
2006 from $269,994 for the year ended December 31, 2005. Such increase in the
net outflows of cash was attributable to payments for increased operating
expenses to support the growth of our subscriber base from 3,316,560
subscribers at December 31, 2005 to 6,024,555 subscribers at December 31,
2006; higher purchases of inventory to support production of SIRIUS radios
and higher sales volumes through our direct to consumer distribution channel; and
prepayments for new programming and distribution arrangements entered into in
2006; offset by cash collected for subscribers electing annual and other
prepaid subscription programs compared with the prior year. 2005 vs 2004: Net cash used in operating
activities decreased $64,469 to $269,994 for the year ended December 31, 2005
from $334,463 for the year ended December 31, 2004. Such decrease in the net
outflows of cash was attributable to cash received for subscribers electing
annual and other prepaid subscription programs and the effects of payments made in 2004 for
future services pursuant to certain programming agreements. These
positive impacts to cash flow were offset by payments for increased operating expenses to support the growth of our subscriber base. 41 Net Cash Used in Investing Activities. 2006 vs 2005: Net cash provided by investing
activities was $20,176 for the year
ended December 31, 2006 compared with net cash used in investing activities
of $175,821 for the year ended December 31, 2005. The $195,997
increase was primarily a result of sales of auction rate securities in 2006,
offset by an increase in capital expenditures from $49,888 for the year ended
December 31, 2005 to $99,827 for the year ended December 31, 2006 primarily
as a result of costs associated with our satellite construction and launch
vehicle. 2005 vs 2004: Net cash used in investing
activities increased $82,969 to $175,821 for the year ended December 31, 2005
from $92,852 for the year ended December 31, 2004. The increase was primarily
a result of purchasing $148,900 of auction rate securities with the proceeds
from the offering of our 95⁄8%
Senior Notes due 2013, of which we sold $31,850, for the year ended December
31, 2005, offset by payments deposited in escrow pursuant to certain
agreements. We
will incur significant capital expenditures to construct and launch our new
satellite and to improve our terrestrial repeater network and broadcast and
administrative infrastructure. These capital expenditures will support our
growth and the resiliency of our operations, and will also support the delivery
of future new revenue streams. Net Cash Provided by Financing Activities. 2006 vs 2005: Net cash provided by financing
activities decreased $428,144 to $25,787 for the year ended December 31, 2006
from $453,931 for the year ended December 31, 2005. The decrease was primarily
a result of the offering of $500,000 in aggregate principal amount of our 95⁄8% Senior Notes due 2013 in
August 2005 resulting in net proceeds to us of $493,005. 2005 vs 2004: Net cash provided by financing
activities decreased $206,296 to $453,931 for the year ended December 31,
2005 from $660,227 for the year ended December 31, 2004. In 2005, we raised
net proceeds of $493,005 through the offering of $500,000 in aggregate
principal amount of our 95⁄8%
Senior Notes due 2013. In 2004, we raised net proceeds of $614,438 through
the offering of 25,000,000 shares of our common stock resulting in net
proceeds of $96,025, $230,000 in aggregate principal amount of our 3¼%
Convertible Notes due 2011 resulting in net proceeds of $224,813, and
$300,000 in aggregate principal amount of our 2½% Convertible Notes due 2009
resulting in net proceeds of $293,600. We also received proceeds from the
exercise of options of $18,543 and $26,051 for the years ended December 31,
2005 and 2004, respectively, and proceeds from the exercise of warrants of
$19,850 for the year ended December 31, 2004. Financings and
Capital Requirements We
have financed our operations through the sale of debt and equity securities. In
2006, we did not enter into any new debt or equity financing transactions.
However, in 2005 and 2004 we had the following transactions: in August
2005, we sold $500,000 in aggregate principal amount of our 95⁄8% Senior Notes due 2013
resulting in net proceeds of $493,005; in October
2004, we sold 25,000,000 shares of our common stock and issued $230,000 in
aggregate principal amount of our 3¼% Convertible Notes due 2011 resulting in
aggregate net proceeds of $320,838; and in the first
quarter of 2004, we issued $300,000 in aggregate principal amount of our 2½%
Convertible Notes due 2009 resulting in net proceeds of $293,600. We also
issued 21,027,512 shares of our common stock for $19,850 in net proceeds in
connection with the exercise of warrants held by affiliates of The Blackstone
Group L.P. 42 Future Liquidity and
Capital Resource Requirements Based
upon our current plans, we believe that our cash, cash equivalents and
marketable securities will be sufficient to cover our estimated funding needs
through cash flow breakeven, the point at which our revenues are sufficient to
fund expected operating expenses, capital expenditures, working capital
requirements, interest and principal payments and taxes. In light
of our pending merger with XM Radio, and the uncertainty surrounding the timing
and financial impact, we are no longer currently providing cash flow guidance.
Our first quarter of positive free cash flow was reached in the fourth quarter
of 2006. Our financial projections are based on assumptions, which we believe
are reasonable but contain significant uncertainties. Our
business is in its early stages, and we regularly evaluate our plans and
strategy. These evaluations often result in changes to our plans and strategy,
some of which may be material and significantly change our cash requirements or
cause us to achieve cash flow breakeven at a later date. These changes in our
plans or strategy may include: the acquisition of unique or compelling
programming; the introduction of new features or services; significant new or
enhanced distribution arrangements; investments in infrastructure, such as
satellites, equipment or radio spectrum; and acquisitions of third parties that
own programming, distribution, infrastructure, assets, or any combination of
the foregoing. In
June 2006, we entered into a Credit Agreement with Space Systems/Loral. Under
the Credit Agreement, Space Systems/Loral has agreed to make loans to us in an
aggregate principal amount of up to $100,000 to finance the purchase of our new
satellite. Loans made under the Credit Agreement will be secured by our rights
under the Satellite Purchase Agreement with Space Systems/Loral, including our
rights to the new satellite. The loans are also entitled to the benefits of a
subsidiary guarantee from Satellite CD Radio, Inc., our subsidiary that holds
our FCC license, and any future material subsidiary that may be formed by us.
The maturity date of the loans is the earliest to occur of (i) April 6, 2009,
(ii) 90 days after the new satellite becomes available for shipment and (iii)
30 days prior to the scheduled launch of the new satellite. Any loans made
under the Credit Agreement generally will bear interest at a variable rate
equal to three-month LIBOR plus 4.75%. The Credit Agreement permits us to
prepay all or a portion of the loans outstanding without penalty. We have no
current plans to draw under this Credit Agreement. To
fund incremental cash requirements, or as market opportunities arise, we may
choose to raise additional funds through the sale of additional debt
securities, equity securities or a combination of debt and equity securities.
The incurrence of indebtedness would result in increased fiscal obligations and
could contain restrictive covenants. The sale of additional equity or
convertible debt securities may result in dilution to our stockholders. These
additional sources of funds may not be available or, if available, may not be available
on terms favorable to us. 2003 Long-Term Stock
Incentive Plan In
January 2003, our board of directors adopted the Sirius Satellite Radio 2003
Long-Term Stock Incentive Plan (the 2003 Plan), and on March 4, 2003 our
stockholders approved this plan. On May 25, 2004, our stockholders approved an
amendment to the 2003 Plan to include members of our board of directors as
eligible participants. Employees, consultants and members of our board of
directors are eligible to receive awards under the 2003 Plan. The 2003 Plan
provides for the grant of stock options, restricted stock, restricted stock
units and other stock-based awards that the compensation committee of our board
of directors may deem appropriate. Vesting
and other terms of stock-based awards are set forth in the agreements with the
individuals receiving the awards. Stock-based awards granted under the 2003
Plan are generally subject to a vesting requirement that includes one or all of
the following: (1) over time, generally three to five years from the date of
grant; (2) on a specific date in future periods with acceleration to earlier
periods if performance criteria are satisfied; or (3) as certain performance
targets set at the time of grant are achieved. Stock-based awards generally
expire ten years from date of grant. Each restricted stock unit entitles the
holder to receive one share of our common stock upon vesting. As
of December 31, 2006, approximately 75,879,000 stock options, shares of
restricted stock and restricted stock units were outstanding. As of December
31, 2006, approximately 86,524,000 shares of our common stock were available
for grant under the 2003 Plan. During the year ended December 31, 2006,
employees exercised 19,284,495 stock options at exercise prices ranging from
$0.47 to $3.93 per share, resulting in proceeds to us of $26,679. The exercise
of the remaining outstanding, vested options could result in an inflow of cash
in future periods. 43 Contractual Cash
Commitments We
have entered into various contracts that contain significant cash obligations.
These cash obligations could vary in future periods if we change our business
plan or strategy, which could include significant additions to our programming,
infrastructure or distribution. The following table summarizes our expected
contractual cash commitments as of December 31, 2006: 2007 2008 2009 2010 2011 Thereafter Total Long-term debt obligations $ $ 36,505 $ 301,744 $ $ 230,000 $ 500,000 $ 1,068,249 Cash interest payments 64,755 64,391 59,856 55,600 55,559 97,320 397,481 Lease obligations 9,079 9,391 9,345 9,161 8,424 26,502 71,902 Satellite and transmission 27,765 79,165 39,869 2,010 1,720 6,617 157,146 Programming and content 122,365 123,549 146,211 147,647 38,660 27,667 606,099 Customer service and billing 3,492 45 3,537 Marketing and distribution 80,289 31,534 22,743 26,153 18,173 5,500 184,392 Chip set development and production 7,022 7,022 Other 7,098 11,575 9 18,682 Total contractual cash commitments $ 321,865 $ 356,155 $ 579,777 $ 240,571 $ 352,536 $ 663,606 $ 2,514,510 Long-Term
Debt Obligations. Long-term debt obligations include
principal payments on our outstanding debt. The amounts presented assume that
the debt will not be converted to common stock since conversion is outside of
our control. Cash
Interest Payments. Cash interest payments include
interest due on our outstanding debt through maturity. Lease
Obligations. We have entered into operating leases
related to our studios, office space, terrestrial repeaters and equipment. Satellite
and Transmission. We have entered into agreements with
third parties to operate and maintain our off-site satellite telemetry,
tracking and control facilities and certain components of our terrestrial
repeater network. We have also entered into an agreement with Space
Systems/Loral to design and construct a new satellite. Construction of this
satellite is expected to be completed in the fourth quarter of 2008. We plan to
launch this satellite on a Proton rocket under our contract with International
Launch Services. Programming
and Content. We have entered into agreements with
licensors of programming and other content providers and, in certain instances,
are obligated to pay license fees and guarantee minimum advertising revenue
share. In addition, we pay royalties for public performances of music to
various rights organizations. Customer
Service and Billing. We have entered into agreements
with third parties to provide billing and subscriber management services. Marketing
and Distribution. We have entered into various
marketing, sponsorship and distribution agreements to promote our brand and are
obligated to make payments to sponsors, retailers, automakers and radio
manufacturers under these agreements. In addition, certain programming and
content agreements require us to purchase advertising on properties owned or
controlled by the licensors. We also reimburse automakers for certain
engineering and development costs associated with the incorporation of SIRIUS
radios into vehicles they manufacture. Chip
Set Development and Production. We have entered into
agreements with third parties to develop, produce and supply chip sets; to
develop products; and in certain instances to license intellectual property
related to chip sets. Other.
We have entered into various agreements with third
parties for general operating and strategic purposes. Amounts associated with
these agreements are included in the commitments table. In
addition to the contractual cash commitments described above, we have entered
into agreements with automakers, radio manufacturers and others that include
per-radio, per-subscriber, per-show and other variable cost arrangements. These
future costs are dependent upon many factors including our subscriber growth
and are difficult to anticipate; however, these costs may be substantial. We
may enter into additional programming, distribution, marketing and other
agreements that contain similar provisions. 44 Under
the terms of a joint development agreement with XM Radio, each party is
obligated to fund one half of the development cost for a unified standard for
satellite radios. The costs related to the joint development agreement are
being expensed as incurred to engineering, design and development expense in
the accompanying unaudited consolidated statements of operations. We are
currently unable to determine the expenditures necessary to complete this
process, but we do not expect that these expenditures will be material. We
are required under the terms of certain agreements to provide letters of credit
and deposit monies in escrow, which place restrictions on our cash and cash
equivalents. As of December 31, 2006 and 2005, $77,850 and $107,615,
respectively, were classified as restricted investments as a result of our
reimbursement obligations under these letters of credit and escrow deposits. As
of December 31, 2006, we have not entered into any off-balance sheet
arrangements or transactions. Recent Accounting Pronouncements In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and
expands the related disclosure requirements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007 and for interim periods within
those years. We are currently evaluating the impact of the adoption, if any, that SFAS No. 157 will have on our
consolidated results of operations and financial position. In
September 2006, the FASB issued
EITF No. 06-1, Accounting for Consideration Given by a Service Provider to
Manufacturers or Resellers of Equipment Necessary for an End-Customer to
Receive Service from the Service Provider. The EITF concluded that if
consideration given by a service provider to a third-party manufacturer or a
reseller that is not the service providers customer can be linked
contractually to the benefit received by the service providers customer, a service
provider should account for the consideration in accordance with EITF No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer. EITF No. 06-1
is effective for annual reporting periods beginning after June 15, 2007. We are
currently evaluating the effects that EITF No. 06-1 will have on our
consolidated results of operations and financial position. In June
2006, the FASB issued EITF No.
06-3, How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation), to clarify diversity in practice on the presentation of
different types of taxes in the financial statements. The EITF concluded that
for taxes within the scope of the issue, a company may include charges to
customers for taxes within revenues and the charge for the taxes from the
taxing authority within cost of sales, or, alternatively, it may net the charge
to the customer and the charge from the taxing authority. If taxes subject to
EITF No. 06-3 are significant, a company is required to disclose its
accounting policy for presenting taxes and the amounts of such taxes that are
recognized on a gross basis. EITF No. 06-3 is effective for the first interim
reporting period beginning after December 15, 2006. We will adopt EITF No. 06-3
effective January 1, 2007. The adoption of EITF No. 06-3 will not have a
material impact on our consolidated results of operations or financial
position. In
June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109, which prescribes a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return, as well as criteria on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. We will adopt FIN No. 48 effective January 1, 2007.
The adoption of FIN No. 48 will not have a material impact on our consolidated
results of operations or financial position. Item 7A. Quantitative
and Qualitative Disclosure About Market Risks (All
dollar amounts referenced in this Item 7A are in thousands, unless otherwise stated) As
of December 31, 2006, we did not have any derivative financial instruments and
we do not intend to use derivatives. We do not hold or issue any free-standing
derivatives. We hold investments in marketable securities, which consist of
United States government notes, certificates of deposit and auction rate
securities. We classify our marketable securities as available-for-sale. These
securities are consistent with the investment objectives contained within our
investment policy. The basic objectives of our investment policy are the
preservation of capital, maintaining sufficient liquidity to meet operating
requirements and maximizing yield. Despite the underlying long- 45 term maturity
of auction rate securities, from the investors perspective, such securities
are priced and subsequently traded as short-term investments because of the
interest rate reset feature. Interest rates are reset through an auction
process at predetermined periods of 28 or 35 days. Failed auctions rarely
occur. As of December 31, 2006, we held approximately $10,850 in auction rate
securities. Our
long-term debt includes fixed interest rates and the fair market value of the
debt is sensitive to changes in interest rates. Under our current policies, we
do not use interest rate derivative instruments to manage our exposure to
interest rate fluctuations. Item 8. Financial Statements and Supplementary Data See
Index to Consolidated Financial Statements contained in Item 15 herein. Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Controls and Procedures We
have performed an evaluation under the supervision and with the participation
of our management, including Mel Karmazin, our Chief Executive Officer, and
David Frear, our Executive Vice President and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation,
our management, including our Chief Executive Officer and Chief Financial
Officer, concluded that our disclosure controls and procedures were effective
as of December 31, 2006 to ensure that information required to be disclosed by
us in the reports filed or submitted by us under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. As a result of this evaluation, there were no
significant changes in our disclosure controls and procedures during the three
months ended December 31, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. Managements Report on Internal Control over
Financial Reporting Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Exchange Act. We have performed an evaluation under the supervision and with
the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of our internal control over
financial reporting. Our management used the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations to perform this evaluation. Based on that evaluation, our
management, including our Chief Executive Officer and Chief Financial Officer,
concluded that our internal control over financial reporting was effective as
of December 31, 2006. Ernst
& Young LLP, our independent registered public accounting firm, who audited
the consolidated financial statements included in this Annual Report on Form
10-K, has issued an attestation report on our managements assessment of the
effectiveness of our internal control over financial reporting as of December
31, 2006, a copy of which is included in this Annual Report on Form 10-K. None. Item 10. Directors, Executive Officers and Corporate
Governance Information
required by this item for executive officers is set forth under the heading
Executive Officers of the Registrant in Part I, Item 1, of this report. The
other information required by this Item 10 is included in our 46 definitive
proxy statement for our 2007 annual meeting of stockholders to be held on
Thursday, May 24, 2007, and is incorporated herein by reference. Item 11. Executive Compensation The
information required by this item is included in our definitive proxy statement
for our 2007 annual meeting of stockholders to be held on Thursday, May 24,
2007, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters The
information required by this item is included in our definitive proxy statement
for our 2007 annual meeting of stockholders to be held on Thursday, May 24,
2007, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and
Director Independence The
information required by this item is included in our definitive proxy statement
for our 2007 annual meeting of stockholders to be held on Thursday, May 24,
2007, and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The
information required by this item is included in our definitive proxy statement
for our 2007 annual meeting of stockholders to be held on Thursday, May 24,
2007, and is incorporated herein by reference. Item 15. Exhibits, Financial Statement Schedules (a) Financial
Statements, Financial Statement Schedules and Exhibits (1) Financial
Statements See Index to
Consolidated Financial Statements appearing on page F-1. (2) Financial
Statement Schedules See Index to
Consolidated Financial Statements appearing on page F-1. (3) Exhibits See
Exhibit Index appearing on pages E-1 through E-3 for a list of exhibits filed
or incorporated by reference as part of this Annual Report on Form 10-K. 47 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 1st day of March
2007. SIRIUS SATELLITE RADIO INC. By: /s/ DAVID J. FREAR David J. Frear Executive Vice President and Chief Financial Officer (Principal Financial Officer) Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated. Signature Title Date /s/ JOSEPH P. CLAYTON Chairman of
the Board of March 1,
2007 (Joseph P. Clayton) /s/ MEL KARMAZIN Chief
Executive Officer March 1,
2007 (Mel Karmazin) /s/ DAVID J. FREAR Executive
Vice President March 1,
2007 (David J. Frear) /s/ ADRIENNE E. CALDERONE Senior Vice
President and March 1,
2007 (Adrienne E. Calderone) /s/ LEON D. BLACK Director March 1,
2007 (Leon D. Black) /s/ LAWRENCE F. GILBERTI Director March 1,
2007 (Lawrence F. Gilberti) /s/ JAMES P. HOLDEN Director March 1,
2007 (James P. Holden) /s/ WARREN N. LIEBERFARB Director March 1,
2007 (Warren N. Lieberfarb) Director March 1, 2007 (Michael J. McGuiness) /s/ JAMES F. MOONEY Director March 1,
2007 (James F. Mooney) 48 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES F-1 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board
of Directors and Stockholders of Sirius Satellite Radio Inc. and Subsidiaries: We
have audited the accompanying consolidated balance sheets of Sirius Satellite
Radio Inc. (the Company) as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended December 31, 2006.
Our audits also included the financial statement schedule listed in the Index
at Item 15(a). These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2006 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2006 in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein. We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Companys
internal control over financial reporting as of December 31, 2006, based
on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 23, 2007 expressed an unqualified opinion thereon.
As discussed in Notes 2 and 11 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004),
Share-Based Payment, effective January 1, 2006. /s/ ERNST
& YOUNG
LLP New York, NY February 23, 2007 F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM To the Board
of Directors and Stockholders of Sirius Satellite Radio Inc.: We
have audited managements assessment, included in the accompanying
Item 9A, that Sirius Satellite Radio Inc. (the Company) maintained
effective internal control over financial reporting as of December 31,
2006, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control
over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2006, and our report dated
February 23, 2007 expressed an unqualified opinion thereon. /s/ ERNST
& YOUNG
LLP New York, NY F-3 SIRIUS SATELLITE RADIO INC. AND
SUBSIDIARIES (In thousands, except per share amounts) For the Years Ended December 31, 2006 2005 2004 Revenue: Subscriber revenue, including effects of mail-in
rebates $ 575,404 $ 223,615 $ 62,881 Advertising revenue, net of agency fees 31,044 6,131 906 Equipment revenue 26,798 12,271 2,898 Other revenue 3,989 228 169 Total revenue 637,235 242,245 66,854 Operating expenses (excludes depreciation shown separately
below)
(1): Cost of services: Satellite and transmission 41,797 29,798 33,198 Programming and content 551,989 118,076 87,252 Customer service and billing 68,949 47,202 22,780 Cost of equipment 35,233 11,827 3,467 Sales and marketing 242,035 212,741 202,848 Subscriber acquisition costs 451,614 399,350 206,851 General and administrative 137,466 87,555 57,905 Engineering, design and development 70,127 66,281 35,487 Depreciation 105,749 98,555 95,370 Total operating expenses 1,704,959 1,071,385 745,158 Loss from operations (1,067,724 ) (829,140 ) (678,304 ) Other income (expense): Interest and investment income 33,320 26,878 9,713 Interest expense, net of amounts
capitalized (64,032 ) (45,361 ) (41,386 ) Loss from redemption of debt (6,214 ) Equity in net loss of affiliate (4,445 ) (6,938 ) Other income 79 89 2,016 Total other income (expense) (35,078 ) (31,546 ) (29,657 ) Loss before income taxes (1,102,802 ) (860,686 ) (707,961 ) Income tax expense (2,065 ) (2,311 ) (4,201 ) Net loss $ (1,104,867 ) $ (862,997 ) $ (712,162 ) Net loss per share (basic and diluted) $ (0.79 ) $ (0.65 ) $ (0.57 ) Weighted average common shares outstanding (basic and
diluted) 1,402,619 1,325,739 1,238,585 (1) Amounts related to stock-based compensation included
in other operating expenses were as follows: Satellite and transmission $ 2,568 $ 1,942 $ 2,041 Programming and content 321,774 19,469 23,899 Customer service and
billing 812 549 439 Sales and marketing 19,543 42,149 48,353 Subscriber acquisition
costs 31,898 49,709 33,149 General and administrative 49,928 27,724 13,877 Engineering, design and
development 11,395 21,536 4,967 Total stock-based compensation $ 437,918 $ 163,078 $ 126,725 See Notes to Consolidated Financial
Statements. F-4 SIRIUS SATELLITE RADIO INC. AND
SUBSIDIARIES (In thousands, except share and per share amounts) As of December 31, 2006 2005 ASSETS Current assets: Cash and cash equivalents $ 393,421 $ 762,007 Marketable securities 15,500 117,250 Accounts receivable, net of allowance for
doubtful accounts of $3,183 and $1,550 at December 31, 2006 and 2005,
respectively 24,189 31,688 Receivables from distribution partners 46,825 26,513 Inventory 34,502 14,256 Prepaid expenses 52,588 18,248 Restricted investments 25,000 25,165 Other current assets 25,241 16,321 Total current assets 617,266 1,011,448 Property and equipment, net 810,389 828,357 FCC license 83,654 83,654 Restricted investments, net of current
portion 52,850 82,450 Deferred financing fees 13,166 16,303 Other long-term assets 81,203 63,150 Total assets $ 1,658,528 $ 2,085,362 LIABILITIES
AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable and accrued expenses $ 437,913 $ 331,953 Accrued interest 24,782 23,546 Deferred revenue 412,370 251,468 Total current liabilities 875,065 606,967 Long-term debt 1,068,249 1,084,437 Deferred revenue, net of current portion 76,580 56,479 Other long-term liabilities 27,705 12,511 Total liabilities 2,047,599 1,760,394 Commitments and contingencies (Note 14) Stockholders equity: Common stock, $0.001 par value:
2,500,000,000 shares authorized, 1,434,635,501 and 1,346,226,851 shares
issued and outstanding at December 31, 2006 and 2005, respectively 1,435 1,346 Additional paid-in capital 3,443,214 3,079,169 Deferred compensation (26,694 ) Accumulated deficit (3,833,720 ) (2,728,853 ) Total stockholders (deficit) equity (389,071 ) 324,968 Total liabilities and stockholders
equity $ 1,658,528 $ 2,085,362 See Notes to Consolidated Financial Statements. F-5 SIRIUS
SATELLITE RADIO INC. AND SUBSIDIARIES Accumulated Common Stock Additional Deferred Accumulated Shares Amount Total Balances, December 31, 2003 1,137,758,947 $ 1,138 $ 2,525,135 $ (47,411 ) $ 26 $ (1,153,694 ) $ 1,325,194 Net loss (712,162 ) (712,162 ) Change in unrealized loss on available-for-sale
securities (50 ) (50 ) Total comprehensive loss $ (712,212 ) Sale of common stock, par value $0.001 per share,
$3.87 per share, net
of expenses 25,000,000 25 96,000 96,025 Issuance of common stock to employees and employee
benefit plans 3,942,133 4 1,624 1,628 Issuance of common stock to third parties 99,602 280 280 Compensation in connection with the issuance of
stock-based awards 87,029 87,029 Issuance of stock-based awards 33,499 (33,499 ) Cancellation of stock-based awards (703 ) 703 Amortization of deferred compensation 29,244 29,244 Issuance of equity to the NFL 15,173,070 15 40,952 40,967 Exercise of options, $0.49 to $7.61 per
share 17,447,086 18 26,042 26,060 Exchange of 3½% Convertible
Notes due 2008,
including accrued interest 56,409,853 56 86,512 86,568 Exercise of warrants, $0.92 and $1.04 per
share 21,091,943 21 19,829 19,850 Balances, December 31, 2004 1,276,922,634 1,277 2,916,199 (50,963 ) (24 ) (1,865,856 ) 1,000,633 Net loss (862,997 ) (862,997 ) Change in unrealized gain on available-for-sale
securities 24 24 Total comprehensive loss $ (862,973 ) Issuance of common stock to employees and employee
benefit plans 2,773,776 3 3,366 3,369 Issuance of common stock to third parties 38,580 480 480 Compensation in connection with the issuance of
stock-based awards 109,112 109,112 Issuance of stock-based awards 18,300 (18,300 ) Cancellation of stock-based awards (1,333 ) 1,333 Amortization of deferred compensation 41,236 41,236 Exercise of options, $0.67 to $5.32 per
share 14,460,738 14 18,803 18,817 Exchange of 3½% Convertible
Notes due 2008,
including accrued interest 10,548,545 11 14,283 14,294 Exercise of warrants, $0.92 to $2.392 per
share 41,482,578 41 (41 ) Balances, December 31, 2005 1,346,226,851 $ 1,346 $ 3,079,169 $ (26,694 ) $ $ (2,728,853 ) $ 324,968 table
continued on next page See Notes to Consolidated Financial Statements. F-6 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES table
continued from previous page
Accumulated Other Common Stock Additional Deferred Accumulated Shares Amount Total Net loss (1,104,867 ) (1,104,867 ) Issuance of common stock to employees and employee
benefit plans 20,063,322 20 22,253 22,273 Issuance of common stock to third parties 34,467,869 35 224,917 224,952 Compensation in connection with the issuance of
stock-based awards 100,923 100,923 Reversal of deferred compensation related to the
adoption of Statement
of Financial Accounting Standards (SFAS) No.123R (26,694 ) 26,694 Exercise of options, $0.47 to $3.93 per
share 19,284,495 19 26,660 26,679 Exercise of warrants, $2.392 per share 2,862,533 3 (3 ) Exchange of 3½% Convertible Notes due 2008,
including accrued interest 11,730,431 12 15,989 16,001 Balances, December 31, 2006 1,434,635,501 $ 1,435 $ 3,443,214 $ $ $ (3,833,720 ) $ (389,071 ) See Notes to Consolidated Financial Statements. F-7 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES For the
Years Ended December 31, 2006 2005 2004 Cash flows from operating activities: Net loss $ (1,104,867 ) $ (862,997 ) $ (712,162 ) Adjustments to reconcile net loss to net cash used
in operating
activities: Depreciation 105,749 98,555 95,370 Non-cash interest expense 3,107 3,169 21,912 Provision for doubtful accounts 7,513 4,311 1,648 Non-cash equity in net loss of affiliate 4,445 6,938 Non-cash loss from redemption of debt 712 Loss on disposal of assets 1,661 1,028 70 Impairment loss 10,917 Stock-based compensation 437,918 163,078 126,725 Deferred income taxes 2,065 2,311 4,201 Changes in operating assets and
liabilities: Marketable securities 16 (292 ) Accounts receivable (14 ) (28,440 ) (7,684 ) Receivables from distribution partners (20,312 ) (17,265 ) (8,031 ) Inventory (20,246 ) (6,329 ) (1,850 ) Prepaid expenses and other current assets (42,367 ) (11,864 ) 2,395 Other long-term assets (19,331 ) 6,476 (44,563 ) Accounts payable and accrued expenses 33,519 145,052 108,511 Accrued interest 1,239 17,813 4,689 Deferred revenue 181,003 210,947 78,541 Other long-term liabilities 3,452 (3,505 ) (3,943 ) Net cash used in operating activities (414,549 ) (269,994 ) (334,463 ) Cash
flows from investing activities: Additions to property and equipment (99,827 ) (49,888 ) (28,589 ) Sales of property and equipment 127 72 443 Purchases of restricted and other
investments (12,339 ) (25,037 ) (89,706 ) Release of restricted investments 26,000 10,997 Purchases of available-for-sale
securities (123,500 ) (148,900 ) Sales of available-for-sale securities 229,715 36,935 25,000 Net cash provided by (used in) investing
activities 20,176 (175,821 ) (92,852 ) Cash flows from financing activities: Proceeds from issuance of long-term debt,
net 493,005 518,413 Proceeds from issuance of common stock,
net 96,025 Redemption of debt (57,609 ) Proceeds from exercise of stock options 25,787 18,543 26,051 Proceeds from exercise of warrants 19,850 Other (8 ) (112 ) Net cash provided by financing
activities 25,787 453,931 660,227 Net (decrease) increase in cash and cash
equivalents (368,586 ) 8,116 232,912 Cash and cash equivalents at the beginning of
period 762,007 753,891 520,979 Cash and cash equivalents at the end of
period $ 393,421 $ 762,007 $ 753,891 Supplemental
Disclosure of Cash and Non-Cash Flow Information Cash paid during
the period for: Interest, net of
amounts capitalized $ 59,929 $ 24,387 $ 14,920 Income taxes 583 158 Non-cash
operating activities: Common stock
issued in satisfaction of accrued compensation 7,243 4,824 913 Non-cash
investing and financing activities: Release of
restriction on marketable securities 4,750 Common stock
issued in exchange of 3½% Convertible Notes due 2008, including accrued
interest 16,001 14,294 86,568 Common stock
issued to third parties 224,952 40,967 See Notes to Consolidated Financial Statements. F-8 SIRIUS
SATELLITE RADIO INC. AND SUBSIDIARIES 1. Business We
are a satellite radio provider in the United States. We currently broadcast
over 130 channels of programming to listeners across the country. We offer 69
channels of 100% commercial-free music and feature 65 channels of sports, news,
talk, entertainment, traffic and weather for a monthly subscription fee of
$12.95. We
broadcast through our proprietary satellite radio system, which currently
consists of three orbiting satellites, 127 terrestrial repeaters that receive
and retransmit our signal, a satellite uplink facility and our studios.
Subscribers receive our service through SIRIUS radios, which are sold by
automakers, consumer electronics retailers, mobile audio dealers and through
our website. Subscribers can also receive our music channels and certain other
channels over the Internet. As of December 31, 2006, we had 6,024,555 subscribers. Our
music channels are available to DISH satellite television subscribers and
certain of our music channels are offered to Sprint subscribers over
multi-media handsets. We also offer traffic and weather data services for a
separate fee. Subscribers to DISH satellite television, Sprint and our traffic
and weather data services are not included in our subscriber count. In
2005, SIRIUS Canada Inc., a Canadian corporation owned by us, Canadian
Broadcasting Corporation and Standard Radio Inc., received a license from the
Canadian Radio-television and Telecommunications Commission to offer a
satellite radio service in Canada. In December 2005, SIRIUS Canada launched
service in Canada with 110 channels of commercial-free music and news, sports,
talk and entertainment programming, including 11 channels of Canadian content.
Subscribers to the SIRIUS Canada service are not included in our subscriber
count. 2. Summary of Significant Accounting Policies Principles of
Consolidation The
accompanying consolidated financial statements of Sirius Satellite Radio Inc.
and its subsidiaries have been prepared in accordance with U.S. generally
accepted accounting principles. All intercompany transactions and accounts have
been eliminated in consolidation. Use of Estimates The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported and related disclosures. Estimates, by their
nature, are based on judgment and available information. Actual results could
differ from those estimates. Significant
estimates inherent in the preparation of the accompanying consolidated
financial statements include allowances for doubtful accounts; depreciable
lives of our assets; stock-based compensation; mail-in rebates; certain
subscriber acquisition costs, including product warranty obligations; asset
retirement obligations; and impairments. Revenue Recognition Revenue
from subscribers consists of subscription fees; revenue derived from our
agreement with Hertz; non-refundable activation fees; and the effects of
mail-in rebates. We
recognize subscription fees as our service is provided to a subscriber. We
record deferred revenue for prepaid subscription fees and amortize these
prepayments to revenue ratably over the term of the respective subscription
plan. At the time of sale, vehicle owners purchasing or leasing a vehicle
with a subscription to our service typically receive between a six month and
one year prepaid subscription. We receive payment from automakers for
these subscriptions in advance of our service being activated. Such prepayments
are recorded to deferred revenue and amortized ratably over the service period
upon activation and sale to a customer. We also reimburse automakers F-9 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES for certain
costs associated with the SIRIUS radio installed in the applicable vehicle at
the time the vehicle is manufactured. The associated payments to the automakers
are included in subscriber acquisition costs. Although we receive payments from
the automakers, they do not resell our service; rather, automakers facilitate
the sale of our service to our customers, acting similar to an agent. We believe
this is the appropriate characterization of our relationship since we are
responsible for providing service to our customers including being obligated to
the customer if there was interruption of service. Activation
fees are recognized ratably over the estimated term of a subscriber
relationship, currently estimated to be 3.5 years. The estimated term of a
subscriber relationship is based on market research and managements judgment
and, if necessary, will be refined in the future as historical data becomes
available. As
required by Emerging Issues Task Force (EITF) No. 01-09, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products), an estimate of mail-in rebates that are paid by us
directly to subscribers is recorded as a reduction to revenue in the period the
subscriber activates our service. For certain mail-in rebate promotions, a
subscriber must remain active for a specified period of time to be considered
eligible. In those instances, such
estimate is recorded as a reduction to revenue over the required activation
period. We estimate the effects of mail-in rebates based on actual take-rates
for rebate incentives offered in prior periods, adjusted as deemed necessary based
on current take-rate data available at the time. In subsequent periods,
estimates are adjusted when necessary. We
recognize revenues from the sale of advertising on some of our non-music
channels as the advertising is broadcast. Agency fees are calculated based on a
stated percentage applied to gross billing revenue for our advertising
inventory and are reported as a reduction of advertising revenue. Advertising
revenue includes advertising sold in exchange for goods or services (barter)
recorded at fair value. Revenue from barter transactions is recognized when the
advertising is broadcast and goods or services exchanged are received. Goods or
services received are charged to expense when received and/or used. Barter
transactions are not significant to our consolidated financial statements. We
pay certain third parties a percentage of advertising revenue. Advertising
revenue is recorded gross of such revenue share payments in accordance with
EITF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent, as we are the primary obligor in the transaction. Advertising revenue
share payments are recorded to programming and content expense during the
period in which the advertising is broadcast. Equipment
revenue from the direct sale of SIRIUS radios and accessories is recognized
upon shipment. Shipping and handling costs billed to customers are recorded as
revenue. Shipping and handling costs associated with shipping goods to
customers are recorded to cost of equipment. EITF
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables,
provides guidance on how and when to recognize revenues for arrangements that
may involve the delivery or performance of multiple products, services and/or
rights to use assets. Revenue arrangements with multiple deliverables are
required to be divided into separate units of accounting if the deliverables in
the arrangement meet certain criteria. Arrangement consideration must be
allocated among the separate units of accounting based on their relative fair
values. We
determined that the sale of our service through our direct to consumer channel
with accompanying equipment constitutes a revenue arrangement with multiple
deliverables. In these types of arrangements, amounts received for equipment
are recognized as equipment revenue; amounts received for service are
recognized as subscription revenue; and amounts received for the
non-refundable, up-front activation fee that are not contingent on the delivery
of the service are allocated to equipment revenue. Activation fees are recorded
to equipment revenue only to the extent that the aggregate equipment and
activation fee proceeds do not exceed the fair value of the equipment. Any
activation fees not allocated to the equipment are deferred upon activation and
recognized as subscriber revenue on a straight-line basis over the estimated
term of a subscriber relationship. Stock-Based
Compensation Effective January 1, 2006, we adopted the provisions of SFAS No. 123 (revised
2004), Share-Based Payment (SFAS No. 123R), using the modified prospective
transition method. Prior periods are not restated under this transition method.
The stock-based compensation cost recognized beginning January 1, 2006 includes
compensation cost for all stock-based awards granted to employees and members
of our board of directors (i) prior to, but not vested as of, January 1, 2006
based on the grant date fair value originally estimated in accordance with F-10 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES the provisions
of SFAS No. 123, Accounting for Stock-Based Compensation, and (ii) subsequent
to December 31, 2005 based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123R. Compensation
cost under SFAS No. 123R is recognized ratably using the straight-line
attribution method over the expected vesting period. SFAS
No. 123R requires forfeitures to be estimated on the grant date and revised in
subsequent periods if actual forfeitures differ from those estimates. Prior to
the adoption of SFAS No. 123R we accounted for forfeitures as they occurred.
For pro forma disclosure purposes in accordance with SFAS No. 123, we estimated
forfeitures. As of January 1, 2006, the cumulative effect of adopting the
estimated forfeiture method was not significant. Prior
to January 1, 2006, we used the intrinsic value method to measure the
compensation cost of stock-based awards granted to employees and members of our
board of directors in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees. Accordingly, we
recorded compensation expense for stock-based awards granted to employees and
members of our board of directors over the vesting period equal to the excess
of the market price of the underlying common stock at the date of grant over
the exercise price of the stock-based award. The intrinsic value of restricted
stock units as of the date of grant was amortized to expense over the vesting
period. We accounted for modifications to stock-based awards in accordance with
Financial Accounting Standards Board Interpretation (FIN) No. 44, Accounting
for Certain Transactions Involving Stock Compensation. FIN No. 44 provided
that when the modification of a stock-based award occured, a new measurement
date resulted because the modification allowed an employee to vest in an award
that would have otherwise been forfeited pursuant to the original terms. In
accordance with FIN No. 44, we also recorded compensation charges or benefits
related to repriced stock options based on the market value of our common stock
until the repriced stock options were exercised, forfeited or expired. The
following table reflects net loss and net loss per share had stock-based
compensation to employees and members of our board of directors been recorded
based on the fair value method under SFAS No. 123 for the periods set forth
below: For the Years Ended December 31, 2005 2004 Net lossas reported $ (862,997 ) $ (712,162 ) Stock-based compensation to
employees and members of our board of directors 47,915 35,434 Stock-based compensation to
employees and members of our board of directors pro forma (94,677 ) (62,491 ) Net losspro forma $ (909,759 ) $ (739,219 ) Net loss per share: Basic and dilutedas
reported $ (0.65 ) $ (0.57 ) Basic and dilutedpro forma $ (0.69 ) $ (0.60 ) Pursuant
to SFAS 123R, we recognized $70,392 of compensation cost for stock-based awards
granted to employees and members of our board of directors for the year ended
December 31, 2006. This compared to $47,915 and $35,434 of compensation cost
for stock-based awards granted to employees and members of our board of
directors recognized pursuant to APB No. 25 for the years ended December 31,
2005 and 2004, respectively. Total unrecognized compensation related to
unvested stock-based awards granted to employees and members of our board of
directors at December 31, 2006, net of estimated forfeitures, is $105,146 and
is expected to be recognized over a weighted-average period of three years. Prior to
January 1, 2006, we accounted for stock-based awards granted to non-employees,
other than non-employee members of our board of directors, at fair value in
accordance with SFAS No. 123. Effective January 1, 2006, we account for such
awards at fair value in accordance with SFAS No. 123R and SEC guidance
contained in Staff Accounting Bulletin (SAB) No. 107. The fair value of
equity instruments granted to non-employees is measured in accordance with EITF
No. 96-18, Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
The final measurement date of equity instruments with performance criteria is
the date that each performance commitment for such equity instrument is
satisfied or there is a significant disincentive for non-performance. F-11 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES Stock-based
awards granted to employees, non-employees and members of our board of
directors generally include warrants, stock options, restricted stock and
restricted stock units. Charges associated with such stock-based awards are referred
to by us as stock-based compensation. Upon
adoption of SFAS No. 123R, we continued to estimate the fair value of
stock-based awards using the Black-Scholes option valuation model
(Black-Scholes). Black-Scholes was developed to estimate the fair market
value of traded options, which have no vesting restrictions and are fully
transferable. Option valuation models require the input of highly subjective
assumptions. Because our stock-based awards have characteristics significantly
different from those of traded options and because changes in the subjective
assumptions can materially affect the fair market value estimate, the existing
option valuation models do not necessarily provide a reliable single measure of
the fair value of our stock-based awards. Fair
value determined using Black-Scholes varies based on assumptions used for the
expected life, expected stock price volatility and risk-free interest rates.
For the years ended December 31, 2005 and 2004, we used historical volatility
of our stock over a period equal to the expected life of stock-based awards to
estimate fair value. We estimated the fair value of awards granted during the
year ended December 31, 2006 using the implied volatility of actively traded
options on our stock. We believe that implied volatility is more representative
of future stock price trends than historical volatility. The expected life
assumption represents the weighted-average period stock-based awards are
expected to remain outstanding. These expected life assumptions are established
through a review of historical exercise behavior of stock-based award grants
with similar vesting periods. Where historical patterns do not exist
contractual terms are used. The risk-free interest rate represents the daily
treasury yield curve rate at the reporting date based on the closing market bid
yields on actively traded U.S. treasury securities in the over-the-counter
market for the expected term. Our assumptions may change in future periods. The
following table summarizes the weighted-average assumptions used to compute
reported and pro forma stock-based compensation to employees and members of our
board of directors for the periods set forth below: For the Years Ended December 31, 2006 2005 2004 (pro forma) (pro forma) Risk-free interest rate 4.20 % 4.18 % 3.85 % Expected life of optionsyears 4.45 5.07 6.23 Expected stock price volatility 60 % 89 % 110 % Expected dividend yield N/A N/A N/A The
following table summarizes the range of assumptions used to compute reported
stock-based compensation to third parties, other than non-employee members of
our board of directors, for the periods set forth below: For the Years Ended December 31, 2006 2005 2004 Risk-free
interest rate 4.29-5.23 % 2.83-4.58 % 1.99-4.69 % Expected
life of optionsyears 1.67-10.00 1.00-9.93 1.00-10.00 Expected
stock price volatility 60 % 56-116 % 56-116 % Expected
dividend yield N/A N/A N/A SFAS
No. 123R changes the presentation of realized excess tax benefits associated
with the exercise of stock options in the statements of cash flows. Excess tax
benefits are realized tax benefits from tax deductions for the exercise of
stock options in excess of the deferred tax asset attributable to stock
compensation expense for such options. Prior to the adoption of SFAS No. 123R
such realized tax benefits were required to be presented as operating cash
flows. SFAS No. 123R requires such realized tax benefits to be presented as
part of cash flows from F-12 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES financing
activities. No income tax benefits have been realized from stock option
exercises during the years ended December 31, 2006, 2005 and 2004 because a
valuation allowance was recorded for all net deferred tax assets. Subscriber
Acquisition Costs Subscriber
acquisition costs include hardware subsidies paid to radio manufacturers,
distributors and automakers, including subsidies paid to automakers who include
a SIRIUS radio and a prepaid subscription to our service in the sale or lease
price of a new vehicle; subsidies paid for chip sets and certain other
components used in manufacturing radios; commissions paid to retailers and
automakers as incentives to purchase, install and activate SIRIUS radios;
product warranty obligations; and compensation costs associated with
stock-based awards granted in connection with certain distribution agreements.
The majority of subscriber acquisition costs are incurred in advance of
acquiring a subscriber. Subscriber acquisition costs do not include
advertising, loyalty payments to distributors and dealers of SIRIUS radios and
revenue share payments to automakers and retailers of SIRIUS radios which are
included in sales and marketing expense. Subscriber acquisition costs also do
not include amounts capitalized in connection with our agreement with Hertz, as
we retain ownership of certain SIRIUS radios used by Hertz. Subsidies
paid to radio manufacturers and automakers are expensed upon shipment or
installation. Commissions paid to retailers and automakers are expensed either
upon activation or sale of the SIRIUS radio. Chip sets that are shipped to radio
manufacturers and held on consignment are recorded as inventory and expensed as
subscriber acquisition costs when placed into production by radio
manufacturers. Costs for chip sets not held on consignment are expensed as
subscriber acquisition costs when the chip sets are shipped to radio
manufacturers. We
record product warranty obligations in accordance with FIN No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34. FIN No. 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken by issuing the guarantee. We warrant that certain products sold through our retail and
direct to consumer distribution channels will perform in all material respects
in accordance with standard published specifications in effect at the time of
the purchase of the products by the customer.
We provide a 12-month warranty on our products from purchase date for
repair or replacement of components and/or products that contain defects of
material or workmanship. Customers may
exchange products directly to the retailer within 30 days of purchase. We record a liability for an estimate of
costs that we expect to incur under our warranty guarantee when the product is
shipped from the manufacturer. Factors affecting our warranty liability
include the number of units sold and historical and anticipated rates of claims
and costs per claim. We periodically assess the adequacy of our warranty
liability based on changes in these factors. The
following table reconciles the beginning and ending aggregate product warranty liability: Product
Balance, December 31, 2005 $ 1,434 Accrual for warranties
issued during the period 7,127 Settlements during the
period (3,520 ) Balance, December 31, 2006 $ 5,041 Sports
Programming Costs We
record the costs associated with our sports programming agreements in
accordance with SFAS No. 63, Financial Reporting by Broadcasters. Programming
costs which are for a specified number of events are amortized on an
event-by-event basis; programming costs which are for a specified season are
amortized over the season on a straight-line basis. We allocate that portion of
sports programming costs which are related to sponsorship and marketing
activities to sales and marketing expenses on a straight-line basis over the
term of the agreement. Advertising
Costs We record the costs associated
with advertising in accordance with Statement of Position (SOP) No. 93-7,
Reporting on Advertising Costs. Media is expensed when aired and advertising
production costs are expensed F-13 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES as incurred.
Market development funds are fixed and variable payments to reimburse retailers
for the cost of advertising and other product awareness activities. Fixed
market development funds are expensed over the periods specified in the applicable
agreement; variable costs are expensed at the time a subscriber is activated. Research
and Development Costs Research
and development costs are expensed as incurred. Research and development costs
for the years ended December 31, 2006, 2005 and 2004 were $46,460, $53,401 and
$26,121, respectively, and are included in engineering, design and development
expenses. Income
Taxes We
account for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. Deferred income taxes are recognized for the tax consequences
related to temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for tax
purposes at each year-end, based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. A valuation allowance is established when necessary based on
the weight of available evidence, if it is considered more likely than not that
all or some portion of the deferred tax assets will not be realized. Income tax
expense is the sum of current income tax plus the change in deferred tax assets
and liabilities. Net
(Loss) Income Per Share We
compute net (loss) income per share in accordance with SFAS No. 128, Earnings
Per Share. Basic net (loss) income per share is based on the weighted average
common shares outstanding during each reporting period. Diluted net (loss)
income per share adjusts the weighted average for the potential dilution that
could occur if common stock equivalents (convertible debt, warrants, stock
options and restricted stock units) were exercised or converted into common
stock. Common stock equivalents of approximately 194,000,000, 235,000,000 and
190,000,000 were not considered in the calculation of diluted net loss per
share for the years ended December 31, 2006, 2005 and 2004, respectively, as
the effect would have been anti-dilutive. Comprehensive
(Loss) Income We
report comprehensive (loss) income in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 established a standard for reporting and
displaying other comprehensive (loss) income and its components within
financial statements. Unrealized gains and losses on available-for-sale
securities were the only component of our other comprehensive loss for the
years ended December 31, 2005 and 2004. There were no unrealized gains and
losses on available-for-sale securities for the year ended December 31, 2006.
Comprehensive loss for the years ended December 31, 2006, 2005 and 2004 was
$1,104,867, $862,973 and $712,212, respectively. Cash
and Cash Equivalents Cash
and cash equivalents consist of cash on hand, money market funds and
investments with an original maturity of three months or less when purchased.
Cash and cash equivalents are stated at fair market value. Investments Our
investments consist of the following: As of December 31, 2006 2005 Marketable securities $ 15,500 $ 117,250 Restricted investments 77,850 107,615 Investment, stated at cost 5,000 Total investments $ 98,350 $ 224,865 Marketable
Securities We
account for marketable securities in accordance with the provisions of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Marketable securities consist of certificates of deposit and auction rate
securities. For the years ended December 31, 2006 and 2005, certificates
of deposit were $4,650 and F-14 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES $200,
respectively, and auction rate securities were $10,850 and $117,050,
respectively. The basic objectives of our investment policy are the
preservation of capital, maintaining sufficient liquidity to meet operating
requirements and maximizing yield. We classify our marketable securities as
available-for-sale securities. Available-for-sale securities are carried at
fair market value. Unrealized gains and losses are included in accumulated
other comprehensive (loss) income as a separate component of stockholders
equity. Realized gains and losses, dividends and interest income, including
amortization of the premium and discount arising at purchase, are included in
interest and investment income. The specific-identification method is used to
determine the cost of all securities and the basis by which amounts are
reclassified from accumulated comprehensive (loss) income into earnings. While
the underlying securities of auction rate securities have contractual
maturities of more than 20 years, the interest rates on such securities reset
at intervals of 28 or 35 days. Auction rate securities are priced and
subsequently trade as short-term investments because of such interest rate
reset feature. We
received proceeds from the sale or maturity of marketable securities of
$229,715, $36,935 and $25,000 for the years ended December 31, 2006, 2005 and
2004, respectively. There were no unrealized holding gains or losses on
marketable securities as of December 31, 2006 and 2005. Restricted
Investments As
of December 31, 2006 and 2005, short-term restricted investments of $25,000 and
$25,165, respectively, included certificates of deposit placed in escrow
primarily for the benefit of a third party pursuant to a programming agreement.
As
of December 31, 2006 and 2005, long-term restricted investments of $52,850 and
$82,450, respectively, included certificates of deposit and money market funds
deposited in escrow for the benefit of third parties pursuant to programming
agreements and certificates of deposit placed in escrow to secure our
reimbursement obligations under letters of credit issued for the benefit of
lessors of office space. Cost
Method Investment In
September 2006, we invested in a third party for strategic purposes. We account for this investment under the
cost method. The carrying value of our investment was $5,000 at December 31,
2006 and is included in other long-term assets in our accompanying consolidated
balance sheet. Equity
Method Investment We
have a 49.9% economic interest in SIRIUS Canada. Our investment in SIRIUS
Canada is recorded using the equity method since we have significant influence,
but less than a controlling voting interest. Under this method, our investment
in SIRIUS Canada, originally recorded at cost, is adjusted to recognize our
share of net earnings or losses as they occur rather than as dividends or other
distributions are received, limited to the extent of our investment in,
advances to and commitments to fund SIRIUS Canada. Our share of net earnings or
losses of SIRIUS Canada is recorded to equity in net loss of affiliate in our
accompanying consolidated statements of operations. We recorded $4,445 and $6,938 for the years ended December 31,
2006 and 2005, respectively, for our share of SIRIUS Canadas net loss. Accounts
Receivable Accounts
receivable are stated at amounts due from customers net of an allowance for
doubtful accounts. We specifically reserve for customers with known disputes or
collectibility issues. The remaining reserve recorded in the allowance for
doubtful accounts is our best estimate of the amount of probable losses in our
existing accounts receivable based on our actual write-off experience. Inventory Inventory
consists of finished goods, chip sets and other raw material components used in
manufacturing radios. Inventory is stated at the lower of cost, determined on a
first-in, first-out basis, or market. We
record an estimated allowance for inventory that is considered slow moving and
obsolete or whose carrying value is in excess of net realizable value. F-15 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES Property
and Equipment Property
and equipment is stated at cost and depreciated on a straight-line basis over
the estimated useful lives of the related assets, which range from 2 to 30
years. Our satellite system is depreciated on a straight-line basis over the
respective remaining useful lives of our satellites from the date we launched
our service in February 2002 or, in the case of our spare satellite, from the
date it was delivered to ground storage in April 2002. Leasehold improvements
and equipment under capital leases is depreciated using the straight-line
method over the lesser of the lease term or the estimated useful life. We capitalize a portion of the interest on funds
borrowed to finance the construction and launch of our satellites. Capitalized
interest is recorded as part of the assets cost and depreciated over the
satellites useful life. Capitalized interest costs for the year ended December
31, 2006 was $4,205. We had no capitalized interest for the year ended December
31, 2005. Major
additions and improvements are capitalized, while replacements, repairs and
maintenance that do not improve or extend the life of the assets are charged to
expense. In the period assets are retired, or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts, and any
gain or loss on disposal is included in our results of operations. The
costs of acquiring, developing and testing software are capitalized under SOP
No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. We capitalize costs associated with software developed or
obtained for internal use when the following occur: (1) the preliminary project
stage is completed and (2) management has authorized funding a computer
software project and it is probable that the project will be completed and the
software will be used to perform the function intended. Capitalized costs
include external direct costs of materials and services consumed in developing
or obtaining internal-use software. Capitalization of such costs ceases no
later than the point at which the project is substantially complete and ready
for its intended use. The total net book value of capitalized software costs
was $17,349 and $14,943 for the years ended December 31, 2006 and 2005,
respectively. Costs charged to expense for
the amortization of capitalized software costs were $4,971, $3,451 and $2,387
for the years ended December 31, 2006, 2005 and 2004, respectively, and
are included in depreciation in our accompanying consolidated statements of
operations. The
estimated useful lives of our property and equipment are as follows: Customer
care, billing and conditional access 3-7 years Furniture,
fixtures, equipment and other 2-7 years Broadcast
studio equipment 3-15 years Satellite
telemetry, tracking and control facilities 3, 4 or 15 years Terrestrial
repeater network 5 or 15 years Leasehold
improvements 2-15 years Satellite
system 13 or 15 years Building 30 years The
expected useful lives of our three in-orbit satellites were originally 15 years
from the date they were placed into orbit. In June 2006, we entered into an
agreement with Space Systems/Loral to design and construct a new satellite. In
connection with this agreement, we adjusted the useful lives of two of our
in-orbit satellites to 13 years to reflect the way we intend to operate the
constellation. We continue to expect our spare satellite to operate effectively
for 15 years from the date of launch. Our
satellites have experienced circuit failures on their solar arrays. We continue
to monitor the operating condition of our satellites. If events or
circumstances indicate that the useful lives of our satellites have changed we
will modify the depreciable life accordingly. In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we review our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset is not recoverable. At the time an impairment in value of a long-lived
asset is identified, except for our FCC license discussed below, the impairment is measured as the amount by which
the carrying amount of a long-lived asset exceeds its fair value. To determine
fair value, we employ an expected present value technique, which utilizes
multiple cash flow scenarios that reflect the range of possible outcomes and an
appropriate discount rate. In
connection with our new satellite agreement, in June 2006 we wrote-off $10,917
for the net book value of certain satellite long-lead time parts purchased in
1999 that we will no longer need. Such amount is included in satellite and transmission expenses in
our accompanying consolidated statement of operations. F-16 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES FCC
License In
October 1997, the FCC granted us a license to operate a commercial satellite
radio service in the United States. While the FCC license has a renewable
eight-year term, we expect to renew our license as there are no legal,
regulatory, contractual, competitive, economic or other factors that limit its
useful life. As a result, we treat the FCC license as an indefinite-lived
intangible asset under the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. We re-evaluate the useful life determination for our FCC
license each reporting period to determine whether events and circumstances
continue to support an indefinite useful life. To date, we have not recorded
any amortization expense related to our FCC license. We
test our FCC license for impairment at least annually or more frequently if
indicators of impairment exist. We use a direct approach in performing our
annual impairment test for this asset which requires estimates of future cash
flows and other factors. If these estimates or projections change in the
future, we may be required to record an impairment charge related to this
asset. We began using the direct approach in 2005. Prior to 2005, we used the
residual method in estimating the fair value of our FCC license. Use of the
direct approach is in accordance with a September 29, 2004 Staff Announcement
from the staff of the Securities and Exchange Commission, Use of the Residual
Method to Value Acquired Assets Other Than Goodwill. Under either the direct
method or the residual method, if the fair value of our license was less than
the aggregated carrying amount of the license, an impairment would have been
recognized. Deferred
Financing Fees Costs
associated with the issuance of debt are deferred and amortized to interest
expense over the term of the respective debt. Fair
Value of Financial Instruments The
carrying amounts of cash and cash equivalents, accounts and other receivables,
and accounts payable approximate fair value due to the short-term nature of
these instruments. We
determined the estimated fair values of our debt using available market
information and commonly accepted 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. The use of alternative valuation methods and/or estimates may have
resulted in materially different estimates from those presented. Quoted
market prices were used to estimate the fair market values of our debt as of
December 31, 2006 and 2005. The following table summarizes the book and fair
values of our debt: As of December 31, 2006 2005 Book Value Fair Value Book Value Fair Value 9 5/8% Senior Notes due 2013 $ 500,000 $ 496,250 $ 500,000 $ 492,500 3 ¼%
Convertible Notes due 2011 230,000 226,838 230,000 338,443 2 ½%
Convertible Notes due 2009 300,000 310,125 300,000 484,875 3 ½%
Convertible Notes due 2008 36,505 100,024 52,693 255,693 8 ¾%
Convertible Subordinated Notes due 2009 1,744 N/A 1,744 907 Asset
Retirement Obligation In
accordance with SFAS No. 143, Accounting for Asset Retirement Obligations, we
recorded costs equal to the present value of the future obligation associated
with the retirement of our terrestrial repeater network. These costs, which are
included in other long-term liabilities, include an amount that we estimate
will be sufficient to satisfy our obligations under leases to remove our
terrestrial repeater equipment and restore the sites to their original
condition. The following table reconciles the beginning and ending aggregate
carrying amount of this asset retirement obligation: F-17 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES Asset Balance,
December 31, 2005 $ 455 Liabilities
settled (16 ) Accretion
expense 114 Balance,
December 31, 2006 $ 553 Reclassifications Certain
amounts in the prior period consolidated financial statements have been
reclassified to conform to the current period presentation, including the reclassification of stock-based
compensation from a separate line item disclosure to being included in other
operating expense line items in order to comply with the requirements of SFAS
No. 123R. Recent
Accounting Pronouncements In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and
expands the related disclosure requirements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007 and for interim periods within
those years. We are currently evaluating the impact of the adoption, if any, that SFAS No. 157 will have on our
consolidated results of operations and financial position. In
September 2006, the FASB issued EITF No. 06-1, Accounting for Consideration
Given by a Service Provider to Manufacturers or Resellers of Equipment
Necessary for an End-Customer to Receive Service from the Service Provider.
The EITF concluded that if consideration given by a service provider to a
third-party manufacturer or a reseller that is not the service providers
customer can be linked contractually to the benefit received by the service
providers customer, a service provider should account for the consideration in
accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor
to a Customer. EITF No. 06-1 is effective for annual reporting periods
beginning after June 15, 2007. We are currently evaluating the effects that
EITF No. 06-1 will have on our consolidated results of operations and financial
position. In June
2006, the FASB issued EITF No. 06-3, How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation), to clarify diversity in
practice on the presentation of different types of taxes in the financial
statements. The EITF concluded that for taxes within the scope of the issue, a
company may include charges to customers for taxes within revenues and the
charge for the taxes from the taxing authority within cost of sales, or,
alternatively, it may net the charge to the customer and the charge from the
taxing authority. If taxes subject to EITF No. 06-3 are significant, a company
is required to disclose its accounting policy for presenting taxes and the
amounts of such taxes that are recognized on a gross basis. EITF No. 06-3 is
effective for the first interim reporting period beginning after December 15,
2006. We will adopt EITF No. 06-3 effective January 1, 2007. The adoption of
EITF No. 06-3 will not have a material impact on our consolidated results of
operations or financial position. In
June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109, which prescribes a recognition
threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return, as
well as criteria on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN No. 48
is effective for fiscal years beginning after December 15, 2006. We will adopt
FIN No. 48 effective January 1, 2007. The adoption of FIN No. 48 will not have
a material impact on our consolidated results of operations or financial
position. 3. Subscriber Revenue Subscriber
revenue consists of subscription fees, non-refundable activation fees and the
effects of mail-in rebates. Revenues received from automakers for prepaid
subscriptions included in the sale or lease price of a new vehicle are also
included in subscriber revenue over the service period upon activation. F-18 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES Subscriber
revenue consists of the following: For the Years Ended December 31, 2006 2005 2004 Subscription
fees $ 572,386 $ 233,635 $ 65,201 Activation
fees 15,612 6,790 2,102 Effects of
mail-in rebates (12,594 ) (16,810 ) (4,422 ) Total subscriber revenue $ 575,404 $ 223,615 $ 62,881 4. Interest Costs During
the year ended December 31, 2006, we capitalized a portion of the interest on
funds borrowed to finance the construction and launch of our new satellite. The
following is a summary of our interest cost: For the Years Ended December 31, 2006 2005 2004 Interest
costs charged to expense $ 64,032 $ 45,361 $ 21,794 Debt
conversion costs charged to expense 19,592 Total interest expense 64,032 45,361 41,386 Interest
costs capitalized 4,205 Total interest costs incurred $ 68,237 $ 45,361 $ 41,386 Debt
conversion costs for the year ended December 31, 2004 were a result of the
exchange of $69,000 in aggregate principal amount of our3½%
Convertible Notes due 2008 for shares of our common stock. 5. Inventory Inventory
consists of the following: As of December 31, 2006 2005 Raw
materials $ 16,459 $ 13,459 Finished
goods 18,043 797 Total inventory $ 34,502 $ 14,256 6. Property and Equipment Property
and equipment consists of the following: As of December 31, 2006 2005 Satellite system $ 933,141 $ 948,573 Terrestrial repeater network 63,753 73,076 Leasehold improvements 33,334 28,476 Broadcast studio equipment 37,350 32,437 Customer care, billing and conditional
access. 35,796 29,534 Satellite telemetry, tracking and control
facilities 17,611 17,416 Furniture, fixtures, equipment and other 54,027 46,336 Land 311 311 Building 2,343 1,936 Construction in progress 101,848 27,907 Total property and equipment 1,279,514 1,206,002 Accumulated depreciation (469,125 ) (377,645 ) Property and equipment, net $ 810,389 $ 828,357 F-19 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES Construction
in progress consists of the following: As of December 31, 2006 2005 Satellite
system $ 78,491 $ 21,000 Terrestrial
repeater network 10,973 2,619 Leasehold
improvements 100 1,472 Other 12,284 2,816 Construction in progress $ 101,848 $ 27,907 Satellites Our
satellites were successfully launched in 2000. Our spare satellite was
delivered to ground storage in 2002. Our three-satellite constellation and
terrestrial repeater network were placed into service in 2002. In
2006, we entered into an agreement with Space Systems/Loral for the design and
construction of a new satellite. Construction of this satellite is expected to
be completed in the fourth quarter of 2008. We plan to launch this satellite on
a Proton rocket under our contract with International Launch Services, which we
entered into in 2005. As of December 31, 2006 and 2005, we recorded $78,491 and
$21,000, respectively, to property and equipment in our accompanying
consolidated balance sheets in connection with these agreements. 7. Related Party Transactions In
2005, we entered into a license and services agreement with SIRIUS Canada Inc.
Pursuant to such agreement, we are reimbursed for certain costs incurred
by us to provide SIRIUS Canada
Inc. service, including certain costs we incur for the production and
distribution of radios used by its subscribers as well as information technology
support costs. In consideration for
the rights granted pursuant to the license and services agreement, SIRIUS
Canada Inc. pays us a royalty based on
a percentage of its annual gross revenues.
Additionally, the initial financing we provided to SIRIUS Canada is by way of subscription to
non-voting shares which carries an 8% cumulative dividend. Total
costs reimbursed by SIRIUS Canada
Inc. for the years ended December 31, 2006 and 2005 were $9,227 and $6,025,
respectively. We recorded $945 and $10
in royalty income for the years ended December 31, 2006 and 2005,
respectively. Such royalty income was
recorded to other revenue in our accompanying consolidated statements of
operations. We also recorded dividend
income of $700 for the year ended December 31, 2006, which was included in
interest and investment income in our accompanying consolidated statements of
operations. Amounts
due from SIRIUS Canada
Inc. at December 31, 2006 were $4,157, of which $2,502 and $1,655 are included
in other current assets and other long-term assets, respectively, on our
accompanying consolidated balance sheets.
Amounts due from SIRIUS Canada
Inc. at December 31, 2005 were $2,277, of which $2,267 and $10 are included in
other current assets and other long-term assets, respectively, on our
accompanying consolidated balance sheets.
Amounts payable to SIRIUS Canada
Inc. at December 31, 2006 and 2005 to fund its remaining capital
requirements were $1,148 and $3,059, respectively, and are included in
accounts payable and accrued expenses in the accompanying consolidated balance
sheets. 8. Accounts Payable and Accrued Expenses Our
accounts payable and accrued expenses consist of the following: As of December 31, 2006 2005 Accounts
payable $ 26,048 $ 6,829 Accrued
programming 116,370 41,436 Accrued
compensation and other payroll related costs 28,376 26,370 Accrued
subsidies and distribution 185,188 151,311 Accrued web
streaming and broadcast royalties 13,629 19,190 Other
accrued expenses 68,302 86,817 Total accounts payable and accrued
expenses $ 437,913 $ 331,953 F-20 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES 9. Long-Term Debt and Accrued Interest Our
long-term debt consists of the following: Conversion As of December 31, 2006 2005 95⁄8% Senior Notes due 2013 N/A $ 500,000 $ 500,000 3¼%
Convertible Notes due 2011 $ 5.30 230,000 230,000 2½%
Convertible Notes due 2009 4.41 300,000 300,000 3½%
Convertible Notes due 2008 1.38 36,505 52,693 8¾%
Convertible Subordinated Notes due 2009 28.4625 1,744 1,744 Total long-term debt $ 1,068,249 $ 1,084,437 Accrued
interest associated with our long-term debt is as follows: As of December 31, 2006 2005 95⁄8% Senior Notes due 2013 $ 20,053 $ 18,888 3¼%
Convertible Notes due 2011 1,557 1,557 2½%
Convertible Notes due 2009 2,902 2,902 3½%
Convertible Notes due 2008 107 161 8¾%
Convertible Subordinated Notes due 2009 38 38 Space Systems/Loral
Credit Agreement 125 Total accrued interest $ 24,782 $ 23,546 The
maturities of our long-term debt are as follows: As of 2007 $ 2008 36,505 2009 301,744 2010 2011 230,000 Thereafter 500,000 Total debt $ 1,068,249 95⁄8%
Senior Notes due 2013 In
August 2005, we issued $500,000 in aggregate principal amount of our 95⁄8% Senior Notes due 2013
resulting in net proceeds of $493,005. In
September 2005, we used proceeds from the issuance of our 95⁄8% Senior Notes due 2013 to
redeem our outstanding 15% Senior Secured Discount Notes due 2007 and our 14½%
Senior Secured Notes due 2009, including accrued interest. We recognized a loss
from redemption of debt of $6,214 in connection with this redemption, including
a redemption premium of $5,502 and the write-off of unamortized debt issuance
costs of $712. The obligations under our 15% Senior Secured Discount Notes due
2007 and 14½% Senior Secured Notes due 2009 were secured by liens on certain of
our assets which were released in connection with the redemption of the notes. 3¼%
Convertible Notes due 2011 In
October 2004, we issued $230,000 in aggregate principal amount of our 3¼%
Convertible Notes due 2011 resulting in net proceeds of $224,813. These notes
are convertible, at the option of the holder, into shares of our common stock
at any time at a conversion rate of 188.6792 shares of common stock for each
$1,000.00 principal F-21 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES amount, or
$5.30 per share of common stock, subject to certain adjustments. Our 3¼% Convertible
Notes due 2011 mature on October 15, 2011 and interest is payable
semi-annually on April 15 and October 15 of each year. The
obligations under our 3¼% Convertible Notes due 2011 are not secured by any of
our assets. 2½%
Convertible Notes due 2009 In
February 2004, we issued $250,000 in aggregate principal amount of our 2½%
Convertible Notes due 2009 resulting in net proceeds of $244,625. In March
2004, we issued an additional $50,000 in aggregate principal amount of our 2½%
Convertible Notes due 2009 pursuant to an option granted in connection with the
initial offering of the notes, resulting in net proceeds of $48,975. These
notes are convertible, at the option of the holder, into shares of our common
stock at any time at a conversion rate of 226.7574 shares of common stock for
each $1,000.00 principal amount, or $4.41 per share of common stock, subject to
certain adjustments. Our 2½% Convertible Notes due 2009 mature on
February 15, 2009 and interest is payable semi-annually on February 15
and August 15 of each year. The obligations under our 2½% Convertible
Notes due 2009 are not secured by any of our assets. 3½%
Convertible Notes due 2008 In
May 2003, we issued $201,250 in aggregate principal amount of our 3½% Convertible
Notes due 2008 resulting in net proceeds of $194,224. These notes are
convertible, at the option of the holder, into shares of our common stock at
any time at a conversion rate of 724.6377 shares of common stock for each
$1,000.00 principal amount, or $1.38 per share of common stock, subject to
certain adjustments. Our 3½% Convertible Notes due 2008 mature on June 1,
2008 and interest is payable semi-annually on June 1 and December 1
of each year. The obligations under our 3½% Convertible Notes due 2008 are not
secured by any of our assets. During
the year ended December 31, 2006, holders of $16,188 in aggregate principal
amount of our 3½% Convertible Notes due 2008 presented such notes for
conversion in accordance with the terms of the indenture. We issued 11,730,431
shares of our common stock upon conversion of these notes. During the year
ended December 31, 2005, we issued 10,548,545 shares of our common stock in
exchange for $14,557 in aggregate principal amount of our 3½% Convertible Notes
due 2008, including accrued interest. In January 2004, we issued 56,409,853
shares of our common stock in exchange for $69,000 in aggregate principal
amount of our 3½% Convertible Notes due 2008, including accrued interest. We
incurred debt conversion costs of $19,592 for the year ended December 31,
2004. There were no debt conversion costs recorded for the years ended
December 31, 2006 and 2005. 8¾%
Convertible Subordinated Notes due 2009 In
1999, we issued our 8¾% Convertible Subordinated Notes due 2009. The remaining
balance of our 8¾% Convertible Subordinated Notes due 2009 mature on September
29, 2009 and interest is payable semi-annually on March 29 and
September 29 of each year. These notes are convertible, at the option of the
holder, into shares of our common stock at any time at a conversion rate of
35.134 shares of common stock for each $1,000.00 principal amount, or $28.4625
per share of common stock, subject to certain adjustments. The obligations
under our 8¾% Convertible Subordinated Notes due 2009 are not secured by any of
our assets. Space
Systems/Loral Credit Agreement In
June 2006, we entered into a Credit Agreement with Space Systems/Loral. Under
the Credit Agreement, Space Systems/Loral has agreed to make loans to us in an
aggregate principal amount of up to $100,000 to finance the purchase of our new
satellite. Loans made under the Credit Agreement will be secured by our rights
under the Satellite Purchase Agreement with Space Systems/Loral, including our
rights to the new satellite. The loans are also entitled to the benefits of a
subsidiary guarantee from Satellite CD Radio, Inc., our subsidiary that holds
our FCC license, and any future material subsidiary that may be formed by us.
The maturity date of the loans is the earliest to occur of (i) April 6, 2009,
(ii) 90 days after the new satellite becomes available for shipment and (iii)
30 days prior to the scheduled launch of the new satellite. Any loans made
under the Credit Agreement generally will bear interest at a variable rate
equal to three-month LIBOR plus 4.75%. The daily unused balance bears interest
at a rate per annum equal to 0.50%, payable quarterly on the last day of each
March, June, September and December, commencing June 30, 2006. The Credit
Agreement permits us to prepay all or a portion of the loans outstanding
without penalty. We have not borrowed under this Credit Agreement as of
December 31, 2006. F-22 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES Covenants
and Restrictions Our
95⁄8% Senior Notes due 2013 and the Credit Agreement require us to comply with
certain covenants that restrict our ability to, among other things, (i) incur
additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain
other restricted payments, investments or acquisitions, (iv) enter into certain
transactions with affiliates, (v) merge or consolidate with another person,
(vi) sell, assign, lease or otherwise dispose of all or substantially all of
our assets, and (vii) make voluntary prepayments of certain debt, in each case
subject to exceptions as provided in the 95⁄8% Senior Notes due 2013 indenture and the Credit
Agreement. If we fail to comply with these covenants, our 95⁄8% Senior Notes due 2013 and
any loans outstanding under the Credit Agreement could become immediately
payable and the Credit Agreement could be terminated. At December 31, 2006, we
were in compliance with all such covenants. 10. Stockholders Equity Common
Stock, Par Value $0.001 Per Share We
are authorized to issue 2,500,000,000 shares of our common stock. As of
December 31, 2006, approximately 424,385,000 shares of our common stock
were reserved for issuance in connection with outstanding convertible debt,
warrants, incentive stock plans and common stock to be granted to third parties
upon satisfaction of performance targets. During
the year ended December 31, 2006, employees exercised 19,284,495 stock options
at exercise prices ranging from $0.47 to $3.93 per share, resulting in proceeds
to us of $26,679. Of this amount, $25,504 was collected as of December 31,
2006. We also collected $283 in 2006 related to stock option exercises that
occurred in 2005. During the year ended December 31, 2005, 14,460,738 stock
options were exercised at exercise prices ranging from $0.67 to $5.32 per
share, resulting in proceeds to us of $18,817. Of this amount, $18,534 was
collected as of December 31, 2005. In
January 2006, Howard Stern and his agent were granted an aggregate of
34,375,000 shares of our common stock as a result of certain performance
targets that were satisfied in January 2006. We recognized expense associated
with these shares of $224,813 during the year ended December 31, 2006. In
October 2004, we sold 25,000,000 shares of our common stock resulting in net
proceeds of $96,025. In
January 2004, we signed a seven-year agreement with the NFL. We delivered to
the NFL 15,173,070 shares of our common stock valued at $40,967 upon execution
of this agreement. These shares of common stock are subject to certain transfer
restrictions which lapse over time. We recognized $5,852, $5,852 and $4,285 of
expense associated with these shares during the years ended December 31,
2006, 2005 and 2004, respectively. Of the remaining $24,978 in common stock
value, $5,852 and $19,126 are included in other current assets and other
long-term assets, respectively, on our accompanying consolidated balance sheet
as of December 31, 2006. Warrants In
June 2004, we issued DaimlerChrysler AG warrants to purchase up to 21,500,000
shares of our common stock at an exercise price of $1.04 per share. These
warrants have vested and are exercisable. These warrants replaced warrants
issued to DaimlerChrysler AG in October 2002. In
February 2004, we announced an agreement with RadioShack Corporation to
distribute, market and sell SIRIUS radios. In connection with this agreement,
we issued RadioShack warrants to purchase up to 10,000,000 shares of our common
stock. These warrants have an exercise price of $5.00 per share and vest and
become exercisable if RadioShack achieves activation targets during the
five-year term of the agreement. In
January 2004, we signed an agreement with Penske Automotive Group, Inc., United
Auto Group, Inc., Penske Truck Leasing Co. L.P. and Penske Corporation
(collectively, the Penske Companies). In connection with this agreement, we
agreed to issue the Penske companies warrants to purchase up to 38,000,000
shares of our common stock at an exercise price of $2.392 per share. The
warrants vest over time and upon achievement of certain milestones by the
Penske companies. During the years ended December 31, 2006 and 2005, Penske
exercised 5,292,500 and 2,838,700, respectively, vested warrants in a series of cashless exercises. In
connection with these transactions, we issued 2,862,533 and 1,944,073 shares of our common
stock for the years ended December 31, 2006 and 2005, respectively. In
January 2004, we issued the NFL warrants to purchase 50,000,000 shares of our
common stock at an exercise price of $2.50 per share. Of these warrants,
16,666,665 vest upon the delivery to us of media assets by the F-23 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES NFL and its
member clubs, and 33,333,335 of these warrants will be earned by the NFL or its
member clubs as we acquire subscribers which are directly trackable through
their efforts. During
the year ended December 31, 2004, we issued warrants to purchase 9,425,000
shares of our common stock at exercise prices of $3.00 to $3.21 per share to
other third parties as part of distribution and programming arrangements. These
warrants vest over time and upon achievement of certain milestones. During the
years ended December 31, 2006, 2005 and 2004, 30,000, 230,000 and 62,000 of these
warrants to purchase shares of our common stock, respectively, were issued to
consultants as stock options and included in our stock option activity. Warrants
to acquire shares of our common stock were outstanding as follows (shares in
thousands): Average Number of Warrants Expiration Date 2006 2005 NFL $ 2.50 March 2008March 2010 50,000 50,000 Penske companies 2.392 July 2009 29,869 35,161 DaimlerChrysler 1.04 May 2012 21,500 21,500 RadioShack 5.00 December 2010 10,000 10,000 Ford 3.00 September 2011 4,000 4,000 Other distribution and programming partners 3.11 January 2008June 2014 4,053 9,133 Other 20.33 June 2005April 2011 4,533 4,533 Total $ 3.11 123,955 134,327 We
recognized expense of $50,297, $100,349 and $74,700 in connection with warrants
for the years ended December 31, 2006, 2005 and 2004, respectively. 11. Benefit Plans Stock-Based
Awards In
January 2003, our board of directors adopted the Sirius Satellite Radio 2003
Long-Term Stock Incentive Plan (the 2003 Plan), and on March 4, 2003 our
stockholders approved this plan. On May 25, 2004, our stockholders
approved an amendment to the 2003 Plan to include members of our board of directors
as eligible participants. Employees, consultants and members of our board of
directors are eligible to receive awards under the 2003 Plan. The 2003 Plan
provides for the grant of stock options, restricted stock, restricted stock
units and other stock-based awards that the compensation committee of our board
of directors may deem appropriate. Vesting
and other terms of stock-based awards are set forth in the agreements with the
individuals receiving the awards. Stock-based awards granted under the 2003
Plan are generally subject to a vesting requirement that includes one or all of
the following: (1) over time, generally three to five years from the date
of grant; (2) on a specific date in future periods with acceleration to
earlier periods if performance criteria are satisfied; or (3) as certain
performance targets set at the time of grant are achieved. Stock-based awards
generally expire ten years from the date of grant. Each restricted stock unit
entitles the holder to receive one share of our common stock upon vesting. As
of December 31, 2006, approximately 75,879,000 stock options, shares of
restricted stock and restricted stock units were outstanding. As of
December 31, 2006, approximately 86,524,000 shares of our common stock
were available for grant under the 2003 Plan. The
following table summarizes the stock option activity under our stock incentive
plans for the year ended December 31, 2006 (shares in thousands): F-24 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES Shares Weighted Weighted Intrinsic Outstanding
at beginning of period 87,024 $ 4.61 Granted 5,254 5.69 Exercised (19,284 ) 1.38 Cancelled or
expired (1,201 ) 4.58 Outstanding
at end of period 71,793 5.56 6.83 $ 23,411 Exercisable
at end of period 42,449 6.00 6.09 21,527 The
weighted average grant date fair value of options granted during the years
ended December 31, 2006, 2005 and 2004 was $3.11, $6.17 and $4.12,
respectively. The total intrinsic value of stock options exercised during the
years ended December 31, 2006, 2005 and 2004 was $51,847, $76,758 and $76,071,
respectively. As
of December 31, 2005 and 2004, we had $2,073 and $7,363, respectively, of
deferred compensation in connection with stock options granted to employees and
members of our board of directors. Such deferred compensation was reversed to
additional paid-in capital in connection with the adoption of SFAS No. 123R. We
also record expense for stock options granted to consultants based on fair
value at the date of grant as determined in accordance with SFAS No. 123.
We recognized stock compensation expense associated with stock options of
$49,083, $13,814 and $27,957 for the years ended December 31, 2006, 2005
and 2004, respectively. Stock compensation expense associated with stock
options for the year ended December 31, 2005 included a charge of $479 for
an employee that was deemed to benefit from the modification of a stock-based
award resulting in a new measurement date. The
following table summarizes the non-vested restricted stock unit activity under
our stock incentive plans for the year ended December 31, 2006 (shares in
thousands): Shares Weighted Outstanding
at beginning of period 21,977 $ 2.36 Granted 1,503 5.57 Vested (19,294 ) 2.11 Cancelled or
expired (100 ) 7.04 Outstanding
at end of period 4,086 4.64 The
weighted average grant date fair value of restricted stock units granted during
the years ended December 31, 2005 and 2004 were $6.11 and $3.14, respectively. The total intrinsic value of
restricted stock units that vested during the year ended December 31, 2006,
2005 and 2004 was $97,846, $11,625 and $1,378, respectively. In
November 2004, we granted 3,000,000 shares of restricted common stock. Such
shares were issued and outstanding as of December 31, 2006. The
restrictions applicable to these shares lapse in equal installments on November
18 of each of the five years beginning on November 18, 2005. As
of December 31, 2005 and 2004, we had $24,621 and $43,600, respectively,
of deferred compensation associated with restricted stock and restricted stock
units. Such deferred compensation was reversed to additional paid-in capital in
connection with the adoption of SFAS No. 123R. We recognized stock compensation
expense associated with restricted stock units and shares of restricted
stock of $16,127, $34,398 and $13,896 for the years ended December 31,
2006, 2005 and 2004, respectively. For
the year ended December 31, 2006, we also recognized stock compensation
expense of $86,249 for restricted stock units expected to be granted for
services performed in 2006 or upon the satisfaction of 2006 performance
targets. For the year ended December 31, 2005, we also recognized stock compensation
expense of $3,361 for restricted stock units granted in February
2006 for services performed in 2005. For the year ended December 31, 2004,
we also recognized stock compensation expense of $2,651 for restricted stock
units granted in February 2005 for services performed in 2004. F-25 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES 401(k)
Savings Plan We
sponsor the Sirius Satellite Radio 401(k) Savings Plan (the Plan) for
eligible employees. The Plan allows eligible employees to voluntarily
contribute from 1% to 50% of their pre-tax salary subject to certain defined
limits. Currently we match 50% of employee voluntary contributions, up to 6% of
an employees pre-tax salary, in the form of shares of our common stock. Our
matching contribution vests at a rate of 33 1/3% for each year of employment
and is fully vested after three years of employment. Expense resulting from our
matching contribution to the Plan was $1,246, $926 and $718 for the years ended
December 31, 2006, 2005 and 2004, respectively. We
may also elect to contribute to the profit sharing portion of the Plan based
upon the total compensation of all participants eligible to receive an
allocation. These additional contributions, referred to as profit-sharing
contributions, are determined by the compensation committee of our board of
directors. Employees are only eligible to share in profit-sharing contributions
during any year in which they are employed on the last day of the year. Profit
sharing contribution expense was $4,251, $4,378 and $2,518 for the years ended
December 31, 2006, 2005 and 2004, respectively. 12. Income Taxes Our
income tax expense consisted of the following: For the Years Ended December 31, 2006 2005 2004 Current taxes: Federal $ $ $ State Total current taxes $ $ $ Deferred
taxes: Federal $ 2,169 $ 1,952 $ 3,662 State (104 ) 359 539 Total deferred taxes $ 2,065 $ 2,311 $ 4,201 Total income
tax expense $ 2,065 $ 2,311 $ 4,201 The
following table indicates the significant elements contributing to the
difference between the federal tax provision (benefit) at the statutory rate
and at our effective rate: For the Years Ended December 31, 2006 2005 2004 Federal tax benefit, at statutory rate $ (385,981 ) $ (301,240 ) $ (247,786 ) State income tax benefit, net of federal benefit (52,650 ) (55,414 ) (36,459 ) Change in state tax rates 45,916 (23,650 ) Change in taxes resulting from permanent differences, net (37,633 ) (24,163 ) (15,627 ) Other (974 ) (2,237 ) Change in valuation allowance 433,387 406,778 306,310 Income tax expense $ 2,065 $ 2,311 $ 4,201 The
tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities are presented below: As of December 31, 2006 2005 Deferred tax
assets: Net operating loss carryforwards $ 1,182,299 $ 794,793 Stock-based awards 139,048 90,987 Start-up costs capitalized for tax
purposes 1,904 25,635 Capitalized interest expense 43,572 53,976 F-26 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES Other 64,910 51,860 Total deferred tax asset 1,444,091 1,017,251 Deferred tax
liabilities: Depreciation of property and equipment (216,896 ) (223,237 ) Amortization of FCC license (10,814 ) (8,955 ) Total deferred tax liability (227,710 ) (232,192 ) Net deferred
tax assets before valuation allowance 1,216,381 785,059 Valuation
allowance (1,227,195 ) (793,808 ) Net deferred tax liability $ (10,814 ) $ (8,749 ) The
net deferred tax liability of $10,814 and $8,749 at December 31, 2006 and 2005, respectively,
is a result of the difference in accounting for our FCC license, which is
amortized over 15 years for tax purposes but not amortized for book purposes.
This net deferred tax liability cannot be offset against our deferred tax
assets under U.S. generally accepted accounting principles since it relates to
an indefinite-lived asset and is not anticipated to reverse in the same period. A
significant portion of our costs incurred to date have been capitalized for tax
purposes as a result of our status as a start-up enterprise. Total unamortized
start-up costs as of December 31, 2006 and 2005 were $4,787 and $64,551,
respectively. These capitalized costs are being amortized over 60 months. At
December 31, 2006, we had net operating loss (NOL) carryforwards of
approximately $2,973,000
for federal and state income tax purposes available to offset future taxable
income. These NOL carryforwards expire on various dates beginning in 2023. We
have had several ownership changes under Section 382 of the Internal
Revenue Code, which limit our ability to utilize tax deductions.
Due to an ownership change on March 4, 2003, we determined that $353,569 of gross deferred tax assets with respect to pre-March 5, 2003 tax loss carryovers will not be available. This amount was written off against the valuation allowance in 2003. Furthermore, future changes in our ownership may limit our ability to utilize
our deferred tax asset. Realization of our deferred tax assets is dependent
upon future earnings; accordingly, a full valuation allowance was recorded
against the assets. 13. Lease Obligations We
have entered into cancelable and non-cancelable operating leases for office
space, equipment and terrestrial repeaters. These leases provide for minimum
lease payments, additional operating expense charges, have initial terms
ranging from one to fifteen years, and certain leases have options to renew.
Total rent expense recognized in connection with leases for the years ended
December 31, 2006, 2005 and 2004 was $15,984, $14,958 and $13,567,
respectively. Future
minimum lease payments under non-cancelable leases as of December 31, 2006
were as follows: Operating 2007 $ 9,079 2008 9,391 2009 9,345 2010 9,161 2011 8,424 Thereafter 26,502 Total minimum lease payments $ 71,902 14. Commitments and Contingencies Contractual
Cash Commitments The
following table summarizes our expected contractual cash commitments (other
than long-term debt obligations, cash interest payments and lease obligations)
as of December 31, 2006: F-27 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES 2007 2008 2009 2010 2011 Thereafter Total Satellite and transmission $ 27,765 $ 79,165 $ 39,869 $ 2,010 $ 1,720 $ 6,617 $ 157,146 Programming and content 122,365 123,549 146,211 147,647 38,660 27,667 606,099 Customer service and billing 3,492 45 3,537 Marketing and distribution 80,289 31,534 22,743 26,153 18,173 5,500 184,392 Chip set development and production 7,022 7,022 Other 7,098 11,575 9 18,682 Total contractual cash commitments $ 248,031 $ 245,868 $ 208,832 $ 175,810 $ 58,553 $ 39,784 $ 976,878 Satellite
and Transmission. We have entered into agreements with
third parties to operate and maintain our off-site satellite telemetry,
tracking and control facilities and certain components of our terrestrial
repeater network. We have also entered into an agreement with Space
Systems/Loral to design and construct a new satellite. Construction of this
satellite is expected to be completed in the fourth quarter of 2008. We plan to
launch this satellite on a Proton rocket under our contract with International
Launch Services. Programming
and Content. We have entered into agreements with
licensors of programming and other content providers and, in certain instances,
are obligated to pay license fees and guarantee minimum advertising revenue
share. In addition, we pay royalties for public performances of music to
various rights organizations. Customer
Service and Billing. We have entered into agreements
with third parties to provide billing and subscriber management services. Marketing
and Distribution. We have entered into various
marketing, sponsorship and distribution agreements to promote our brand and are
obligated to make payments to sponsors, retailers, automakers and radio
manufacturers under these agreements. In addition, certain programming and
content agreements require us to purchase advertising on properties owned or
controlled by the licensors. We also reimburse automakers for certain engineering
and development costs associated with the incorporation of SIRIUS radios into
vehicles they manufacture. Chip
Set Development and Production. We have entered into
agreements with third parties to develop, produce and supply chip sets; to
develop products; and in certain instances to license intellectual property
related to chip sets. Other.
We have entered into various agreements with third
parties for general operating and strategic purposes. Amounts associated with
these agreements are included in the commitments table. In
addition to the contractual cash commitments described above, we have entered
into agreements with automakers, radio manufacturers and others that include
per-radio, per-subscriber, per-show and other variable cost arrangements. These
future costs are dependent upon many factors including our subscriber growth
and are difficult to anticipate; however, these costs may be substantial. We
may enter into additional programming, distribution, marketing and other
agreements that contain similar provisions. Under
the terms of a joint development agreement with XM Radio, each party is
obligated to fund one half of the development cost for a unified standard for
satellite radios. The costs related to the joint development agreement are
being expensed as incurred to engineering, design and development expense in
the accompanying consolidated statements of operations. We are currently unable
to determine the expenditures necessary to complete this process, but we do not
expect that these expenditures will be material. We
are required under the terms of certain agreements to provide letters of credit
and deposit monies in escrow, which place restrictions on our cash and cash
equivalents. As of December 31, 2006 and 2005, $77,850 and $107,615,
respectively, were classified as restricted investments as a result of our
reimbursement obligations under these letters of credit and escrow deposits. As
of December 31, 2006, we have not entered into any off-balance sheet
arrangements or transactions. Legal
Proceedings FCC
Matters. In April 2006, we learned that two
manufacturers of SIRIUS radios and XM Radio had received inquiries from the
Federal Communications Commission as to whether the FM transmitters in their
products complied with the FCCs emissions and frequency rules. We promptly
began an internal review of the compliance of the FM transmitters in a number
of our radios. In June 2006, we learned that a third manufacturer of SIRIUS
radios had received an inquiry from the Federal Communications Commission as to
whether the FM F-28 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES transmitters
in its products complied with the FCCs emissions and frequency rules. In June
2006, we received a letter from the FCC making similar inquiries. In July 2006,
we responded to the letter from the FCC in respect of the preliminary results
of our review. In August 2006, we received a follow-up letter of inquiry from
the FCC and responded to the FCCs further inquiry. We continue to cooperate
with the FCCs inquiry. During
our internal review, we determined that certain of our radios with FM
transmitters were not compliant with FCC rules. We have taken a series of
actions to correct the problem. In
connection with our internal review, we discovered that certain SIRIUS
personnel requested manufacturers to produce SIRIUS radios that were not
consistent with the FCCs rules. As a result of this review, we are taking
significant steps to ensure that this situation does not happen again,
including the adoption of a comprehensive compliance plan, approved by our board
of directors, to ensure that in the future our products comply with all
applicable FCC rules. The
FCC is continuing its review of our products. The FCCs laboratory has tested a
number of our products and found them to be compliant with the FCCs rules. We
believe our radios that are currently in production comply with applicable
FCCs rules. No health or safety issues are involved with these SIRIUS radios
and radios which are factory-installed in new vehicles are not affected. We do
not expect the resolution of these issues to have an adverse impact on our
previous guidance. In
October 2006, we ceased operating 11 of our terrestrial repeaters which we
discovered had been operating at variance to the specifications and applied to
the FCC for new authority to resume operating these repeaters. Copyright
Royalty Board Proceeding. We are a party to a
proceeding before the Copyright Royalty Board of the Library of Congress to
establish the royalty rate and terms for the sound recordings we use on our
satellite radio service for the period for 2007 through 2012. In October 2006,
we and XM filed our direct case in this proceeding with the Copyright Royalty
Board and proposed a royalty rate for our satellite radio subscription revenue. The
Copyright Royalty Board must set a rate that is calculated to achieve four
statutory objectives: to maximize
the availability of creative works to the public; to afford
the copyright owner a fair return for his creative work and the copyright
user a fair income under existing economic conditions; to reflect
the relative roles of the copyright owner and the copyright user in the
product made available to the public with respect to relative creative
contribution, technological contribution, capital investment, cost, risk and
contribution to the opening of new markets for creative expression and media
for their communication; and to minimize
any disruptive impact on the structure of the industries involved and on generally
prevailing industry practices. We
believe that the fee we proposed achieves these objectives and is consistent in
principle with the fee established under the same standard for digital cable
audio. SoundExchange,
the organization that collects and distributes royalties from various digital
music services on behalf of artists and music labels, simultaneously submitted
its direct case in this proceeding and proposed a substantially higher royalty
rate than we proposed. This submission of direct cases is the beginning of a
twelve to eighteen month process which, absent an agreement among the parties,
will result in a determination by the Copyright Royalty Board of an applicable
royalty rate. U.S.
Electronics Arbitration. U.S. Electronics Inc., a
licensed manufacturer and distributor of SIRIUS radios, has commenced an
arbitration proceeding against us. U.S. Electronics alleges that we breached
our contract, failed to pay monies owed under the contract, interfered with U.S.
Electronics relationships with retailers and manufacturers, and withheld
information relating to the FCCs inquiring into SIRIUS radios that include FM
modulators. U.S. Electronics is seeking $48,000 in damages. We believe that
approximately $41,000 of these F-29 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES damages are
barred by the limitation of liability provisions contained in the contract
between us and U.S. Electronics. We are vigorously defending this action. 15. Quarterly Financial Data (Unaudited) Our
quarterly results of operations are summarized below: For the Three Months Ended March 31 June 30 September 30 December 31 2006: Total revenue $ 126,664 $ 150,078 $ 167,113 $ 193,380 Cost of services(1) (333,997 ) (112,561 ) (108,223 ) (143,187 ) Loss from operations (446,169 ) (230,472 ) (154,154 ) (236,929 ) Net loss (458,544 ) (237,828 ) (162,898 ) (245,597 ) Net loss per share (basic and diluted)(2) $ (0.33 ) $ (0.17 ) $ (0.12 ) $ (0.17 ) 2005: Total revenue $ 43,216 $ 52,194 $ 66,831 $ 80,004 Cost of services(1) (47,145 ) (37,732 ) (47,101 ) (74,925 ) Loss from operations (190,259 ) (174,582 ) (166,919 ) (297,380 ) Net loss (193,612 ) (177,546 ) (180,450 ) (311,389 ) Net loss per share (basic and diluted)(2) $ (0.15 ) $ (0.13 ) $ (0.14 ) $ (0.23 ) (1) Quarterly cost of services
previously reported for the quarters ended 2005 reflect the reclassification
of certain costs from cost of services to sales and marketing expenses and
from stock-based compensation to cost of services. (2) The sum of the quarterly net
loss per share applicable to common stockholders (basic and diluted) does not
necessarily agree to the net loss per share for the year due to the timing of
our common stock issuances. 16. Subsequent Events In
January 2007, Howard Stern and his agent were granted an aggregate of
approximately 22,058,000 shares of our common stock as a result of certain
performance targets that were satisfied on December 31, 2006. The value of
these shares recorded to stock-based compensation expense during 2006 was
$82,941. We
and XM Radio announced on February 19, 2007 a definitive agreement, under which
we will be combined in a tax-free, all-stock merger of equals. Under the terms
of the agreement, XM Radio shareholders will receive 4.6 shares of our common
stock for each share of XM Radio they own. XM Radio and our shareholders will
each own approximately 50% of the combined company. The transaction is subject
to approval by XM Radio and our shareholders, the satisfaction of customary
closing conditions and regulatory review and approvals, including antitrust
agencies and the FCC. We and XM Radio expect the transaction to be completed by
the end of 2007. F-30 SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES Schedule IISchedule of Valuation and
Qualifying Accounts Balance at Charged to Write-offs/ Balance at For the year ended December 31, 2004 Allowance for Doubtful Accounts $ 380 $ 1,648 $ (1,496 ) $ 532 Deferred Tax AssetsValuation
Allowance 80,720 306,310 387,030 For the year ended December 31, 2005 Allowance for Doubtful Accounts $ 532 $ 4,311 $ (3,293 ) $ 1,550 Deferred Tax AssetsValuation
Allowance 387,030 406,778 793,808 For the year ended December 31, 2006 Allowance for Doubtful Accounts $ 1,550 $ 7,542 $ (5,909 ) $ 3,183 Deferred Tax AssetsValuation
Allowance 793,808 433,387 1,227,195 F-31 EXHIBIT INDEX Exhibit Description 2.1 Agreement
and Plan of Merger, dated as of February 19, 2007, by and among the Company,
Vernon Merger Corporation and XM Satellite Radio Holdings Inc. (incorporated
by reference to Exhibit 2.1 to the Companys Current Report on From 8-K dated
February 21, 2007). 3.1 Amended and
Restated Certificate of Incorporation dated March 4, 2003 (incorporated by
reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2002). 3.2 Amended and
Restated By-Laws (incorporated by reference to Exhibit 3.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 4.1 Form of
certificate for shares of Common Stock (incorporated by reference to Exhibit
4.3 to the Companys Registration Statement on Form S-1 (File No. 33-74782)). 4.2 Warrant
Agreement, dated as of May 15, 1999, between the Company and United States
Trust Company of New York, as warrant agent (incorporated by reference to
Exhibit 4.4.4 to the Companys Registration Statement on Form S-4 (File No.
333-82303)). 4.3 Indenture,
dated as of September 29, 1999, between the Company and United States Trust
Company of Texas, N.A., as trustee, relating to the Companys 8¾% Convertible
Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on October 13, 1999). 4.4 First
Supplemental Indenture, dated as of September 29, 1999, between the Company
and United States Trust Company of Texas, N.A., as trustee, relating to the
Companys 8¾% Convertible Subordinated Notes due 2009 (incorporated by
reference to Exhibit 4.01 to the Companys Current Report on Form 8-K filed
on October 1, 1999). 4.5 Second
Supplemental Indenture, dated as of March 4, 2003, among the Company, The
Bank of New York (as successor to United States Trust Company of Texas,
N.A.), as resigning trustee, and HSBC Bank USA, as successor trustee,
relating to the Companys 8¾% Convertible Subordinated Notes due 2009
(incorporated by reference to Exhibit 4.16 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2002). 4.6 Third
Supplemental Indenture, dated as of March 7, 2003, between the Company and
HSBC Bank USA, as trustee, relating to the Companys 8¾% Convertible
Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.17 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2002). 4.7 Form of 8¾%
Convertible Subordinated Note due 2009 (incorporated by reference to Article
VII of Exhibit 4.01 to the Companys Current Report on Form 8-K filed on
October 1, 1999). 4.8 Indenture,
dated as of May 23, 2003, between the Company and The Bank of New York, as
trustee (incorporated by reference to Exhibit 99.2 to the Companys Current
Report on Form 8-K dated May 30, 2003). 4.9 First
Supplemental Indenture, dated as of May 23, 2003, between the Company and The
Bank of New York, as trustee, relating to the Companys 3½% Convertible Notes
due 2008 (incorporated by reference to Exhibit 99.3 to the Companys Current
Report on Form 8-K dated May 30, 2003). 4.10 Second
Supplemental Indenture, dated as of February 20, 2004, between the Company
and The Bank of New York, as trustee, relating to the Companys 2½%
Convertible Notes due 2009 (incorporated by reference to Exhibit 4.20 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2003). 4.11 Third
Supplemental Indenture, dated as of October 13, 2004, between the Company and
The Bank of New York, as trustee, relating to the Companys 3¼% Convertible
Notes due 2011 (incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K dated October 13, 2004). 4.12 Indenture,
dated as of August 9, 2005, between the Company and The Bank of New York, as
trustee relating to the Companys 9 5/8% Senior Notes due 2013
(incorporated by reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K filed on August 12, 2005). 4.13 Common Stock
Purchase Warrant granted by the Company to DaimlerChrysler AG dated October
4, 2005 (incorporated by reference to Exhibit 4.13 to the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2005). E-1 Exhibit Description 4.14 Common Stock
Purchase Warrant granted by the Company to Ford Motor Company dated October
7, 2002 (incorporated by reference to Exhibit 4.16 to the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002). 4.15 Form of
Media-Based Incentive Warrant dated February 3, 2004 issued by the Company to
NFL Enterprises LLC (incorporated by reference to Exhibit 4.25 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2003). 4.16 Bounty-Based
Incentive Warrant dated February 3, 2004 issued by the Company to NFL
Enterprises LLC (incorporated by reference to Exhibit 4.26 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2003). 4.17 Amended and
Restated Warrant Agreement, dated as of December 27, 2000, between the
Company and United States Trust Company of New York, as warrant agent and
escrow agent (incorporated by reference to Exhibit 4.27 to the Companys
Registration Statement on Form S-3 (File No. 333-65602)). 4.18 Customer
Credit Agreement, dated as of May 31, 2006, between the Company and Space
Systems/Loral, Inc. (incorporated by reference to Exhibit 4.18 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 10.1.1 Lease
Agreement, dated as of March 31, 1998, between Rock-McGraw, Inc. and the
Company (incorporated by reference to Exhibit 10.1.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.1.2 Supplemental
Indenture, dated as of March 22, 2000, between Rock-McGraw, Inc. and the
Company (incorporated by reference to Exhibit 10.1.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). *10.2 Employment
Agreement dated November 18, 2004 between the Company and Mel Karmazin
(incorporated by reference to Exhibit 10.2 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2004). *10.3 Employment
Agreement, dated as of June 3, 2003, between the Company and David J. Frear
(incorporated by reference to Exhibit 10.7 to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003). *10.4 First
Amendment, dated as of August 10, 2005, to the Employment Agreement, dated as
of June 3, 2003, between the Company and David Frear (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form 8-K dated
August 12, 2005). *10.5 Employment
Agreement, dated as of May 5, 2004, between the Company and Scott A.
Greenstein (incorporated by reference to Exhibit 10.4 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). *10.6 First
Amendment, dated as of August 8, 2005, to the Employment Agreement, dated as
of May 5, 2004, between the Company and Scott Greenstein (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated
August 12, 2005). *10.7 Amended and
Restated Employment Agreement, dated as of March 11, 2005, between the
Company and James E. Meyer (incorporated by reference to Exhibit 10.5 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2004). *10.8 First
Amendment, dated February 2, 2006, to the Amended and Restated Employment
Agreement, dated March 11, 2005, between the Company and James E. Meyer
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K dated February 1, 2006). *10.9 Restricted
Stock Unit Agreement, dated as of August 9, 2005, between the Company and
James E. Meyer (incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K dated August 12, 2005). *10.10 Employment
Agreement, dated as of November 8, 2004, between the Company and Patrick L.
Donnelly (incorporated by reference to Exhibit 10.6 to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004). E-2 Exhibit Description *10.11 CD Radio
Inc. 401(k) Savings Plan (incorporated by reference to Exhibit 4.4 to the
Companys Registration Statement on Form S-8 (File No. 333-65473)). *10.12 Amended and
Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan (filed
herewith). *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 Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.14 Joint
Development Agreement, dated as of February 16, 2000, between the Company and
XM Satellite Radio Inc. (incorporated by reference to Exhibit 10.28 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). 21.1 List of
subsidiaries (filed herewith). 23.1 Consent of
Ernst & Young LLP (filed herewith). 31.1 Certificate
of Mel Karmazin, Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certificate
of David J. Frear, Executive Vice President and Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certificate
of Mel Karmazin, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith). 32.2 Certificate
of David J. Frear, Executive Vice President and Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith). * This
document has been identified as a management contract or compensatory plan or
arrangement. Portions of
this exhibit have been omitted pursuant to Applications for Confidential
treatment filed by the Company with the Securities and Exchange Commission. E-3 Exhibit 10.12
AMENDED AND RESTATED SIRIUS SATELLITE RADIO
Section 1. Purpose. The purposes of this Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan are to promote the interests
of Sirius Satellite Radio Inc. and its stockholders by (i) attracting and retaining employees and directors of, and consultants to, the Company and its Affiliates, as defined below; (ii) motivating such individuals by means of performance-related
incentives to achieve longer-range performance goals; and (iii) enabling such individuals to participate in the long-term growth and financial success of the Company.
Section 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below:
Affiliate shall mean any entity (i) that, directly or indirectly, is controlled by, controls or is under common control with, the Company or (ii) in which the Company has a significant equity interest, in
either case as determined by the Committee.
Award shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, Performance Award, Other Stock-Based Award or Performance Compensation Award made or granted from time
to time hereunder.
Award Agreement shall mean any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant.
Board shall mean the Board of Directors of the Company.
Change of Control shall mean the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of
the assets of the Company to any person or group (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), (ii) any person or group is or becomes the beneficial owner (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have beneficial ownership of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company, including by way of merger, consolidation or otherwise or (iii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board (together with any new directors whose election by such Board or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors of the
Company, then still in office, who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board, then in office.
Code shall mean the Internal Revenue Code of 1986, as amended from time to time.
Committee shall mean a committee of the Board designated by the Board to administer the Plan and composed of not less than two directors, each of whom is required to be a Non-Employee Director (within the
meaning of Rule 16b-3) and an outside director (within the meaning of Section 162(m) of the Code) to the extent Rule 16b-3 and Section 162(m) of the Code, respectively, are applicable to the Company and the Plan. If at any time such a
committee has not been so designated, the Board shall constitute the Committee.
Company shall mean Sirius Satellite Radio Inc., together with any successor thereto.
Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
Fair Market Value shall mean (i) with respect to any property other than Shares, the fair market value of such property determined by such methods or procedures as shall be established from time to time by the
Committee and (ii) with respect to the Shares, as of any date, (1) the mean between the high
and low sales prices of the Shares on the Nasdaq Stock Market for such date (or if not then trading on the Nasdaq Stock Market, the mean between the high and low sales price of the Shares on the stock exchange or
over-the-counter market on which the Shares are principally trading on such date), or, if there were no sales on such date, on the closest preceding date on which there were sales of Shares or (2) in the event there shall be no public market for the
Shares on such date, the fair market value of the Shares as determined in good faith by the Committee.
Incentive Stock Option shall mean a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any
successor provision thereto.
Negative Discretion shall mean the discretion authorized by the Plan to be applied by the Committee to eliminate or reduce the size of a Performance Compensation Award; provided that the exercise of such discretion would not cause the Performance Compensation Award to fail to qualify as performance-based compensation under Section 162(m) of the Code. By
way of example and not by way of limitation, in no event shall any discretionary authority granted to the Committee by the Plan including, but not limited to, Negative Discretion, be used to (a) grant or provide payment in respect of Performance
Compensation Awards for a Performance Period if the Performance Goals for such Performance Period have not been attained or (b) increase a Performance Compensation Award above the maximum amount payable under Section 4(a) or 11(d)(vi) of the Plan.
Notwithstanding anything herein to the contrary, in no event shall Negative Discretion be exercised by the Committee with respect to any Option or Stock Appreciation Right (other than an Option or Stock Appreciation Right that is intended to be a
Performance Compensation Award under Section 11 of the Plan).
Non-Qualified Stock Option shall mean a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is not intended to be an Incentive Stock Option.
Option shall mean an Incentive Stock Option or a Non-Qualified Stock Option.
Other Stock-Based Award shall mean any right granted under Section 10 of the Plan.
Participant shall mean any employee of, or consultant to, the Company or its Affiliates, or non-employee director who is a member of the Board or the board of directors of an Affiliate, eligible for an Award
under Section 5 and selected by the Committee to receive an Award under the Plan.
Performance Award shall mean any right granted under Section 9 of the Plan.
Performance Compensation Award shall mean any Award designated by the Committee as a Performance Compensation Award pursuant to Section 11 of the Plan.
Performance Criteria shall mean the criterion or criteria that the Committee shall select for purposes of establishing the Performance Goal(s) for a Performance Period with respect to any Performance
Compensation Award under the Plan. The Performance Criteria that will be used to establish the Performance Goal(s) shall be based on the attainment of specific levels of performance of the Company (or an Affiliate, division or operational unit of
the Company) and shall be limited to the following: return on net assets, return on shareholders' equity, return on assets, return on capital, shareholder returns, profit margin, earnings per Share, net earnings, operating earnings, earnings before
interest, taxes, depreciation and amortization, number of subscribers, growth of subscribers, operating expenses, capital expenses, subscriber acquisition costs, Share price or sales or market share. To the extent required under Section 162(m) of
the Code, the Committee shall, within the first 90 days of a Performance Period (or, if longer, within the maximum period allowed under Section 162(m) of the Code), define in an objective fashion the manner of calculating the Performance Criteria it
selects to use for such Performance Period.
Performance Formula shall mean, for a Performance Period, the one or more objective formulas applied against the relevant Performance Goal to determine, with regard to the Performance Compensation Award of a
particular Participant, whether all, some portion but less than all, or none of the Performance Compensation Award has been earned for the Performance Period.
Performance Goals shall mean, for a Performance Period, the one or more goals established by the Committee for the Performance Period based upon the Performance Criteria. The Committee is authorized at any time
during the first 90 days of a Performance Period, or at any time thereafter (but only to the extent the exercise of such authority after the first 90 days of a Performance Period would not cause the Performance Compensation Awards granted to any
Participant for the Performance Period to fail to qualify as 'performance-based compensation' under Section 162(m) of the Code), in its sole and absolute discretion, to adjust or modify the calculation of a Performance Goal for such Performance
Period to the extent permitted under Section 162(m) of the Code in order to prevent the dilution or enlargement of the rights of Participants, (a) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction,
event or development affecting the Company; or (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of,
changes in applicable laws, regulations, accounting principles, or business conditions.
Performance Period shall mean the one or more periods of time of at least one year in duration, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the
purpose of determining a Participant's right to and the payment of a Performance Compensation Award.
Person shall mean any individual, corporation, partnership, association, limited liability company, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other
entity.
Plan shall mean this Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan.
Restricted Stock shall mean any Share granted under Section 8 of the Plan.
Restricted Stock Unit shall mean any unit granted under Section 8 of the Plan.
Rule 16b-3 shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time.
SEC shall mean the Securities and Exchange Commission or any successor thereto and shall include the Staff thereof.
Shares shall mean the common stock of the Company, $.001 par value, or such other securities of the Company (i) into which such common stock shall be changed by reason of a recapitalization, merger,
consolidation, split-up, combination, exchange of shares or other similar transaction or (ii) as may be determined by the Committee pursuant to Section 4(b) of the Plan.
Stock Appreciation Right shall mean any right granted under Section 7 of the Plan.
Substitute Awards shall have the meaning specified in Section 4(c) of the Plan.
Section 3. Administration. (a) The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, and in addition
to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to a Participant and
designate those Awards which shall constitute Performance Compensation Awards; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv)
determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or
suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and
other amounts payable with respect to an Award (subject to Section 162(m) of the Code with respect to Performance Compensation Awards) shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii)
interpret, administer or reconcile any inconsistency, correct any defect, resolve ambiguities and/or supply any omission in the Plan and any instrument or agreement relating to, or Award made under, the Plan;
(viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; (ix) establish and administer Performance Goals and
certify whether, and to what extent, they have been attained; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.
(b) Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, and any stockholder.
(c) The mere fact that a Committee member shall fail to qualify as a Non-Employee Director or outside director within the meaning of Rule 16b-3 and Section 162(m) of the Code, respectively, shall
not invalidate any Award made by the Committee which Award is otherwise validly made under the Plan.
(d) No member of the Committee shall be liable to any Person for any action or determination made in good faith with respect to the Plan or any Award hereunder.
(e) With respect to any Performance Compensation Award granted to a Covered Employee (within the meaning of Section 162(m) of the Code) under the Plan, the Plan shall be interpreted and construed in accordance with Section
162(m) of the Code.
(f) Notwithstanding the foregoing, the Committee may delegate to one or more officers of the Company the authority to grant awards to Participants who are not officers or directors of the Company subject to Section 16 of
the Exchange Act or Covered Employees (within the meaning of Section 162(m) of the Code).
Section 4. Shares Available for Awards.
(a) Shares Available. Subject to adjustment as provided in Section 4(b), the aggregate number of Shares with respect to which Awards may be granted
from time to time under the Plan shall in the aggregate not exceed, at any time, 240,000,000; provided, however, that the aggregate number of Shares with respect to which Incentive Stock Options may be granted under the Plan shall be 40,000,000. The
maximum number of Shares with respect to which Options and Stock Appreciation Rights may be granted to any Participant in any fiscal year shall be 40,000,000 and the maximum number of Shares which may be paid to a Participant in the Plan in
connection with the settlement of any Award(s) designated as Performance Compensation Awards in respect of a single Performance Period shall be 40,000,000 or, in the event such Performance Compensation Award is paid in cash, the
equivalent cash value thereof. If, after the effective date of the Plan, any Shares covered by an Award granted under the Plan, or to which such an Award relates, are forfeited, or if an Award has expired, terminated or been canceled for any reason
whatsoever (other than by reason of exercise or vesting), then the Shares covered by such Award shall again be, or shall become, Shares with respect to which Awards may be granted hereunder.
(b) Adjustments. Notwithstanding any provisions of the Plan to the contrary, in the event that the Committee determines in its sole discretion that
any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or
exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other corporate transaction or event affects the Shares such that an adjustment is appropriate in
order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, equitably adjust any or all of (i) the number of Shares or other securities of the Company (or
number and kind of other securities or property) with respect to which Awards may be granted, (ii) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards, and (iii)
the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award in consideration for the cancellation of such Award, which, in the case of Options and Stock
Appreciation Rights shall equal the excess, if any, of the Fair Market Value of the Shares subject to such Options or Stock Appreciation Rights over the aggregate exercise price or grant price of such Options or Stock Appreciation Rights.
(c) Substitute Awards. Awards may, in the discretion of the Committee, be made under the Plan in assumption of, or in substitution for, outstanding
awards previously granted by the Company or its Affiliates or a company acquired by the Company or with which the Company combines (Substitute Awards). The number of Shares underlying any Substitute Awards shall be counted against the
aggregate number of Shares available for Awards under the Plan.
(d) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and
unissued Shares or of treasury Shares.
Section 5. Eligibility. Any employee of, or consultant to, the Company or any of its Affiliates (including any prospective employee), or non-employee
director who is a member of the Board or the board of directors of an Affiliate, shall be eligible to be selected as a Participant.
Section 6. Stock Options.
(a) Grant. Subject to the terms of the Plan, the Committee shall have sole and complete authority to determine the Participants to whom Options shall
be granted, the number of Shares to be covered by each Option, the exercise price therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to
grant Non-Qualified Stock Options, or to grant both types of Options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as
from time to time amended, and any regulations implementing such statute. All Options when granted under the Plan are intended to be Non-Qualified Stock Options, unless the applicable Award Agreement expressly states that the Option is intended to
be an Incentive Stock Option. If an Option is intended to be an Incentive Stock Option, and if for any reason such Option (or any portion thereof) shall not qualify as an Incentive Stock Option, then, to the extent of such nonqualification, such
Option (or portion thereof) shall be regarded as a Non-Qualified Stock Option appropriately granted under the Plan; provided that such Option (or portion thereof) otherwise complies with the Plan's requirements relating to Non-Qualified Stock
Options.
(b) Exercise Price. The Committee shall establish the exercise price at the time each Option is granted, which exercise price shall be set forth in
the applicable Award Agreement.
(c) Exercise. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion,
specify in the applicable Award Agreement. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary
or advisable. Options with an exercise price equal to or greater than the Fair Market Value per Share as of the date of grant are intended to qualify as performance-based compensation under Section 162(m) of the Code. In the sole
discretion of the Committee, Options may be granted with an exercise price that is less than the Fair Market Value per Share and such Options may, but need not, be intended to qualify as performance-based compensation in accordance with Section 11
hereof.
(d) Payment. (i) No Shares shall be delivered pursuant to any exercise of an Option until payment in full of the aggregate exercise price therefor is
received by the Company. Such payment may be made in cash, or its equivalent, or (x) by exchanging Shares owned by the optionee (which are not the subject of any pledge or other security interest and which have been owned by such optionee for at
least six months) or (y) subject to such rules as may be established by the Committee, through delivery of irrevocable instructions to a broker to sell the Shares otherwise deliverable upon the exercise of the Option and to deliver promptly to the
Company an amount equal to the aggregate exercise price or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair
Market Value of any such Shares so tendered to the Company as of the date of such tender is at least equal to such aggregate exercise price.
(ii) Wherever in this Plan or any Award Agreement a Participant is permitted to pay the exercise price of an Option or taxes relating to the exercise of an Option by delivering Shares, the Participant may, subject to
procedures satisfactory to the Committee, satisfy such delivery requirement by presenting proof of beneficial ownership of such Shares, in which case the Company shall treat the Option as exercised without further payment and shall withhold such
number of Shares from the Shares acquired by the exercise of the Option.
Section 7. Stock Appreciation Rights.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Participants to whom Stock
Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. Stock Appreciation Rights with a grant
price equal to or greater than the Fair Market Value per Share as of the date of grant are intended to qualify as performance-based compensation under Section 162(m) of the Code. In the sole discretion of the Committee, Stock
Appreciation Rights may be granted with an exercise price that is less than the Fair Market Value per Share and such Stock Appreciation Rights may, but need not, be intended to qualify as performance-based compensation in accordance with Section 11
hereof. Stock Appreciation Rights may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. Stock Appreciation Rights granted in tandem with or in addition to an Award may be granted
either before, at the same time as the Award or at a later time.
(b) Exercise and Payment. A Stock Appreciation Right shall entitle the Participant to receive an amount equal to the excess of the Fair Market Value
of a Share on the date of exercise of the Stock Appreciation Right over the grant price thereof. The Committee shall determine in its sole discretion whether a Stock Appreciation Right shall be settled in cash, Shares or a combination of cash and
Shares.
(c) Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at the grant of a
Stock Appreciation Right, the term, methods of exercise, methods and form of settlement, and any other terms and conditions of any Stock Appreciation Right. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate.
Section 8. Restricted Stock and Restricted Stock Units.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Participants to whom Shares
of Restricted Stock and Restricted Stock Units shall be granted, the number of Shares of Restricted Stock and/or the number of Restricted Stock Units to be granted to each Participant, the duration of the period during which, and the conditions, if
any, under which, the Restricted Stock and Restricted Stock Units may be forfeited to the Company, and the other terms and conditions of such Awards.
(b) Transfer Restrictions. Shares of Restricted Stock and Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise
encumbered, except, in the case of Restricted Stock, as provided in the Plan or the applicable Award Agreements. Certificates issued in respect of Shares of Restricted Stock shall be registered in the name of the Participant and deposited by such
Participant, together with a stock power endorsed in blank, with the Company. Upon the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such certificates to the Participant or the Participant's legal
representative.
(c) Payment. Each Restricted Stock Unit shall have a value equal to the Fair Market Value of a Share. Restricted Stock Units shall be paid in cash,
Shares, other securities or other property, as determined in the sole discretion of the Committee, upon the lapse of the restrictions applicable thereto, or otherwise in accordance with the applicable Award Agreement. Dividends paid on any Shares of
Restricted Stock may be paid directly to the Participant, withheld by the Company subject to vesting of the Restricted Shares pursuant to the terms of the applicable Award Agreement, or may be reinvested in additional Shares of Restricted Stock or
in additional Restricted Stock Units, as determined by the Committee in its sole discretion.
Section 9. Performance Awards.
(a) Grant. The Committee shall have sole and complete authority to determine the Participants who shall receive a Performance Award,
which shall consist of a right which is (i) denominated in cash or Shares, (ii) valued, as determined by the Committee, in accordance with the achievement of such performance goals during such performance periods as the Committee shall establish,
and (iii) payable at such time and in such form as the Committee shall determine.
(b) Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the Performance Goals to
be achieved during any Performance Period, the length of any Performance Period, the amount of any Performance Award and the amount and kind of any payment or transfer to be made pursuant to any Performance Award.
(c) Payment of Performance Awards. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or,
in accordance with procedures established by the Committee, on a deferred basis.
SECTION 10. Other Stock-Based Awards.
(a) General. The Committee shall have authority to grant to Participants an Other Stock-Based Award, which shall consist of any right
which is (i) not an Award described in Sections 6 through 9 above and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without
limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan; provided that any such rights must comply, to the extent deemed desirable by the Committee, with Rule 16b-3 and applicable
law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award, including the price, if any, at which securities may be purchased pursuant to any
Other Stock-Based Award granted under this Plan.
(b) Dividend Equivalents. In the sole and complete discretion of the Committee, an Award, whether made as an Other Stock-Based Award under this
Section 10 or as an Award granted pursuant to Sections 6 through 9 hereof, may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis.
Section 11. Performance Compensation Awards.
(a) General. The Committee shall have the authority, at the time of grant of any Award described in Sections 6 through 10 (other than Options and
Stock Appreciation Rights granted with an exercise price or grant price, as the case may be, equal to or greater than the Fair Market Value per Share on the date of grant), to designate such Award as a Performance Compensation Award in order to
qualify such Award as performance-based compensation under Section 162(m) of the Code.
(b) Eligibility. The Committee will, in its sole discretion, designate within the first 90 days of a Performance Period (or, if longer, within the
maximum period allowed under Section 162(m) of the Code) which Participants will be eligible to receive Performance Compensation Awards in respect of such Performance Period. Designation of a Participant eligible to receive an Award hereunder for a
Performance Period shall not in any manner entitle the Participant to receive payment in respect of any Performance Compensation Award for such Performance Period. The determination as to whether or not such Participant becomes entitled to payment
in respect of any Performance Compensation Award shall be decided solely in accordance with the provisions of this Section 11. Moreover, designation of a Participant eligible to receive an Award hereunder for a particular Performance Period shall
not require designation of such Participant eligible to receive an Award hereunder in any subsequent Performance Period and designation of one person as a Participant eligible to receive an Award hereunder shall not require designation of any other
person as a Participant eligible to receive an Award hereunder in such period or in any other period.
(c) Discretion of Committee with Respect to Performance Compensation Awards. With regard to a particular Performance Period, the Committee shall have
full discretion to select the length of such Performance Period, the type(s) of Performance Compensation Awards to be issued, the Performance Criteria that will be used to establish the Performance Goal(s), the kind(s) and/or level(s) of the
Performance Goals(s) is/are to apply to the Company and the Performance Formula. Within the first 90 days of a Performance Period (or, if longer, within the maximum period allowed under Section 162(m) of the Code), the Committee shall, with regard
to the Performance Compensation Awards to be issued for such Performance Period, exercise its discretion with respect to each of the matters enumerated in the immediately preceding sentence of this Section 11(c) and record the same in writing.
(d) Payment of Performance Compensation Awards. (i) Condition to Receipt of Payment. Unless otherwise provided in the applicable Award Agreement, a
Participant must be employed by the Company on the last day of a Performance Period to be eligible for payment in respect of a Performance Compensation Award for such Performance Period.
(ii) Limitation. A Participant shall be eligible to receive payment in respect of a Performance Compensation Award only to the extent that: (1) the Performance Goals for such period are achieved; and (2) the Performance
Formula as applied against such Performance Goals determines that all or some portion of such Participant's Performance Award has been earned for the Performance Period.
(iii) Certification. Following the completion of a Performance Period, the Committee shall meet to review and certify in writing whether, and to what extent, the Performance Goals for the Performance Period have been
achieved and, if so, to calculate and certify in writing that amount of the Performance Compensation Awards earned for the period based upon the Performance Formula. The Committee shall then determine the actual size of each Participant's
Performance Compensation Award for the Performance Period and, in so doing, may apply Negative Discretion, if and when it deems appropriate.
(iv) Negative Discretion. In determining the actual size of an individual Performance Award for a Performance Period, the Committee may reduce or eliminate the amount of the Performance Compensation Award earned under the
Performance Formula in the Performance Period through the use of Negative Discretion if, in its sole judgement, such reduction or elimination is appropriate.
(v) Timing of Award Payments. The Awards granted for a Performance Period shall be paid to Participants as soon as administratively possible following completion of the certifications required by this Section 11.
(vi) Maximum Award Payable. Notwithstanding any provision contained in the Plan to the contrary, the maximum Performance Compensation Award payable to any one Participant under the Plan for a Performance Period is
40,000,000 Shares or, in the event the Performance Compensation Award is paid in cash, the equivalent cash value thereof on the last day of the Performance Period to which such Award relates. Furthermore, any Performance Compensation Award that has
been deferred shall not (between the date as of which the Award is deferred and the payment date) increase (i) with respect to Performance Compensation Award that is payable in cash, by a measuring factor for each fiscal year greater than a
reasonable rate of interest set by the Committee or (ii) with respect to a Performance Compensation Award that is payable in Shares, by an amount greater than the appreciation of a Share from the date such Award is deferred to the payment date.
Section 12. Amendment and Termination.
(a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided that
no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement applicable to the Plan; and provided, further, that
any such amendment, alteration, suspension, discontinuance or termination that would impair the rights of any Participant or any holder or beneficiary of any Award previously granted shall not be effective without the consent of the affected
Participant, holder or beneficiary.
(b) Amendments to Awards. The Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or
terminate, any Award theretofore granted; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would impair the rights of any Participant or any holder or beneficiary of any Award
previously granted shall not be effective without the consent of the affected Participant, holder or beneficiary.
(c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make equitable
adjustments in the terms and conditions of, and the criteria included in, all outstanding Awards in recognition of unusual or nonrecurring events (including, without limitation,
the events described in Section 4(b) hereof) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles,
whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be
authorized to the extent that such authority or adjustment would cause an Award designated by the Committee as a Performance Compensation Award under Section 11 of the Plan to fail to qualify as performance-based compensation under
Section 162(m) of the Code.
Section 13. Change of Control. In the event of a Change of Control, any outstanding Awards then held by Participants which are unexercisable or
otherwise unvested shall automatically be deemed exercisable or otherwise vested, as the case may be, effective as of immediately prior to such Change of Control, unless the terms of the Award Agreement expressly provides to the contrary.
Section 14. General Provisions.
(a) Nontransferability.
(i) Each Award, and each right under any Award, shall be exercisable only by the Participant during the Participant's lifetime, or, if permissible under applicable law, by the Participant's legal guardian or representative.
(ii) No Award may be sold, assigned, alienated, pledged, attached or otherwise transferred or encumbered by a Participant otherwise than by will or by the laws of descent and distribution, and any such purported sale,
assignment, alienation, pledge, attachment, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided that the designation of a beneficiary shall not constitute a sale, assignment, alienation, pledge,
attachment, transfer or encumbrance.
(iii) Notwithstanding the foregoing, the Committee may in the applicable Award Agreement evidencing an Option granted under the Plan or at any time thereafter in an amendment to an Award Agreement provide that Options
granted hereunder which are not intended to qualify as Incentive Options may be transferred by the Participant to whom such Option was granted (the Grantee) without consideration, subject to such rules as the Committee may adopt to
preserve the purposes of the Plan, to: (1) the Grantee's spouse, children or grandchildren (including adopted and stepchildren and grandchildren) (collectively, the 'Immediate Family'); (2) a trust solely for the benefit of the Grantee and his or
her Immediate Family; or (3) a partnership, corporation or limited liability company whose only partners, members or shareholders are the Grantee and his or her Immediate Family; (each transferee described in clauses (1), (2) and (3) above is
hereinafter referred to as a Permitted Transferee); provided that the Grantee gives the Committee advance written notice describing the terms and conditions of the proposed transfer and the Committee notifies the Grantee in writing that
such a transfer would comply with the requirements of the Plan and any applicable Award Agreement evidencing the Option.
The terms of any Option transferred in accordance with the immediately preceding sentence shall apply to the Permitted Transferee and any reference in the Plan or in an Award Agreement to an optionee, Grantee or
Participant shall be deemed to refer to the Permitted Transferee, except that (a) Permitted Transferees shall not be entitled to transfer any Options, other than by will or the laws of descent and distribution; (b) Permitted Transferees shall not be
entitled to exercise any transferred Options unless there shall be in effect a registration statement on an appropriate form covering the Shares to be acquired pursuant to the exercise of such Option if the Committee determines that such a
registration statement is necessary or appropriate, (c) the Committee or the Company shall not be required to provide any notice to a Permitted Transferee, whether or not such notice is or would otherwise have been required to be given to the
Grantee under the Plan or otherwise and (d) the consequences of termination of the Grantee's employment by, or services to, the Company under the terms of the Plan and the applicable Award Agreement shall continue to be applied with respect to the
Grantee, following which the Options shall be exercisable by the Permitted Transferee only to the extent, and for the periods, specified in the Plan and the applicable Award Agreement.
(b) No Rights to Awards. No Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of
treatment of Participants, or holders or beneficiaries of Awards. The
terms and conditions of Awards and the Committee's determinations and interpretations with respect thereto need not be the same with respect to each Participant (whether or not such Participants are similarly situated).
(c) Share Certificates. All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any
Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the SEC, any stock exchange upon which such
Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.
(d) Withholding. (i) A Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and
is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or
other property) of any applicable withholding taxes in respect of an Award, its exercise, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all
obligations for the payment of such taxes. The Committee may provide for additional cash payments to holders of Awards to defray or offset any tax arising from the grant, vesting, exercise or payments of any Award.
(ii) Without limiting the generality of clause (i) above, a Participant may satisfy, in whole or in part, the foregoing withholding liability by delivery of Shares owned by the Participant (which are not subject to any
pledge or other security interest and which have been owned by the Participant for at least six months) with a Fair Market Value equal to such withholding liability or by having the Company withhold from the number of Shares otherwise issuable
pursuant to the exercise of the option a number of Shares with a Fair Market Value equal to such withholding liability.
(iii) Notwithstanding any provision of this Plan to the contrary, in connection with the transfer of an Option to a Permitted Transferee pursuant to Section 14(a), the Grantee shall remain liable for any withholding taxes
required to be withheld upon the exercise of such Option by the Permitted Transferee.
(e) Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement which shall be delivered to the Participant and shall specify the
terms and conditions of the Award and any rules applicable thereto, including but not limited to the effect on such Award of the death, disability or termination of employment or service of a Participant and the effect, if any, of such other events
as may be determined by the Committee.
(f) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing
in effect other compensation arrangements, which may, but need not, provide for the grant of options, restricted stock, Shares and other types of Awards provided for hereunder (subject to stockholder approval if such approval is required), and such
arrangements may be either generally applicable or applicable only in specific cases.
(g) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of, or in any
consulting relationship to, or as a director on the Board or board of directors, as applicable, of, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment or discontinue any
consulting relationship, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan, any Award Agreement or any applicable employment contract or agreement.
(h) No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or holder or beneficiary of any Award shall have any
rights as a stockholder with respect to any Shares to be distributed under the Plan until he or she has become the holder of such Shares. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable
Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock.
(i) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement
shall be determined in accordance with the laws of the State of New York, applied without giving effect to its conflict of laws principles.
(j) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction
or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform the applicable laws, or if it cannot be construed or deemed
amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain
in full force and effect.
(k) Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the
Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted
hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all
applicable requirements of the U.S. federal securities laws.
(l) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no
greater than the right of any unsecured general creditor of the Company or any Affiliate.
(m) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated.
(n) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not
be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.
Section 15. Term of the Plan.
(a) Effective Date. The Plan shall be effective as of the date of its approval by the stockholders of the Company.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2006
OR
o 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
(Exact
name of registrant in its charter)
New York, New York 10020
(Address of principal executive offices)
None
(Title of class)
Yes o No x
2006 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
subscriber (4)(6)
2005
2004
Directors
and Director
and Director
(Principal Executive
Officer)
and Chief
Financial
Officer (Principal
Financial Officer)
Corporate
Controller (Principal
Accounting Officer)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
February 23, 2007
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share and per
share amounts)
Other
Comprehensive
Loss
Paid-In
Capital
Compensation
Deficit
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY - Continued
(In thousands, except share and per
share amounts)
Comprehensive
Loss
Paid-In
Capital
Compensation
Deficit
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in
thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
Warranty
Liability
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
Retirement
Obligation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
Price
(per share)
December 31, 2006
Our 95⁄8% Senior Notes due 2013 mature on August 1, 2013 and
interest is payable semi-annually on February 1 and August 1 of each
year. The obligations under our
95⁄8% Senior Notes due 2013 are not secured by any of our assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
Exercise
Price
Outstanding as of
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
Average
Exercise
Price
Average
Remaining
Contractual
Life (Years)
Value
Average
Grant Date
Fair Value
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
Deferred revenue
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, unless
otherwise stated)
Beginning of
Year
Expense
Other
End of Year
2003 LONG-TERM STOCK INCENTIVE PLAN
EXHIBIT 21.1
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Subsidiaries |
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Satellite CD Radio, Inc |
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State of Delaware |
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Sirius Asset Management Company LLC |
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State of Delaware |
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Sirius Entertainment Promotions LLC |
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State of Delaware |
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Spend LLC |
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State of Maryland |
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Earth Station Ecuador Cia. Ltda |
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Quito, Ecuador |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to reference to our firm in the headnote to Item 6 Selected Financial Data and to the use of our reports dated February 23, 2007 in this Annual Report (Form 10-K) of Sirius Satellite Radio Inc. (Company), with respect to the consolidated financial statements of Sirius Satellite Radio Inc., Sirius Satellite Radio Inc. managements assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Sirius Satellite Radio Inc., included in the 2006 Annual Report to Shareholders of Sirius Satellite Radio Inc.
Our audits also included the financial statement schedule of Sirius Satellite Radio Inc. listed in Item 15(a). This schedule is the responsibility of the Companys management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We consent to the incorporation by reference in the following Registration Statements:
Form S-8 No. 333-139214, No. 333-133277, No. 333-125118, 333-119479, No. 333-81914, No. 333-74752, No. 333-65473, No. 333-15085, No. 33-95118, No. 33-92588, No. 333-31362, No. 333-62818, No. 333-81914, No. 333-100083, No. 333-101515, No. 333-106020 and No. 333-111221
Form S-3 No. 333-130949, No. 333-130949, No. 333-127169, No. 333-115695, No. 333-64344, No. 333-65602, No. 333-52893, No. 333-85847, No. 333-86003, No. 333-10446 and No. 333-108387
of our reports dated February 23, 2007, with respect to the consolidated financial statements and schedule of Sirius Satellite Radio Inc., Sirius Satellite Radio Inc. managements assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Sirius Satellite Radio Inc., included in this Annual Report (Form 10-K) of Sirius Satellite Radio Inc.
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/s/ Ernst & Young LLP |
New York, New York
March 1, 2007
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
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I, Mel Karmazin, the Chief Executive Officer of Sirius Satellite Radio Inc., certify that: |
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1. |
I have reviewed this Annual Report on Form 10-K of Sirius Satellite Radio Inc. for the period ended December 31, 2006; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any changes in the registrants internal controls over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
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5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
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(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
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(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
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By: |
/s/ MEL KARMAZIN |
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Mel Karmazin |
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Chief Executive Officer |
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(Principal Executive Officer) |
March 1, 2007
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
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I, David J. Frear, the Executive Vice President and Chief Financial Officer of Sirius Satellite Radio Inc., certify that: |
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1. |
I have reviewed this Annual Report on Form 10-K of Sirius Satellite Radio Inc. for the period ended December 31, 2006; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any changes in the registrants internal controls over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
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5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
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(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
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(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
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By: |
/s/ DAVID J. FREAR |
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David J. Frear |
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Executive Vice President and |
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Chief Financial Officer |
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(Principal Financial Officer) |
March 1, 2007
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Annual Report of Sirius Satellite Radio Inc. (the Company) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Mel Karmazin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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By: |
/s/ MEL KARMAZIN |
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Mel Karmazin |
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Chief Executive Officer |
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(Principal Executive Officer) |
March 1, 2007
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Annual Report of Sirius Satellite Radio Inc. (the Company) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David J. Frear, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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By: |
/s/ DAVID J. FREAR |
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David J. Frear |
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Executive Vice President and |
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Chief Financial Officer |
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(Principal Financial Officer) |
March 1, 2007
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.